ITEM 1. BUSINESS
Puroflow Incorporated (the "Registrant" or the "Company") designs and manufactures specialized filtration devices. The Company's specialty high performance filtration products are designed and manufactured to meet specific customer needs. Used in automobile airbag inflators, aerospace, petrochemical and a wide range of commercial and industrial applications, Puroflow's diversity of products and customer base has contributed to its current financial vibrance. Representing the state-of-the-art in filtration technology, each product delivered achieves effectiveness of performance through a careful selection of materials ranging from all welded titanium construction to epoxy assembled paper elements.
The Company was incorporated in Delaware in 1961 and has its principal offices located at 16559 Saticoy Street, Van Nuys, California, 91406. The Company's telephone number is (818) 756-1388. Consolidated within a single, 50,000 square foot facility, Puroflow is fully self contained within the engineer, test and manufacturing disciplines.
AUTOMOTIVE AIRBAG FILTERS
The Company produces filters which are an integral part of conventional pyrotechnic automotive airbag inflators. The primary functions of the airbag filter is to cool and control the expansion of the hot gas into the inflating bag and to prevent hot particles of combustion from entering the expanding bag. The Company's filters are comprised of a unique blend of woven wire meshes and random fiber materials.
An entire pyrotechnic airbag system includes the bag, the inflator (initiator, filter and gas generant), the module for the steering wheel or dashboard, the sensors, and the diagnostics. When the crash sensors (located in the front of the vehicle) detect a rapid deceleration, equivalent to hitting a stationary object at a predetermined speed, an electrical impulse is transmitted to the initiator. The initiator triggers a chemical reaction of the airbag's gas generant, which inflates the bag, forcing open the module's cover (located either in the center of the steering wheel or in the dashboard on the passenger-side). The inflation sequence is designed to take place in less than one-tenth of a second without interfering with control of the car. After inflation, the airbag automatically deflates in less than one second.
The Company has agreements to supply airbag filters on a purchase order basis to two customers - ISI and Breed. The Company supplies airbag filters to ISI for use in systems produced for Honda, General Motors, Mazda, and Mitsubishi. Breed's customer base is comprised of Chrysler, Fiat, Ford of Australia, Jaguar, and General Motors. Both ISI and Breed currently use Puroflow as their exclusive filter supplier.
The Company designs, manufactures, and operates high precision machines to fabricate airbag filters. They require minimal time for tooling changes between production runs of different filter types. These methods permit greater flexibility and lower unit costs without compromising the high reliability which is essential for automotive airbag filters.
The Company is in the process of designing and developing new filters in response to requests for proposals made by various inflator manufacturers, both domestic and offshore, and has supplied pre-production qualification filters for possible use in airbag systems to some of these manufacturers. The Company intends to continue to enhance its technology and product development in order to meet the changing needs of airbag manufacturers and their customers. The Company is developing filters for the next generation azide and non-azide passenger and side impact airbag applications.
MARKETING
The Company markets its airbag filters directly to airbag manufacturers through its executive officers. The Company markets its commercial aerospace products group through exclusive distributorships on assigned
PMA applications. Typically, the terms of these distribution agreements provide that the distributor will act as the exclusive distributor for specific parts manufactured by the Company for a period between 3 to 5 years with minimum monthly requirements for number and dollar amount of units purchased. The purchase price of the parts is subject to mutual agreement of the parties and may be adjusted to take into account inflation, market changes, changes in costs of production and sales, and other factors. Such agreements may be terminated by the Company if the distributor does not comply with these purchase requirements or by either party if the other party is rendered insolvent. The Company markets its high performance filters through manufacturers representatives and, to a lesser extent, the Company's own sales force.
GOVERNMENT CONTRACTS
The Company has a number of direct contracts with the United States government. Substantial sales of high performance filters are made to companies that are prime contractors of the United States government. Sales to the United States government accounted for approximately 7% of net sales for fiscal 1997 and 1996. While separate figures are not maintained, the Company believes that when added to sales to the United States government's prime contractors, government sales accounted for approximately 29% of the Company's net sales during these periods.
COMPETITIVE CONDITIONS
A broad range of companies produce products or are capable of producing products that compete with products manufactured by the Company in its various markets. Many of these companies have significantly greater financial resources than the Company. Morton International, Inc. ("MII") and other major domestic airbag manufacturers produce their airbag filter components in-house, and TRW Vehicle Safety Systems, Inc., a significant global manufacturer of airbag inflator assemblies ("TRW"), produces passenger side airbag filters for its own use. Other companies may choose to enter the automotive airbag filter market. There is no assurance that the Company's airbag manufacturer customers will not manufacture all their own filters or that the Company will be able to effectively compete in the future against independent manufacturers of airbag filters or of the Company's other products.
PRODUCT WARRANTIES
In all product lines, the Company provides standard commercial warranties, consistent with its products and industry. Although claims under product warranties have been minimal during the past five years, no assurance can be given that such claims will not increase in the future.
RESEARCH AND DEVELOPMENT
In fiscal 1997 and fiscal 1996, the Company incurred research and development expenditures of approximately $6,500 and $28,000, respectively. The Company charges research and development expenditures to operations as a production expense as such expenditures occur. The Company intends to expand research and development activities in its core businesses, including passenger side, advanced driver-side and side impact airbag filters and Parts Manufacturer Approval for the commercial aerospace products group.
HIGH PERFORMANCE FILTERS
Since 1961, the Company has designed and manufactured, state-of-the-art, precision filtration products for critical applications. Specializing in highly reliable, all metallic filters of standard and custom design, the Company's products range from filters in hydraulic, fuel and pneumatic systems to large cryogenic and petrochemical filters. The Company also designs and manufactures surface tension devices for propellant management in missiles and satellites using porous metal, high-performance filter media and specialized gas tungsten arc welding processes.
