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ARGAN INC — Annual Report 2001
Apr 30, 2001
31210_rns_2001-04-30_6dcaae3c-43f3-453f-8f33-fb81b887d9d3.zip
Annual Report
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10KSB40 1 a2046799z10ksb40.htm 10KSB40 Prepared by MERRILL CORPORATION QuickLinks -- Click here to rapidly navigate through this document
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-KSB
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/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended January 31, 2001
or
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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For the transition period from to
Commission File No. 0-5622
PUROFLOW INCORPORATED (Exact name of registrant as specified in its charter)
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| DELAWARE (State or other jurisdiction of incorporation or organization) | 13-1947195 (I.R.S. Employer Identification No.) |
|---|---|
| 16559 Saticoy Street, Van Nuys, California (Address of principal executive offices) | 91406 (Zip Code) |
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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 $2,744,178 as of March 31, 2001, 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, 2001: 7,399,091
The Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on June 29, 2001 is hereby incorporated by reference into Part III of this Form 10-KSB.
ZEQ.=1,SEQ=1,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=509736,FOLIO='blank',FILE='DISK030:[01WLA8.01WLA1378]BA1378A.;5',USER='TOSBORNA',CD='27-APR-2001;12:10' Generated by Merrill Corporation (www.merrillcorp.com) TOC_END
PUROFLOW INCORPORATED 2001 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS
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| Page | ||
|---|---|---|
| PART I | ||
| ITEM 1. | Business | 1 |
| ITEM 2. | Properties | 4 |
| ITEM 3. | Legal Proceedings | 5 |
| ITEM 4. | Submission of Matters to Vote of Security Holders | 5 |
| PART II | ||
| ITEM 5. | Market for Registrant's Common Equity and Related Shareholder Matters | 6 |
| ITEM 6. | Selected Consolidated Financial Data | 7 |
| ITEM 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 8 |
| ITEM 8. | Financial Statements and Supplementary Data | 10 |
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 10 |
| ITEM 10. | Recently Issued Accounting Standards | 10 |
| PART III | ||
| ITEM 11. | Directors and Executive Officers of the Registrant | 10 |
| ITEM 12. | Executive Compensation | 10 |
| ITEM 13. | Security Ownership of Certain Beneficial Owners and Management | 10 |
| ITEM 14. | Certain Relationships and Related Transactions | 11 |
| PART IV | ||
| ITEM 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 11 |
| Signatures | 12 |
end of user-specified TAGGED TABLE ZEQ.=1,SEQ=2,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=9537,FOLIO='blank',FILE='DISK030:[01WLA8.01WLA1378]BG1378A.;7',USER='TOSBORNA',CD='27-APR-2001;12:17' Generated by Merrill Corporation (www.merrillcorp.com)
TOC_END
PART I
ITEM 1. BUSINESS
Puroflow Incorporated (the "Registrant" or the "Company") provides 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 filter 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 its 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 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's International sales group was discontinued at year-end.
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ZEQ.=1,SEQ=3,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=562635,FOLIO='1',FILE='DISK030:[01WLA8.01WLA1378]DE1378A.;5',USER='TOSBORNA',CD='27-APR-2001;12:10'
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 prime contractors of the United States government. Sales to the United States government accounted for approximately 13.7% and 10.6%, respectively, of net sales for fiscal 2001 and 2000. While separate figures are not maintained, the Company believes that when added to sales with the United States government's prime contractors, government sales accounted for approximately 29% of the Company's net sales during these period.
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. There are no assurance 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 2001 and fiscal 2000, the Company incurred research and development expenditures of approximately $131,000 and $177,000, 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, specialty filtration products and Federal Aviation Administration 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
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assists them to dominate, on a part number base, 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.
Major Customers
Sales to three customers represented approximately 53% and 47% of net sales during fiscal years 2001 and 2000 respectively. 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 2001 three customers accounted for more than 10% of net sales.
Backlog
As of February 28, 2001 and February 28, 2000, the Company had a backlog of approximately $8,587,000 and $8,051,000, respectively. Approximately $4,000,000 of the Company's backlog at February 28, 2001 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 1999 and 2000,
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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, 2001, the Company had 65 full-time employees. No employees are represented by a collective bargaining unit. Management considers its relationship with its employees to be excellent.
Insurance
The Company maintains general liability, automobile, aircraft products, product liability, workers' compensation, and employer's liability insurance coverage. The Company is engaged in various businesses which could expose it to claims for injury, resulting from the failure of products sold by it. During the last decade, the Company has had only one claim for injury filed as a result of an Ultra Dynamics product installation, wherein the Distributor failed to service the installation, and the Company was joined in the action which was successfully defended by the Company. The Company has product liability insurance covering in such amounts and against such risk as management believes advisable, in light of the Company's business and the terms and cost of such insurance. There is no assurance that claims will not arise in the future in excess of such insurance or that the Company will maintain the same level of insurance coverage.
ITEM 2. PROPERTIES
The following table sets forth information as to the location and general character of the facility of the Registrant:
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| Location | Principal Use | Approximate Sq. Ft. | Lease Exp. Date |
|---|---|---|---|
| 16559 Saticoy Street Van Nuys, CA 91406 | Headquarters and manufacturing facility for airbag components, government and aerospace filtration. | 50,000 | December 31, 2002 |
| 6118 Ferguson Drive Commerce, CA 90040 | Administration and production facility for Quality Controlled Cleaning Corporation. | 10,000 | January 31, 2004 |
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ZEQ.=4,SEQ=6,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=487560,FOLIO='4',FILE='DISK030:[01WLA8.01WLA1378]DE1378B.;10',USER='TOSBORNA',CD='27-APR-2001;12:10'
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 exercised its option to extend the lease for 29 months until December 31, 2002, at an annual rental of $384,000, 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
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.
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ZEQ.=5,SEQ=7,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=887295,FOLIO='5',FILE='DISK030:[01WLA8.01WLA1378]DE1378B.;10',USER='TOSBORNA',CD='27-APR-2001;12:10'
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.
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| High Bid | Low Bid | |
|---|---|---|
| Fiscal Year Ended January 31, 2000 | ||
| 1st Quarter | 1.03 | .80 |
| 2nd Quarter | .936 | .713 |
| 3rd Quarter | .945 | .736 |
| 4th Quarter | .625 | .56 |
| Fiscal Year Ended January 31, 2001 | ||
| 1st Quarter | .647 | .579 |
| 2nd Quarter | .621 | .536 |
| 3rd Quarter | .652 | .557 |
| 4th Quarter | .672 | .579 |
| Fiscal Year Ended January 31, 2002 | ||
| Two Months Ending March 31, 2002 | .656 | .58 |
end of user-specified TAGGED TABLE (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, 2001, the closing bid price for the Company's Common Stock on the Bulletin Board System was $.58 per share. As of March 31, 2001, the Company had approximately 238 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.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JANUARY 31, (in thousands)
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| 1997 | 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Statement of Operations Data(1): | ||||||||||
| Net Sales | $ 8,458 | $ | 8,597 | $ | 8,018 | $ | 7,022 | $ 7,611 | ||
| Cost of goods sold | 5,888 | 6,161 | 5,834 | 5,257 | 5,335 | |||||
| Gross profit | 2,570 | 2,436 | 2,184 | 1,765 | 2,276 | |||||
| Selling, general & administrative expense | 1,446 | 1,497 | 1,833 | 2,059 | 1,763 | |||||
| Operating income (loss) | 1,124 | 939 | 351 | (294 | ) | 513 | ||||
| Other income (expense) | (61 | ) | 17 | 6 | 9 | 51 | ||||
| Non recurring expenses(2) | (394 | ) | (656 | ) | (93 | ) | (462 | ) | -0- | |
| Income (loss) from continuing operations before income taxes | 669 | 300 | 264 | (747 | ) | 462 | ||||
| Provision (benefit for income taxes) | 6 | (192 | ) | (465 | ) | 75 | 185 | |||
| Income (loss) from continuing operations | 663 | 492 | 729 | (822 | ) | 277 | ||||
| Income (loss) from discontinued operations | -0- | -0- | -0- | (.26 | ) | (299 | ) | |||
| Net income (loss) | $ 663 | $ | 492 | $ | 792 | $ | (848 | ) | $ (22 | ) |
| Net income (loss) per common share: | ||||||||||
| From continuing operations | $ 0.11 | $ | 0.07 | $ | 0.10 | $ | (0.10 | ) | $ .04 | |
| From discontinued operations | -0- | -0- | -0- | -0- | (.04 | ) | ||||
| $ 0.11 | $ | 0.07 | $ | 0.10 | $ | (0.10 | ) | $ -0- | ||
| Weighted average number of shares: | 6,107 | 7,248 | 7,598 | 8,119 | 7,521 |
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| 1997 | 1998 | 1999 | 2000 | 2001 | |
|---|---|---|---|---|---|
| Balance Sheet Data: | |||||
| Working Capital | $ 2,518 | $ 2,710 | $ 2,792 | $ 2,193 | $ 2,417 |
| Total Assets | 4,094 | 5,046 | 6,479 | 5,463 | 5,605 |
| Long-Term Debt | -0- | -0- | 139 | 92 | 44 |
| Stockholders' Equity | 3,489 | 3,981 | 4,852 | 4,020 | 3,998 |
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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, 1999 and 2000 represents litigation settlements and related litigation fees.