The Company is a leading filter supplier for United States space applications, including the Space Shuttle program, various commercial and military satellites, launch vehicles and boosters, and ground support equipment. Certain of the manufacturing, welding, cleaning and testing required by these applications are performed in a laminar flow, class 10,000 clean room.
REPLACEMENT PARTS
The Company is a leading supplier of aftermarket filtration products used in jet aircraft and turboshaft powered aircraft and helicopters. Utilizing highly successful reverse engineering techniques, the Company produces "generic plain wrap" filters for use in the aftermarket at a substantial reduction in cost to the distributor and end user. The Company utilizes exclusive agreements with its distributor base which assists them to dominate, on a part number base, a particular market segment. The Company continues to market this product and projects that it will contribute 45 percent of both sales and profit in FY 1998.
RAW MATERIALS AND SUPPLIES
The principal raw materials utilized by the Company in connection with its filter operations include stainless steel and other manmade or natural products, which are standard items available from a number of sources. Additionally, the Company subcontracts out a significant portion of the fabricated or machine parts required to produce components used in the Company's products, which it designs and assembles. These services are rapidly available from a wide variety of sources. The Company engineers, manufactures and assembles its products at its facility in Van Nuys, California. This facility does not handle or store hazardous substances and thus does not incur significant costs relating to compliance with environmental laws.
PATENTS AND TRADEMARKS
Although management believes that patents and trademarks associated with the Company's various product lines are of value to the Company, it does not consider any of them to be essential to its business.
MAJOR CUSTOMERS
Sales to three customers identified below represented approximately 53% of net sales during fiscal year 1997 and 60% of net sales during fiscal year 1996, and 83% during fiscal year 1995. For fiscal year 1997, 1996 and 1995, sales to Breed Automotive Technologies, Inc. were $2,200,127, $2,047,315 and $2,666,281, respectively. Sales to Inflation Systems Inc. were $1,438,355, $2,213,823 and $4,470,337, respectively, and sales to Norcross Air, Inc. were $818,372, $1,037,135 and $333,734, 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 1997 no other customer accounted for more than 10% of net sales.
BACKLOG
As of February 28, 1997, and February 29, 1996, the Company had a backlog of approximately $5,900,000 and $5,165,000, respectively. Approximately $3,600,000 of the Company's backlog at February 28, 1997 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-asides. To the extent bidding may be so limited, the Company has an opportunity to benefit from the reduced number of qualified bidders.
EMPLOYEES
At February 1, 1997, the Company had 75 full-time employees, including 3 employed in Sales and Marketing, 15 employed in Engineering and Quality Control, and 50 employed in Production. The remaining employees are administrative and support staff. No employees are represented by a collective bargaining unit. Management considers its relationship with its employees to be excellent.
INSURANCE
The Company maintains general liability, automobile, aircraft products, product liability, workers' compensation, and employer's liability insurance coverage. The Company is engaged in various businesses which could expose it to claims for injury, resulting from the failure of products sold by it. During the last decade, the Company has had only one claim for injury filed as a result of an Ultra Dynamics product installation, wherein the Distributor failed to service the installation, and the Company was joined in the action. The Company has product liability insurance, covering in such amounts and against such risk as Management believes advisable, in light of the Company's business and the terms and cost of such insurance. There is no assurance that claims will not arise in the future in excess of such insurance or that the Company will maintain the same level of insurance coverage.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth information as to the location and general character of the facility of the Registrant:
The Company's current sub-lease from Kaiser Aerospace & Electronics Corporation includes the use of gas, electric, water, telephone service, real estate taxes and parking at an annual rental of $291,000. The Company has an option to extend the lease for 29 months until December 31, 2002, at an annual rental of $312,000, inclusive of the above services.
ITEM 3.
ITEM 3. PENDING LEGAL PROCEEDINGS
1) On July 2, 1993, Ultra Dynamics, a former wholly owned subsidiary of the Company was named as one of six co-defendants in a civil action filed by Cynthia H. Meals in the Court of Common Pleas of Chester County, Pennsylvania for unspecified damages resulting from improper maintenance of a treatment system for drinking water. Ultra Dynamics is included as a co- defendant because it supplied the equipment to a co-defendant distributor. Ultra Dynamics has filed a cross-complaint against all co-defendants and plaintiff.
2) Reliable Metallurgical Processes Inc. ("Reliable") commenced an action against the Company and Michigan Dynamics Inc., a former wholly owned subsidiary of the Company, in September 1995, in Los Angeles County Superior Court for breach of contract, open account, and anticipatory breach. The contract related to the performance by Reliable of heat- treatment services which the Company believes Reliable did not perform adequately. The plaintiff is seeking damages in the principal sum of $133,821.37, interest at the rate of 18 percent per annum from net thirty days after delivery of the goods, attorneys' fees and cost of litigation.
3) Jerome Pearlman d.b.a. J & F Enterprises, a former Director of the Company, commenced an action in the Los Angeles County Superior Court in December 1995 for breach of an alleged promissory note for money borrowed. The plaintiff claims that the Company has not repaid amounts due under the alleged note which the Company disputes. The complaint seeks approximately $73,000 in damages.
4) 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 in December 1995, against the Company and the Receiver for possession and conversion of personal property. The complaint alleges the Company is wrongfully in possession of a computer owned by the plaintiff under an alleged capital lease, which claim the Company disputes. The complaint seeks damages not to exceed $25,000.
5) Memtec America Corporation obtained a confession of judgment from the Circuit Court for Baltimore County, Maryland, on December 19, 1995, against the Company for approximately $220,000, based upon the execution of a promissory note by a former chief executive officer of the Company, which note was executed in exchange for goods and services delivered by the plaintiff. The Company disputes that any amounts are due under the note as a result of Company's right of set-off. The judgment was obtained without due notice to the Company. The
Receiver retained counsel in Baltimore, Maryland, for the purpose of setting aside the confession of judgment and to assert a number of counter- claims against Memtec America Corporation. The confession of judgment was vacated by order or the Circuit Court for Baltimore County on June 24, 1996. The Company filed an amended counterclaim and third party complaint on August 12, 1996 against Memtec America Corporation and four former employees of the Company now employed by Memtec America Corporation.