In January 2001 the company elected to shut down its International division. This division has been accounted for as a discontinued operation in the years ending January 31, 2001 and 2000. The division did not have significant operations prior to Fiscal 2000.
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ZEQ.=7,SEQ=9,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=863314,FOLIO='7',FILE='DISK030:[01WLA8.01WLA1378]DE1378B.;10',USER='TOSBORNA',CD='27-APR-2001;12:10' Generated by Merrill Corporation (www.merrillcorp.com)
TOC_END
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 International Division was discontinued January 31, 2001.
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, 2000 and 2001 are as follows:
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| Year Ended January 31, (in thousands) — 2000 | 2001 | |
|---|---|---|
| Net Sales: | ||
| Airbag Filters | $ 1,719 | $ 1,572 |
| High Performance Filters | 4,553 | 5,688 |
| Precision Cleaning & Repair | 750 | 351 |
| TOTAL | $ 7,022 | $ 7,611 |
end of user-specified TAGGED TABLE
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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, 2001.
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| Year Ended January 31, (in thousands) — 2000 | 2001 | |||
|---|---|---|---|---|
| Net Sales: | 100.0 | % | 100.0 | % |
| Cost and expenses: | ||||
| Cost of goods sold | 74.9 | 70.1 | ||
| Selling, general and administrative | 29.3 | 23.2 | ||
| Other (income) expense | (.4 | ) | (.2 | ) |
| Non-recurring expenses | 1.5 | -0- | ||
| Proxy Litigation | 5.0 | -0- | ||
| Interest expense | .3 | .8 | ||
| Income (loss) from continuing operations before income taxes | (10.6 | ) | 6.1 | |
| Provision for income taxes | 1.1 | 2.4 | ||
| Income (loss) from discontinued operations | .4 | 3.9 | ||
| Net income (loss) | (12.1 | )% | (.2 | )% |
end of user-specified TAGGED TABLE
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 2001 AND 2000
Net sales increased 8% in fiscal 2001 compared to fiscal 2000, due to a increase in high performance filters which offset modest decrease in airbag volume and a reduction in precision cleaning and repairs.
Gross profit as a percentage of net sales was 29.1% in fiscal 2001 compared to 25.1% in fiscal 2000. The increase is attributable to a higher margin product mix and an increase in sales volume combined with control of factory overhead expenses.
Selling, general and administrative expense for continuing operations decreased to $1,762,902 in fiscal 2001 compared to $2,059,966 in fiscal 2000. The decrease is attributable to a shift in sales and promotional costs from aerospace and airbags to international division for the penetration of the International sales effort which is included in the loss on discontinued operations, and managements cost containment efforts.
Interest expense of $61,940 in the current year compared to $23,213 in fiscal 2000 was higher because the Company maintained a higher line of credit balance due to the losses sustained by the International Division.
Non-recurring expenses of $356,314 incurred in fiscal 2000 mainly due to litigation and proxy costs relating to Steel Partners II.
The Company's International Division was terminated at the end of fiscal 2001 due to the inability to meet sales volume targets and lack of profitability.
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 2001, cash provided by bank financing was increased from $500,000 to $544,000. The company reduced its term debt by $97,200 during the same period.
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ZEQ.=2,SEQ=11,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=15556,FOLIO='9',FILE='DISK030:[01WLA8.01WLA1378]DG1378A.;20',USER='TOSBORNA',CD='27-APR-2001;12:18'
The Company's working capital was $2,417,314 and $2,191,367 as of January 31, 2001 and 2000 respectively. The current ratio is 2.5 at January 31, 2001 compared to 2.6 at January 31, 2000.
Cash used in investing activities was used to purchase plant equipment of $68,397.
The Company maintains a revolving credit line of $1,000,000 with an interest rate of .25% 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 $3,800,000; (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 1.50 to 1.00. The Company was not in compliance with certain covenants. The Company has obtained waivers from the bank for such non-compliance.
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)."
10
ZEQ.=3,SEQ=12,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=995575,FOLIO='10',FILE='DISK030:[01WLA8.01WLA1378]DG1378A.;20',USER='TOSBORNA',CD='27-APR-2001;12:18'
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."