At January 31, 1997, an accrual in the amount of approximately $232,000 has been recorded in anticipation of judgments which may result against the Company as a result of the foregoing. Although the Company cannot determine the potential liability which may result from the foregoing, it believes it will prevail in its defenses, and does not expect that such litigation will have a material adverse effect on its financial position or results of operation. See "Financial Statements - Note 7".
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.
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.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS, COMMON STOCK PRICE RANGE, AND DIVIDEND POLICY
The Common Stock of the Company is traded on the National Association of Securities Dealers, Inc. Electronic Bulletin Board ("NASDAQ") System under the symbol PURO.
The following table sets forth the high and low bid quotations for the Common Stock for the periods indicated as reported by NASDAQ. These quotations represent inter-dealer prices and do not include retail markups, markdowns or commissions, and may not necessarily represent actual transactions.
High Low -------- ------- -------- ------- Fiscal Year Ended January 31, 1996 1st Quarter . . . . . . . . . . . . . . . . . . . 23/32 21/32 2nd Quarter . . . . . . . . . . . . . . . . . . . 11/32 8/32 3rd Quarter . . . . . . . . . . . . . . . . . . . N/A N/A 4th Quarter . . . . . . . . . . . . . . . . . . . 1 3/8 5/8
Fiscal Year Ended January 31, 1997 1st Quarter . . . . . . . . . . . . . . . . . . . 1 3/8 1 3/8 2nd Quarter (Note 1). . . . . . . . . . . . . . . 1 5/8 1 3/8 3rd Quarter (Note 1) . . . . . . . . . . . . . . 1 1/4 1 1/4 4th Quarter . . . . . . . . . . . . . . . . . . . 1 15/16
Fiscal Year Ended January 31, 1998 Two Months Ending March 20, 1997. . . . . . . . . 31/32 7/8
(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 20, 1997, the closing bid price for the Company's Common Stock on the Bulletin Board System was $7/8 per share. As of March 20, 1997, the Company had approximately 328 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(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 and 1995 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION, ANALYSIS OF FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in Delaware in 1961, under the name Ultra Dynamics Corporation, and was originally engaged in the water purification business.
In November 1968, the Company organized Puroflow Corporation to acquire all of the assets and liabilities of a business established in 1961, under the name Aerospace Components Corporation, and was primarily engaged in the manufacture of high performance filters for the aerospace industry. In 1980, the Company acquired Decca Valves Corporation, a corporation engaged in the manufacture of fluid control valves. The Company changed its name to Puroflow Incorporated in 1983. The Company acts as the holding company, directly or indirectly, for Puroflow Corporation and Michigan Dynamics, Inc.
In fiscal 1989, the Company began designing, testing and producing filters for automotive airbag systems, primarily as an outgrowth of its expertise in aerospace filtration. During September 1992, the Company disposed of its CPI division, including CPI assets it had acquired from MDI in June 1992. During November 1994, the Company settled the litigation with Glasco Ultraviolet Systems Inc. and disposed of the operating assets of Ultra Dynamics Corporation, its ultraviolet water products subsidiary. During June 1995, the Company disposed of the inventory and intangible assets of Decca Valves Corporation. The disposal of these assets have been accounted for as a discontinued operation. (See Note 11 of the Notes to Consolidated Financial Statements.)
The Company's principal products consist of automotive airbag filters and high performance filters. Net sales for each of these product lines for the fiscal years ended January 31, 1995, 1996 and 1997 are as follows:
YEAR ENDED JANUARY 31, ---------------------------------- ---------------------------------- (in thousands) 1995 1996 1997 -------- -------- -------- -------- -------- -------- Net Sales: Airbag Filters $ 6,361 $ 4,175 $ 3,639 High Performance Filters 2,684 4,641 4,819 -------- -------- --------
TOTAL $ 9,045 $ 8,816 $ 8,458 -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS
The following table reflects the percentage relationship to net sales of certain items included in the Company's statement of operations for each of the three years in the period ended January 31, 1997.
YEAR ENDED JANUARY 31, -------------------------------- -------------------------------- (in thousands) 1995 1996 1997 -------- -------- -------- -------- -------- -------- Net Sales: 100.0% 100.0% 100.0% -------- -------- -------- Cost and expenses: Cost of goods sold 84.6 67.5 69.6 Selling, general and administrative 18.0 16.4 17.1 Other (income) expense (0.2) (.1) Non-recurring expenses 2.9 4.7 Interest expense 3.4 3.2 .8 -------- -------- -------- Income (loss) from continuing operations before income taxes (5.8) 10.0 7.9 Provision for income taxes (.1) (.1) (.1) Income (loss) from discontinued operations 20.3 0.3 - -------- -------- -------- Net income (loss) (26.2)% 10.2% 7.8% -------- -------- -------- -------- -------- --------
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
Net sales in fiscal 1997 decreased 4.1%, compared to fiscal 1996, due primarily to a decrease in sales of airbag filters from $4,175,000 to $3,639,000 resulting from a continuance of customer supplied raw materials and price adjustments. Sales of high performance filters increased in the current fiscal year to $4,819,000 from $4,641,000, due primarily to continued concentration on expanding the PMA program. The Company has obtained FAA approval for 40 part numbers and there are 11 applications pending for parts qualification as of January 31, 1997. The year-to-year decrease in sales was also due to a minimum marketing effort by management during the receivership period which ended August 22, 1996.
Gross profit as a percentage of net sales was 30.4% for fiscal 1997, compared to 32.5% in fiscal 1996. The reduction in gross profit was due to the increase in material costs and price adjustments for airbag business.
For the fiscal year ended 1997 and 1996, selling, general and administrative expenses were $1,446,000 and $1,443,000, respectively, due to continued cost control of overhead despite payroll adjustment for annual salaries for employees and year end bonuses for key personnel.
Interest expense decreased by $207,000 in fiscal 1997, due to elimination of bank debt in the middle of fiscal 1997.
Non recurring expenses of $394,000 and $253,000 in fiscal 1997 and 1996, respectively, was a direct result of the Receivership which was terminated on August 22, 1996.
A provision for income taxes of $5,600 for minimum franchise taxes to the State of California was recorded. No additional provision is necessary due to the Company's federal net operating loss carryforwards of approximately $2,728,000 for Federal Income Tax purposes and $1,852,000 for California State Income Tax purposes at January 31, 1997. Such operating loss carryforwards expire from 2008 to 2011.
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1996 AND 1995
Net sales in fiscal 1996 decreased 2.5% compared to fiscal 1995. This is due primarily to a decrease in sales of airbag filters from $6,361,000 to $4,175,000 due to a change in customer supplied raw material in the current year compared to prior year practice of the Company supplying the raw material. Sales of high performance filters, including the PMA program, increased in the current year to $4,641,000 compared to $2,684,000 in the prior year. The Company sold their valve business in June 1995.
The wide swing in the gross margins of 32.5% in fiscal 1996, compared to 15.4% in fiscal 1995, is a result of a combination of factors. The Company consolidated its manufacturing facilities in September 1995, with reduced rental and manufacturing costs; increased prices in the PMA program line with cost controls and manufacturing efficiencies; and increased margins in high- performance filters. The gross margins in fiscal 1995 were affected by a discontinuance of the MDI Dynapore product line, resulting in approximately $1,000,000 inventory write-down, and high manufacturing and other costs incurred during the program start-up phase of the PMA products due to the learning curve and the time lag in securing qualification of the PMA products.
Selling, general and administrative expenses were $1,443,000 and $1,630,000 for fiscal 1996 and 1995 respectively, a decrease of 11.5%, due primarily to overhead cost controls and payroll reduction and benefits of the move to the new facility.
Interest expense decreased to $279,000 in fiscal 1996 from $306,000 in fiscal 1995, due to the reduction of the principal balance outstanding. This occurred despite an increase in the interest rate to 12% by the lending institution.
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 1997, cash provided by operating activities was $339,000, consisting of $663,000 from net income, non-cash operating income and expenses of $209,000 and an increase in inventories, prepaid expenses, and a reduction in accounts payable and accrued expenses offset by a reduction in accounts receivable.
The Company's working capital was $2,518,000 and $(13,000) as of January 31, 1997 and 1996 respectively. An improvement in the current ratio to 5.2 at January 31, 1997 from 1.0 at January 31, 1996 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 $253,000, offset by collection on notes receivable of $63,000.
On March 26, 1996, the Company entered into an agreement with Toluca Pacific Securities Corporation ("TPSC") to raise equity through a private placement offering. On July 24, 1996, such offering was completed. The Company sold 2,530,000 shares of Common Stock and received $1,742,900 of net proceeds, including $1,300 of interest. The purchase price of the Common Stock was $.80 per share. From the gross proceeds, TPSC received a fee of $202,400. TPSC (or its designees) also received 24-month options to purchase 177,100 common shares, at a price of $.80 per share. Proceeds received by the Company were used to retire bank debt and other pre-Receiver debt. Pursuant to the terms of a Registration Rights Agreement, the Company is obligated to register the Securities under the Securities Act.
On August 13, 1996, all bank debt owed by the Company was repaid. On August 22, 1996, the Receivership Estate was terminated by order of the Superior Court of the State of California and control of the Company was returned to the Board of Directors and management.
Additionally, the Company entered into a new banking relationship. The Company obtained a $750,000 revolving credit line. This credit line bears interest at the rate of prime plus 1.5% per annum, and is secured primarily by the Company's accounts receivable and inventories. The Company also obtained a $300,000, non- revolving equipment acquisition credit line, which bears interest at the rate of prime plus 1.75% per annum, and is secured by all of the Company's assets. Both of these loans are cross-collateralized. The terms of these loan agreements contain certain restrictive covenants, including maintenance of (i) aggregate net worth (plus subordinated debt, less any intangible assets and less any amount due from shareholders, officers and affiliates of the Company) of not less than $3,250,000, (ii) a ratio of current and non-current liabilities (less subordinated debt) to net worth of not more than 0.50 to 1.00, (iii) working capital of not less than $2,000,000, and (iv) debt service coverage ratio of not less than 1.75 to 1.00. The Company is currently in compliance with the foregoing covenants.
EFFECTS OF INFLATION ON BUSINESS
Management believes that inflation has not had a material effect on the Company's operations.
ITEM 8.
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 of this report on Form 10-K.
ITEM 9.
ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "MANAGEMENT" and "ELECTION OF DIRECTORS".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "EXECUTIVE COMPENSATION" and "NON-STATUTORY STOCK OPTIONS (NSO)."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "STOCK OPTIONS" and "NON-STATUTORY STOCK OPTIONS (NSO)."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the caption "RELATED PARTY TRANSACTIONS."
PART IV
ITEM 14.
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements (including notes thereto and the Independent Auditors' Report with respect thereto), are filed as part of this annual report on Form 10-K starting on page hereof:
Independent Auditors' Reports.
Consolidated Balance Sheets at January 31, 1997 and 1996.
Consolidated Statements of Operations for each of the three years in the period ended January 31, 1997.
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 31, 1997.
Consolidated Statements of Cash Flows for each of the three years in the period ended January 31, 1997.
Notes to Consolidated Financial Statements.