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:
(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
11
ZEQ.=4,SEQ=13,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=1020630,FOLIO='11',FILE='DISK030:[01WLA8.01WLA1378]DG1378A.;20',USER='TOSBORNA',CD='27-APR-2001;12:18'
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
User-specified TAGGED TABLE
By: /s/ MICHAEL H. FIGOFF Michael H. Figoff President/Chief Executive Officer Director April 25, 2001
end of user-specified TAGGED TABLE
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.
User-specified TAGGED TABLE
| By: | /s/ MICHAEL H. FIGOFF Michael H. Figoff President/Chief Executive
Officer Director | April 25, 2001 |
| --- | --- | --- |
| By: | /s/ ROBERT A. SMITH Robert A. Smith Vice Chairman of the Board | April 25, 2001 |
| By: | /s/ TRACY K. PUGMIRE Tracy K. Pugmire Director | April 25, 2001 |
| By: | /s/ WARREN LICHTENSTEIN Warren Lichtenstein Director | April 25, 2001 |
| By: | /s/ TRAVIS BRADFORD Travis Bradford Director | April 25, 2001 |
end of user-specified TAGGED TABLE
12
ZEQ.=5,SEQ=14,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=478329,FOLIO='12',FILE='DISK030:[01WLA8.01WLA1378]DG1378B.;13',USER='TOSBORNA',CD='27-APR-2001;12:18' Generated by Merrill Corporation (www.merrillcorp.com)
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, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Puroflow Incorporated and Subsidiaries at January 31, 2001 and 2000, and the results of their operations and their 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
April 2, 2001
F-1
ZEQ.=1,SEQ=15,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=838725,FOLIO='F-1',FILE='DISK030:[01WLA8.01WLA1378]FA1378A.;3',USER='TOSBORNA',CD='27-APR-2001;12:10' Generated by Merrill Corporation (www.merrillcorp.com)
TOC_END
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, 2001 and 2000
User-specified TAGGED TABLE
| 2001 | ||||
|---|---|---|---|---|
| CURRENT ASSETS: | ||||
| Cash, note 8 | $ 8,250 | $ | 56,829 | |
| Accounts Receivable, net of allowance for doubtful accounts of $25,000 (January 31, 2001 and January 31, 2000) | 1,701,442 | 1,589,322 | ||
| Advances to officers and employees | 3,125 | 4,100 | ||
| Deferred tax benefit, current, Note 5 | 136,528 | 45,347 | ||
| Inventories, Note 2 | 2,016,792 | 1,741,088 | ||
| Prepaid expenses and deposits | 114,068 | 107,464 | ||
| TOTAL CURRENT ASSETS | 3,980,205 | 3,544,150 | ||
| PROPERTY AND EQUIPMENTNote 2 | ||||
| Leasehold improvements | 62,834 | 59,229 | ||
| Machinery and equipment | 3,622,541 | 3,583,124 | ||
| Tooling and dies | 376,307 | 350,932 | ||
| 4,061,682 | 3,993,285 | |||
| Less accumulated depreciation and amortization | 3,366,441 | 3,145,251 | ||
| NET PROPERTY AND EQUIPMENT | 695,241 | 848,034 | ||
| DEFERRED TAX BENEFIT, NOTE 5 | 590,165 | 678,980 | ||
| OTHER ASSETS, NOTE 12 | 339,762 | 392,227 | ||
| TOTAL ASSETS | $ 5,605,373 | $ | 5,463,391 | |
| CURRENT LIABILITIES: | ||||
| Line of Credit, Note 2 | $ 544,000 | $ | 500,000 | |
| Notes Payable, current, Note 3 | 48,000 | 97,200 | ||
| Bank Overdraft | 34,698 | | ||
| Accounts payable | 506,207 | 428,554 | ||
| Accrued expenses | 429,986 | 325,029 | ||
| TOTAL CURRENT LIABILITIES | 1,562,891 | 1,350,783 | ||
| LONG TERM DEBT, Note 3 | 44,200 | 92,200 | ||
| COMMITMENTS AND CONTINGENCIES Note 6 | ||||
| STOCKHOLDERS' EQUITY, Notes 4 and 9 | ||||
| Preferred stock, par value $.10 per share Authorized500,000 shares. IssuedNone | ||||
| Common stock, par value $.01 per share Authorized12,000,000 shares. | ||||
| Outstanding 7,399,091 shares at January 31, 2001 and 8,130,121 shares at January 31, 2000 | 433,967 | 441,277 | ||
| Additional paid-in capital | 5,141,767 | 5,682,729 | ||
| Accumulated deficit | (1,538,533 | ) | (1,516,407 | ) |
| Less: | ||||
| Notes receivable from stockholders | (6,000 | ) | (554,272 | ) |
| Treasury stock at cost | (32,919 | ) | (32,919 | ) |
| TOTAL STOCKHOLDERS' EQUITY | 3,998,282 | 4,020,408 | ||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 5,605,373 | $ | 5,463,391 |
end of user-specified TAGGED TABLE
See independent auditors' report and notes to financial statements.