(a) (2) EXHIBITS
Exhibits, including management contracts, compensatory plans and arrangements required to be filed as part of this report, are listed in the Exhibit Index, which follows the financial statements and financial statement schedules.
(b) REPORTS ON FORM 8-K
On March 13, 1995, the Company filed a Form 8-K reporting the commencement of litigation by Joseph B. Jasso for termination of his employment contract. The Company has a vigorous defense to the action for violation of his fiduciary obligation as a Director and Chief Executive Officer. On May 12, 1995, the Company filed Form 8-K, reporting the appointment of a Receiver, pursuant to an order of the Los Angeles Superior Court. On November 9, 1995, the Company and the Receiver filed Form 8-K, reporting the commencement of two actions by Jerome Pearlman, a former Director of the Registrant for funds advanced, and for conversion of personal property. The Receiver, on behalf of the Company, filed cross-complaints in both actions for breach of fiduciary duties and constructive trust, seeking a return of all funds paid to Plaintiff.
On November 18, 1995, the Company filed a Form 8-K reporting a change in auditors to Rose, Snyder & Jacobs, CPA's, Burbank, California for the fiscal year ended January 31, 1996, replacing Deloitte & Touche. The change in auditors was based solely upon cost reduction of audit fees, and not a result of any disagreement with the former auditors on the scope and auditing or presentation of financials.
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 28, 1997 ------------------------------------------------ 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 28, 1997 ------------------------------------------------ Michael H. Figoff President/Chief Executive Officer Director
By /s/ Reuben M. Siwek April 28, 1997 ------------------------------------------------ Reuben M. Siwek Chairman of the Board General Counsel
By /s/ Robert A. Smith April 28, 1997 ------------------------------------------------ Robert A. Smith Vice Chairman of the Board
By /s/ Tracy K. Pugmire April 28, 1997 ------------------------------------------------ Dr. Tracy K. Pugmire Director
By /s/ Leo S. Unger April 28, 1997 ------------------------------------------------ Leo S. Unger Director
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Puroflow Incorporated
We have audited the accompanying consolidated balance sheets of Puroflow Incorporated (a Delaware corporation), and subsidiaries at January 31, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Puroflow Incorporated and Subsidiaries at January 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Rose, Snyder & Jacobs A Corporation of Certified Public Accountants
Burbank, California
April 1, 1997
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31, 1997 AND 1996
1997 1996 ----------- ----------- ----------- ----------- ASSETS CURRENT ASSETS: Cash, Note 9 $ 164,415 Accounts receivable Net of allowance for doubtful accounts of $49,504 (January 31, 1997) and $140,000 (January 31, 1996), note 3 1,462,170 $ 1,548,495 Inventories 1,398,561 1,239,467 Current portion of note receivable, note 2 40,889 43,831 Prepaid expenses and deposits 57,595 33,700 ----------- -----------
TOTAL CURRENT ASSETS 3,123,630 2,865,493 ----------- -----------
PROPERTY AND EQUIPMENT - NOTE 3 Leasehold improvements 11,660 Machinery and equipment 2,988,092 2,880,343 Automobile 1,679 Tooling and dies 262,480 253,921 Construction in progress 143,542 20,000 ----------- ----------- 3,407,453 3,154,264 Less accumulated depreciation and amortization 2,452,888 2,134,836 ----------- -----------
NET PROPERTY AND EQUIPMENT 954,565 1,019,428 ----------- -----------
NOTE RECEIVABLE, NOTE 2 60,276
OTHER ASSETS 16,750 16,750 ----------- -----------
TOTAL ASSETS $ 4,094,945 $ 3,961,947 ----------- ----------- ----------- -----------
1997 1996 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: Bank overdraft $ 59,363 Line of credit, note 3 235,857 Current portion of long-term debt notes 4 & 7 $ 207,087 1,763,681 Accounts payable 212,397 582,393 Accrued expenses 186,395 237,472 ----------- -----------
TOTAL CURRENT LIABILITIES 605,879 2,878,766 ----------- -----------
LONG TERM DEBT, NOTE 4 ----------- -----------
COMMITMENTS AND CONTINGENCIES, NOTE 7
STOCKHOLDERS' EQUITY, notes 5 and 10 Preferred stock, par value $.10 per share authorized - 500,000 shares issued - None Common stock, par value $.01 per share authorized - 12,000,000 shares issued and outstanding - 7,108,621 shares at January 31, 1997 and 4,578,521 shares at January 31, 1996 430,579 405,279 Additional paid-in capital 4,947,727 3,230,127 Accumulated deficit (1,889,240) (2,552,225) ----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 3,483,066 $ 1,083,181 ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,094,945 $ 3,961,947 ----------- ----------- ----------- -----------
See independent auditors' report and notes to financial statements.
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See independent auditors' report and notes to the financial statements.
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
See independent auditors' report and notes to financial statements.
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See independent auditors' report and notes to the financial statements.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Puroflow Incorporated was organized on May 15, 1961 under the laws of the State of Delaware. Puroflow Incorporated and its wholly owned subsidiaries (together referred therein as the "Company") specializes primarily in designing and manufacturing automotive airbag filters and high performance filters. The Company is located in Van Nuys, California, and does business with customers throughout the world, most of which are located in the United States.
RECEIVERSHIP
On May 1, 1995, the Superior Court of California appointed a Receiver as a result of a lawsuit filed by the Company's bank. The Company was in default of its obligations under various credit agreements with the bank. The Receiver assumed jurisdiction over all the Company's assets, which were in the possession of the Receiver's estate, and held for the benefit of all creditors and shareholders. The Receiver was not obligated to pay liabilities that existed prior to their appointment; however, the Receiver could elect to pay certain of those liabilities with the leave of the Court.
On August 13, 1996, all bank debt owed by the Company was repaid. On August 22, 1996, the Receivership Estate was terminated by order of the Superior Court of the State of California and control of the Company was returned to the Board of Directors and Management.
CONSOLIDATED SUBSIDIARIES
The consolidated financial statements include the accounts of the Company's wholly-owned subsidiaries, Puroflow Corporation, Decca Valves Corporation, Michigan Dynamics, Inc., and Ultra Dynamics Corporation. Material intercompany transactions and balances have been eliminated. Only Puroflow Corporation is presently active and the accounts of the other companies are included in discontinued operations.
INVENTORIES
Inventories are stated at the lower of cost of market on a first-in, first-out basis, and consists of the following items:
JANUARY 31, January 31, 1997 1996 ----------- ----------- ----------- ----------- Raw materials and purchased parts $ 729,740 $ 757,921 Work in progress 247,868 235,404 Finished goods 420,953 246,142 ----------- ----------- Total $ 1,398,561 $ 1,239,467 ----------- ----------- ----------- -----------
See independent auditors' report.
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 and the useful lives of property and equipment. Management uses its historical record and knowledge of its business in making these estimates.
RECLASSIFICATION
Certain amounts previously reported in the Company's January 31, 1996, and January 31, 1995 financial statements have been reclassified to conform to the presentation adopted in the year ended January 31, 1997. The most significant reclassification is nonrecurring expenses for the year ended January 31, 1996. Such reclassifications had no effect on the net profits or losses as previously reported.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are expensed as incurred and are approximately as follows for the years ended January 31,:
1997 1996 1995 -------------- --------------- ---------------- -------------- --------------- ---------------- $ 6,500 $ 28,000 $ 381,000 -------------- --------------- ----------------
See independent auditors' report.
NON-RECURRING EXPENSES
Non-recurring expenses are comprised of a one-time fee of $89,834 charged by the Company's former bank for its costs related to the Receivership during August, 1996, and the monthly administrative fees charged by the Receiver during the receivership period. Administrative fees were billed monthly by the Receiver for its role as monitor for the bank of all of the Company's cash disbursements and receipts and for its handling of all court reports, filings and related Receivership matters. The Receivership Estate began on May 1, 1995 and ended August 22, 1996.
EARNINGS PER SHARE
The computation of the net income (loss) per common share (primary) is based on the weighted average number of common shares and common share equivalents outstanding.
NOTE 2 - NOTE RECEIVABLE
JANUARY 31, JANUARY 31, 1997 1996 ----------- ----------- ----------- ----------- 8 1/2% note receivable, monthly principal and interest payments of $4,250, secured by equipment of the debtor, maturing in November, 1997 $ 40,889 $ 104,107
Less current portion 40,889 43,831 ---------- ----------
$ -0- $ 60,276 ---------- ---------- ---------- ----------
NOTE 3 - LINE OF CREDIT
On November 5, 1993, the Company entered into a security and loan agreement with its bank under which it could obtain credit up to 65% of certain accounts receivable, but not in excess of $1,200,000, at prime plus 3 1/2%. This loan was secured by accounts receivable, inventories and a first priority interest in all unencumbered assets, and matured in June, 1996. In August, 1996, the outstanding balance was repaid in full.
In August, 1996, the Company entered a new banking relationship. The Company obtained a $750,000 revolving credit line. This credit line bears interest at the rate of prime plus 1.5% per annum, and is secured primarily, by the Company's accounts receivable and inventories. The Company also obtained a $300,000 non-revolving equipment acquisition credit line, which bears interest at the rate of prime plus 1.75% per annum, and is secured by all the Company's assets. Both of these loans are cross-collateralized. The terms of these loan agreements contain certain restrictive covenants, including maintenance of minimum working capital, net worth, and ratios of current assets to current liabilities and debt to net worth.
See independent auditors' report.
NOTE 4 - LONG-TERM DEBT
JANUARY 31, January 31, 1997 1996 ----------- ----------- ----------- ----------- Note payable to bank at prime rate plus 3 1/2%, secured by all assets of the Company, matured in June, 1996. $ $ 107,900
Note payable to bank at prime rate plus 3 1/2%, secured by all assets of the Company, matured in June, 1996. 971,297
Notes payable to vendors bearing no interest maturing at various dates. These notes were negotiated with vendors to convert accounts payable balances into notes with terms varying from three months to three years. All these notes existed when the Receiver was appointed on May 1, 1995. All the notes have been paid in full or written-off, except for two which are in dispute (see Note 7). $ $ 684,483 ----------- ----------- 207,087 1,763,680 Less current portion 207,087 1,763,680 ----------- -----------
Long-term debt $ -0- $ -0- ----------- -----------
All the above bank debt was repaid in August, 1996 and replaced by the new loan commitments (See Notes 3 and 12).
Interest paid in cash totaled as follows, for the years ended January 31,:
1997 1996 1995 ----------- ----------- ----------- ----------- ----------- ----------- $ 87,017 $ 263,627 $ 305,627 ----------- ----------- -----------
NOTE 5 - STOCK OPTION PLANS
In the year ended January 31, 1996, the Company implemented stock option plans which provide for the granting of options to certain officers and key employees 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 the options granted was $0.87 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, 1995 (outstanding and unexercised) -0- Granted 359,000 Exercised -0- Canceled or expired -0- ---------- Held at January 31, 1996 (outstanding and unexercised) 359,000
See independent auditors' report.
Granted -0- Exercised 100 Canceled or expired 9,000 ------------- Held at January 31, 1997 (outstanding and unexercised) 349,900
Shares exercisable, January 31, 1997 249,860 -------------
Shares available for future grants, end of period 266,000 ------------- -------------
Price range of options held, January 31, 1997 $.025- $ .075
Statement of Financial Accounting No. 123, "Accounting for Stock-Based Compensation," requires companies to measure employee stock compensation plans based on the fair value method of accounting. However, the statement allows the alternative of continued use of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with pro-forma disclosure of net income earnings per share determined as if the fair value based method had been applied in measuring compensation cost. The Company has elected the alternative of continued use of APB No. 25. No pro-forma disclosure is presented because the change in compensation cost is immaterial.