F-2
ZEQ.=1,SEQ=16,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=707144,FOLIO='F-2',FILE='DISK030:[01WLA8.01WLA1378]FC1378A.;10',USER='TOSBORNA',CD='27-APR-2001;12:10'
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended January 31, 2001 and 2000
User-specified TAGGED TABLE
| Years ended January 31, — Net sales | 2001 — $ 7,610,663 | 2000 — $ 7,022,559 | ||
|---|---|---|---|---|
| Cost of goods sold | 5,334,656 | 5,256,852 | ||
| Gross profit | 2,276,007 | 1,765,707 | ||
| Selling, general and administrative expenses | 1,762,902 | 2,059,967 | ||
| Operating income (loss) | 513,105 | (294,260 | ) | |
| Other income and (expense) | ||||
| Other income | 10,999 | 32,760 | ||
| Interest expense | (61,940 | ) | (23,213 | ) |
| Loss on disposal of fixed assets | | (106,067 | ) | |
| Nonrecurring expenses | | (356,314 | ) | |
| Income (loss) before tax from continuing operations | 462,164 | (747,094 | ) | |
| Income tax expense | 185,000 | 75,696 | ||
| Net income (loss) from continuing operations | $ 277,164 | $ (822,790 | ) | |
| Loss from discontinued operations, Note 14 | (173,290 | ) | (25,587 | ) |
| Loss from disposal of discontinued operations, Note 14 | (126,000 | ) | ||
| Net loss | $ (22,126 | ) | $ (848,377 | ) |
| Basic earnings per share, Continuing Operations | $ 0.04 | $ (0.10 | ) | |
| Basic earnings per share, Discontinued Operations | $ (0.04 | ) | $ | |
| Total | $ | $ (0.10 | ) | |
| Diluted earnings per share, Continuing Operations | $ 0.04 | $ (0.10 | ) | |
| Diluted earnings per share, Discontinued Operations | $ (0.04 | ) | $ | |
| Total | $ | $ (0.10 | ) | |
| Weighted average number of shares, basic | 7,520,929 | 8,118,738 | ||
| Weighted average number of shares, diluted | 7,535,461 | 8,118,738 |
end of user-specified TAGGED TABLE
See independent auditors' report and notes to financial statements.
F-3
ZEQ.=2,SEQ=17,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=45866,FOLIO='F-3',FILE='DISK030:[01WLA8.01WLA1378]FC1378B.;6',USER='TOSBORNA',CD='27-APR-2001;12:10' Generated by Merrill Corporation (www.merrillcorp.com)
TOC_END
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended January 31, 2001 and 2000
User-specified TAGGED TABLE
| Balance at January 31, 1999 | Common Stock Par Value — $ 440,979 | $ | 5,667,327 | $ (668,030 | ) | Notes Receivable from Stockholders and Treasury Stock — $ (587,819 | ) | Total — $ 4,852,457 | |
|---|---|---|---|---|---|---|---|---|---|
| Payment of note receivable | 628 | 628 | |||||||
| Exercise of Stock Options for 9000 shares at $0.50 per share | 90 | 4,410 | 4,500 | ||||||
| Exercise of Stock Options for 12,000 shares at $0.75 per share | 120 | 8,880 | 9,000 | ||||||
| Exercise of Stock Options for 8,800 shares at $0.25 per share | 88 | 2,112 | 2,200 | ||||||
| Net loss | (848,377 | ) | (848,377 | ) | |||||
| Balance at January 31, 2000 | 441,277 | 5,682,729 | (1,516,407 | ) | (587,191 | ) | $ 4,020,408 | ||
| Reversal of Notes Receivable on Stock Purchase and retirement of shares, Note 9 | (7,310 | ) | (540,962 | ) | 548,272 | | |||
| Net loss | (22,126 | ) | (22,126 | ) | |||||
| Balance at January 31, 2001 | $ 433,967 | $ | 5,141,767 | $ (1,538,533 | ) | $ (38,919 | ) | $ 3,998,282 |
end of user-specified TAGGED TABLE
See independent auditors' report and notes to financial statements.