NOTE 6 - INCOME TAXES
The following is a reconciliation of the tax provision, computed by applying the statutory federal income tax rates, and the income tax provision per the financial statements for the years ended January 31,:
1997 1996 --------- --------- --------- ---------
Income tax provision at 34% $ 227,319 $ 305,360 Meals and entertainment 2,048 Officer's life insurance 2,803 Excess book (tax) depreciation and amortization 30,707 (39,658) Excess book loss on disposition 20,252 Change in allowance for doubtful accounts (30,769) (21,920) Write-off of obsolete inventory (51,396) (338,358) Reserve for legal matters 9,059 11,975 Other 2,608 11,440 State taxes for prior year (1,632) Benefit of net operating loss carryforwards (190,747) --------- --------- Current federal tax benefit -0- (50,909) Current State tax benefit -0- (12,106) --------- --------- Net current tax benefit -0- (63,015)
Unrecognized benefit of losses 63,015 Minimum California franchise tax 5,600 5,600 --------- ---------
Provision for income taxes $ 5,600 $ 5,600 --------- --------- --------- ---------
See independent auditors' report.
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:
1997 1996 ---------- ---------- ---------- ----------
Allowance for doubtful accounts $ 16,831 $ 60,620 Allowance for inventory obsolescence 78,426 165,332 Less valuation allowance (95,257) (225,952) ---------- ----------
Current $ -0- $ -0- ---------- ---------- ---------- ----------
Tax loss carryforward 927,362 1,422,366 Depreciation and amortization (47,071) (41,741) Reserve for legal matters 43,059 43,300 Less valuation allowance (923,350) (1,423,925) ---------- ----------
Non current $ -0- $ -0- ---------- ---------- ---------- ----------
Realization of the deferred benefit is contingent upon future taxable earnings. In accordance with SFAS No. 109, the valuation allowance is 100% of the benefit based on the uncertainty that the Company will realize this benefit.
The Company estimates it had available net operating loss carryforwards of approximately $2,728,000 for federal income tax purposes and $1,852,000 for state income tax purposes at January 31, 1997. The Company's net operating loss carryforwards expire from 2008 to 2011.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed to minimum lease payments on a non-cancelable operating lease for its facility, which expires in August, 2000, as follows:
Twelve Months Ending January 31, -------------------------------- --------------------------------
1998 $ 291,000 1999 291,000 2000 291,000 2001 169,750 2002 -0- -----------
TOTAL $ 1,042,750 ----------- -----------
The leases with respect to the former location were terminated under the powers of the Receiver.
Total rental expense under the facility lease (including expenses) is as follows in the years ending January 31,:
1997 1996 1995 ----------- ----------- ----------- ----------- ----------- -----------
$ 305,000 $ 275,000 $ 410,000 ----------- ----------- -----------
See independent auditors' report.
CAPITAL LEASES
All of the Company's capital leases for machinery and equipment were terminated under the powers of the Receiver during the year ended January 31, 1995. At January 31, 1995, the obligation under capital leases was $51,366.
LEGAL MATTERS
The Company is party to various legal proceedings. Except as noted below, the outcome of these proceedings and the potential liability cannot be determined; however, the Company believes it will prevail in its defenses, and does not expect that such litigation will have a material adverse effect on its financial position or results of operations. Additionally, the Company has filed counterclaims in some of the actions. At January 31, 1997 and January 31, 1996, an accrual in the amount of approximately $242,000 and $332,000 has been recorded in anticipation of certain judgments against the Company related to these matters. $207,807 of the accrual remains in notes payable to vendors at January 31, 1997 (see Note 4).
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company is using the legal expertise of a lawyer who is a director of the Company. Related legal expenses totaled $62,033, $42,284 and $80,625 for the years ended January 31, 1997, 1996, and 1995, respectively. The amount due to this director was $0 at January 31, 1997, and $27,500 at January 31, 1996.
NOTE 9 - CONCENTRATIONS
MAJOR CUSTOMER INFORMATION
Concentration of sales in the Company's three largest customers is as follows in the years ending January 31,:
1997 1996 1995 ----------- ----------- ----------- ----------- ----------- ----------- Breed Automotive Technologies $ 2,200,127 $ 2,047,315 $ 2,666,281 Inflation Systems, Inc. 1,438,355 2,213,823 4,470,337 Norcross Air, Inc. 818,372 1,037,135 333,734 ----------- ----------- ----------- $ 4,456,854 $ 5,298,273 $ 7,470,352 ----------- ----------- ----------- ----------- ----------- -----------
CONCENTRATION OF CREDIT RISK
Concentration of receivables due from the Company's three largest customers is as follows at January 31,:
1997 1996 --------- --------- --------- ---------
Breed Automotive Technologies $ 276,566 $ 118,340 Inflation Systems, Inc. 369,073 422,028 Norcross Air, Inc. 88,511 52,942 --------- --------- $ 734,150 $ 593,310 --------- ---------
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. The Company grants trade credit to these customers on an unsecured basis.
MAJOR SUPPLIERS
The Company is dependent on three suppliers for the majority of its material needs for automotive airbag filter production.
See independent auditors' report.
CASH IN BANK
At January 31, 1997, the Company had cash in a bank in excess of federally insured limits by $28,695.
NOTE 10 - STOCKHOLDERS' EQUITY
During the year ended January 31, 1997, the Company sold 2,530,000 shares of common stock and received $1,742,900 of net proceeds, including $1,300 of interest. The purchase price of the common stock was $.80 per share. From the gross proceeds, the underwriter received $202,400 as a fee. The Company incurred $80,000 of legal, printing and accounting costs related to registration of the shares. The underwriter also received a 24 month option to purchase 177,100 shares, at a price of $.80 per share. Proceeds received by the Company have been used to retire bank debt (See Note 12) and other pre-Receiver debt.
During the year ended January 31, 1995, the Company issued 210,000 shares of common stock, the net proceeds of which were $250,000.
NOTE 11 - FOURTH QUARTER ADJUSTMENTS
During the quarter ended January 31, 1996, the Company wrote-off all abandoned fixed assets and recorded a gain on recovery of excess inventory reserves.
During the quarter ended January 31, 1995, the Company recorded an inventory write-down of $1,000,000, resulting from the re-evaluation of inventory requirements caused by the discontinuation of the Michigan Dynamics' Dynapore product line.
NOTE 12 - CESSATION OF RECEIVERSHIP
On August 13, 1996, all bank debt owed by the Company was repaid. On August 22, 1996, the Receivership Estate was terminated by order of the Superior Court of the State of California and control of the Company was returned to the Board of Directors and Management.
NOTE 13 - DISCONTINUED OPERATIONS
On June 15, 1995, the Company sold certain inventory, equipment, trade name, contracts and work in progress, of its wholly owned subsidiary, Decca Valves Corporation, leading to a discontinuation of its related operations. The assets were sold for a consideration of $305,000 cash. During the year ended January 31, 1996, the operations of its wholly owned subsidiary, Michigan Dynamics, Inc., were also discontinued. The remaining assets of this subsidiary have been transferred to Puroflow Corporation.
In November, 1994, the Company sold the operating assets of its ultraviolet water purification products subsidiary, Ultra Dynamics, including inventories, property and intangible assets for 234,629, consisting of $100,000 cash and a note receivable of $134,629.
The disposition of these assets have been accounted for as discontinued operations and accordingly, the operating results of the subsidiaries are aggregated and reported as discontinued operation in the accompanying consolidated statement of operations. The 1995 financial statements have been restated to reflect the discontinued operations. Revenue applicable to the discontinued operations were $326,509 for the year ended January 31, 1996 and $2,615,540 for the year ended January 31, 1995.
NOTE 14 - VENDOR NOTE SETTLEMENTS
The Company paid $352,915 as settlement for $477,397 of vendor notes in the year ended January 31, 1997.
See independent auditors' report.
PUROFLOW INCORPORATED
INDEX TO EXHIBITS
This Index is filed in response to Item 14(a)(3), and the following documents are filed as Exhibits in response to Item 14(c), as required by Item 601 of Regulation S-K:
Exhibit No. Description - ------- -----------
3.1 Certificate of Incorporation*
3.2 Bylaws*
10.1 Asset Purchase Agreement dated September 29, 1992 between the Company and Engineered Magnetics, Inc. for sale of the CPI Division*****
10.2 Asset Purchase Agreement dated as of April 30, 1992 among the Company, Michigan Dynamics, Inc. and consented and agreed to by Fuji Filter Manufacturing Co. Ltd. and consented to by NBD Bank, N.A.**
10.3 Lease Agreement dated April 6, 1984 for premises at 1631 10th Street, Santa Monica, California*
10.4 Lease Agreement dated August 1, 1985 for premises at 1648 10th Street, Santa Monica, California*
10.5 Lease Agreement dated November 10, 1992 for premises at 1558 10th Street, Santa Monica, California*****
10.6 Employment Agreement dated March 1, 1993 between the Company and Joseph B. Jasso*****
10.7 Employment Agreement dated March 1, 1993 between the Company and Michael H. Figoff*****
10.8 Employment Agreement dated February 14, 1991 between the Company and Robert A. Smith*
10.9 1991 Key Employee Incentive Stock Option Plan*
10.10 Form of Stock Option Agreement under the 1991 Key Employee Incentive Stock Option Plan*
10.11 Form of Directors Stock Option Agreement dated July 9, 1987*
10.12 Form of Directors Stock Option Agreement dated February 14, 1991*
10.13 Letter Agreement and related Note Payable to Imperial Bank dated March 17, 1993*****
10.14 Note payable to Imperial Bank dated March 17, 1993*****
10.15 Security and Loan Agreement with Imperial Bank dated March 17, 1993*****
10.16 Letter dated May 14, 1993 waiving compliance with covenants contained in the Credit Terms and Conditions Agreement with Imperial Bank dated July 24, 1989*****
10.17 Lease dated January 13, 1992 between the Company and Jerome and Faith Pearlman***
10.18 Settlement Agreement with Stroock & Stroock & Lavan, special counsel to the Registrant, dated November 17, 1992****
Exhibit No. Description - ------- -----------
10.19 Agreement between Registrant and Alpine Services Ltd. dated June 30, 1993 for the private placement of 1,000,000 Shares pursuant to Regulation "S" of the Securities Act of 1933, as amended******
10.20 Note payable to Imperial Bank dated November 5, 1993*******
10.21 Note payable to Imperial Bank dated November 5, 1993*******
10.22 Security and Loan Agreement with Imperial Bank dated November 5, 1993*******
10.23 Stipulation for immediate appointment of Receiver on behalf of Imperial Bank dated May 1, 1995********
10.24 Stipulation re First Amendment to Order Appointing Receiver dated September 5, 1995********
10.25 First Amendment to Stipulation re First Amendment to Order Appointing Receiver dated January 16, 1996********
10.26 Sublease dated July 27, 1995 between Kaiser Marquardt and the Company with sublease guarantor Kaiser Aerospace and Electronics ********
22 Subsidiaries of the Company
- ------------------
* Incorporated by reference to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on October 15, 1991, Registration No. 33-43228.
** Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 14, 1992, Registration No. 33-43225.
*** Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on April 29, 1992.
**** Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on December 15, 1992.
***** Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on May 15, 1993.
****** Incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on September 10, 1993.
******* Incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on December 12, 1993.
******** Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on April 26, 1996.