F-4
ZEQ.=1,SEQ=18,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=301880,FOLIO='F-4',FILE='DISK030:[01WLA8.01WLA1378]FE1378A.;6',USER='TOSBORNA',CD='27-APR-2001;12:10'
PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended January 31, 2001 and 2000
User-specified TAGGED TABLE
| Years ended January 31, — 2001 | 2000 | |||
|---|---|---|---|---|
| CASH AT BEGINNING OF PERIOD | $ 56,829 | $ | 828,809 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
| Net loss | (22,126 | ) | (848,377 | ) |
| Adjustments to reconcile net loss to net cash provided (used) by in operating activities: | ||||
| Depreciation and amortization | 273,655 | 341,173 | ||
| Provision for losses on accounts receivable | 33,142 | 89,225 | ||
| Loss on disposal of fixed assets | | 106,067 | ||
| Changes in operating assets and liabilities: | ||||
| Advances to officers & employees | 975 | (1,193 | ) | |
| Accounts receivable | (145,262 | ) | (305,293 | ) |
| Other receivable | | 375,763 | ||
| Inventories | (275,704 | ) | (178,149 | ) |
| Prepaid expenses and deposits | (6,604 | ) | 963 | |
| Deferred taxes | (2,366 | ) | 69,000 | |
| Accounts payable and accrued expenses | 182,610 | (189,430 | ) | |
| Payable for acquired company | | (447,875 | ) | |
| Net cash provided (used) by operating activities | 38,320 | (988,126 | ) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
| Purchases of property and equipment | (68,397 | ) | (127,982 | ) |
| Business acquisition, net of cash acquired | | (125,000 | ) | |
| Net cash used by investing activities | (68,397 | ) | (252,982 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Bank Overdraft | 34,698 | | ||
| Advance on Credit Line | 44,000 | 500,000 | ||
| Principal payments on notes payable | (97,200 | ) | (47,200 | ) |
| Proceeds from exercise of stock options | | 15,700 | ||
| Proceed from sale of common stock, net of loan to stockholders | | 628 | ||
| Net cash provided (used) by financing activities | (18,502 | ) | 469,128 | |
| NET DECREASE IN CASH | (48,579 | ) | (771,980 | ) |
| CASH AT END OF PERIOD | $ 8,250 | $ | 56,829 |
end of user-specified TAGGED TABLE
See independent auditors' report and notes to financial statements.
F-5
ZEQ.=2,SEQ=19,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=628712,FOLIO='F-5',FILE='DISK030:[01WLA8.01WLA1378]FE1378B.;5',USER='TOSBORNA',CD='27-APR-2001;12:10' Generated by Merrill Corporation (www.merrillcorp.com)
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.
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 inter-company 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:
User-specified TAGGED TABLE
| January 31, 2001 | January 31, 2000 | |
|---|---|---|
| Raw materials and purchased parts | $ 1,263,199 | $ 1,038,359 |
| Work in progress | 394,580 | 267,968 |
| Finished goods | 359,013 | 434,761 |
| Total | $ 2,016,792 | $ 1,741,088 |
end of user-specified TAGGED TABLE
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:
User-specified TAGGED TABLE
| Classification | Life |
|---|---|
| Machinery and equipment | 5-15 years |
| Tooling and dies | 5 years |
| Leasehold improvements | 5 years |
end of user-specified TAGGED TABLE
REVENUE RECOGNITION
Revenue is recognized when finished products are shipped.
INCOME TAXES
The Company complies with Financial Accounting Standards No. 109, Accounting for Income Taxes.
See independent auditors' report
F-6
ZEQ.=1,SEQ=20,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=886047,FOLIO='F-6',FILE='DISK030:[01WLA8.01WLA1378]FG1378A.;10',USER='TOSBORNA',CD='27-APR-2001;12:18'
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.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are expensed as incurred and are approximately as follows for the years ended January 31,
User-specified TAGGED TABLE
| 2001 | 2000 |
|---|---|
| $131,000 | $177,000 |
end of user-specified TAGGED TABLE
NON-RECURRING EXPENSES
For the year ended January 31, 2000, Non-recurring expenses were comprised of legal and other expenses related to the proxy dispute which was settled in September 1999.
At the annual meeting of stockholders held Thursday, October 21, 1999, the size of the Board was reduced to five, with the Company nominating three representatives and Steel Partners nominating two representatives. The Company and Steel Partners also agreed to vote their shares of Puroflow common stock in favor of the new five-person slate of nominees presented at the 1999 annual meeting. The Company also agreed to promptly amend its shareholders rights plan to increase the beneficial ownership threshold at which the rights plan is triggered from 17.5% to 20%. Also as a part of the settlement agreement, both the Company and Steel Partners agreed to dismiss their respective lawsuits in California and Delaware. In May 2000 the agreement was further amended to increase the beneficial ownership threshold to 30%.
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.
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. Goodwill amortization is computed using straight line over 10 years and accumulated amortization totaled $75,551 at January 31, 2001. Non-compete agreement amortization is computed using straight line over 3 years and accumulated amortization totaled $33,360 at January 31, 2001.
F-7
ZEQ.=2,SEQ=21,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=560495,FOLIO='F-7',FILE='DISK030:[01WLA8.01WLA1378]FG1378A.;10',USER='TOSBORNA',CD='27-APR-2001;12:18'
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 2LINE OF CREDIT
The Company has a $1,000,000 revolving credit line maturing on December 17, 2001. This credit line bears interest at the rate of prime plus 0.25% 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. At January 31, 2001, the Company was not in compliance with certain covenants on the line of credit. The Company has obtained waivers from the bank for such noncompliance. The balance outstanding was $544,000 and $500,000 at January 31, 2001 and 2000, respectively.
NOTE 3LONG-TERM DEBT
User-specified TAGGED TABLE
| January 31, 2001 | January 31, 2000 | |
|---|---|---|
| Note payable to a bank bearing interest at prime plus 1.5% payable in principal monthly payments of $3,933, maturing on April 2003. | $ 92,200 | $ 139,400 |
| Note payable bearing interest at 7%, principal and interest matured in January 2000. | -0- | 50,000 |
| 92,200 | 189,400 | |
| Less current portion | 48,000 | 97,200 |
| Long-term debt | $ 44,200 | $ 92,200 |
end of user-specified TAGGED TABLE
Maturities of long-term debt is as follows:
User-specified TAGGED TABLE
| 2002 | 48,000 |
|---|---|
| 2003 | 44,200 |
| $ | 92,200 |
end of user-specified TAGGED TABLE
Interest paid in cash totaled as follows for the years ended January 31,
User-specified TAGGED TABLE
| 2001 | 2000 |
|---|---|
| $61,940 | $23,213 |
end of user-specified TAGGED TABLE
F-8
ZEQ.=3,SEQ=22,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=84046,FOLIO='F-8',FILE='DISK030:[01WLA8.01WLA1378]FG1378A.;10',USER='TOSBORNA',CD='27-APR-2001;12:18'
NOTE 4STOCK 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, 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:
User-specified TAGGED TABLE
| Held at January 31, 1999 (outstanding and unexercised) | Shares — 319,000 | |
|---|---|---|
| Granted | 0 | |
| Exercised | (29,800 | ) |
| Canceled or expired | (74,600 | ) |
| Held at January 31, 2000, (outstanding and unexercised) | 214,600 | |
| Granted | 0 | |
| Exercised | 0 | |
| Canceled or expired | (12,000 | ) |
| Held at January 31, 2001 (outstanding and unexercised) | 202,600 | |
| Shares exercisable, January 31, 2001 | 183,600 | |
| Shares available for future grants, end of period | 167,300 | |
| Price range of options held, January 31, 2001 | $ .025 - $.081 |
end of user-specified TAGGED TABLE
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 there were no stock options granted in the years ending January 31, 2001 and 2000.
F-9
ZEQ.=4,SEQ=23,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=701558,FOLIO='F-9',FILE='DISK030:[01WLA8.01WLA1378]FG1378B.;7',USER='TOSBORNA',CD='27-APR-2001;12:18'
NOTE 5INCOME 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,
User-specified TAGGED TABLE
| Income tax provision at 34% | 2001 — $ 157,136 | $ | (267,264 |
|---|---|---|---|
| Other | 127.864 | 29,518 | |
| Benefit of net operating loss carryforwards | -0- | 237,746 | |
| Current federal tax provision, continuing operations | 185,000 | -0- | |
| Tax benefit, discontinued operations | (180,526 | ) | -0- |
| Change in valuation allowance | (5,173 | ) | 69,000 |
| State franchise taxes | 5,173 | 6,696 | |
| Provision for income tax | $ 4,474 | $ | 75,696 |
end of user-specified TAGGED TABLE
During the years ended January, 31, 2001 and 2000, the Company paid cash income taxes of $4,800 and $1,896 respectively. 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:
User-specified TAGGED TABLE
| Allowance for doubtful accounts | 2001 — $ 10,710 | $ | 10,710 | |
|---|---|---|---|---|
| Allowance for inventory obsolescence | 12,852 | 21,420 | ||
| Vacation accrual | 36,414 | 36,592 | ||
| Inventory uniform capitalization | 56,159 | 48,482 | ||
| Loss on disposal of discontinued operations | 90,393 | -0- | ||
| Other | -0- | (1,857 | ) | |
| Less valuation allowance | (70,000 | ) | (70,000 | ) |
| Current | 136,528 | 45,347 | ||
| Tax loss carryforward | 999,797 | 1,105,410 | ||
| Depreciation and amortization | (137,051 | ) | (129,544 | ) |
| Other | 11,846 | (7,886 | ) | |
| Less valuation allowance | (283,827 | ) | (289,000 | ) |
| Non-current | $ 590,165 | $ | 678,980 |
end of user-specified TAGGED TABLE
Realization of the deferred benefit is contingent upon future taxable earnings. For the year ending January 31, 2001 the Company reduced it's valuation allowance by $5,173. For the year ended January 31, 2000 the Company increased its valuation allowance by $324,000 due to the Company generating losses.
The Company estimates it has available net operating loss carryforwards of approximately $2,919,821 for federal income tax purposes and $79,843 for state income tax purposes at January 31, 2001. The Company's federal net operating loss carryforwards expire from 2008 to 2020, State net operating loss carryforwards expire in 2005.
F-10
ZEQ.=5,SEQ=24,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=816652,FOLIO='F-10',FILE='DISK030:[01WLA8.01WLA1378]FG1378B.;7',USER='TOSBORNA',CD='27-APR-2001;12:18'
NOTE 6COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed to minimum lease payments on two non-cancelable operating leases for its facilities which expire in December 2002 and January 2004, as follows:
User-specified TAGGED TABLE
| Twelve Months Ending January 31, | |
|---|---|
| 2002 | $ 408,000 |
| 2003 | 376,500 |
| 2004 | 30,000 |
| TOTAL | $ 814,500 |
end of user-specified TAGGED TABLE
Total rental expense under the facility lease (including expenses) is as follows for the years ending January 31,
User-specified TAGGED TABLE
| 2001 | 2000 |
|---|---|
| $384,840 | $347,270 |
end of user-specified TAGGED TABLE
LEGAL MATTERS
The Company is not party to any legal matters at January 31, 2001.
NOTE 7RELATED PARTY TRANSACTIONS
The Company is using the legal expertise of a lawyer who was a director of the Company. Related legal expenses totaled $53,626 and $72,257 for the years ended January 31, 2001 and 2000, respectively.
NOTE 8CONCENTRATIONS
MAJOR CUSTOMER INFORMATION
Concentration of sales in the Company's four largest customers is as follows for the years ending January 31,
User-specified TAGGED TABLE
| 2001 | 2000 | |
|---|---|---|
| Inflation Systems, Inc. | $ 1,546,396 | $ 1,583,520 |
| DFAS | 1,046,573 | 588,307 |
| Norcross Air, Inc | 1,461,537 | 1,110,333 |
| $ 4,054,506 | $ 3,282,160 |
end of user-specified TAGGED TABLE
F-11
ZEQ.=6,SEQ=25,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=480064,FOLIO='F-11',FILE='DISK030:[01WLA8.01WLA1378]FG1378B.;7',USER='TOSBORNA',CD='27-APR-2001;12:18' Generated by Merrill Corporation (www.merrillcorp.com)
CONCENTRATION OF CREDIT RISK
Concentration of receivables due from the Company's largest customers is as follows at January 31,
User-specified TAGGED TABLE
| 2000 | 2000 | |
|---|---|---|
| Inflation Systems, Inc. | $ 534,437 | 165,234 |
| DFAS | 141,945 | 185,823 |
| Norcross Air, Inc. | 127,825 | 123,074 |
| $ 804,207 | $ 474,131 |
end of user-specified TAGGED TABLE
Inflation Systems, Inc. is a U.S. based major supplier 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 one supplier for the majority of its material needs for automotive airbag filter production.
CASH IN BANK
At January 31, 2001, the Company had no cash in a bank in excess of federally insured limits.
NOTE 9STOCKHOLDERS' 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 receivable. The notes receivable bore interest at 5% and were due on August 2001. 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.
On February 17, 2000, the Board entered into a plan to retire 920,000 shares of its common stock, from shares issued August 24, 1998 in return for cancellation of notes received by the Company from employees and board members. The Company received and retired 731,030 shares of common stock.
F-12
ZEQ.=1,SEQ=26,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=420487,FOLIO='F-12',FILE='DISK030:[01WLA8.01WLA1378]FI1378A.;5',USER='TOSBORNA',CD='27-APR-2001;12:10'
NOTE 10EARNINGS PER SHARE
Reconciliation of basic and diluted earnings per share continuing operations:
User-specified TAGGED TABLE
| INCOME | SHARES | PER SHARE AMOUNT | |||
|---|---|---|---|---|---|
| YEAR ENDED JANUARY 31, 2001 | |||||
| Basic earnings (loss) per share | $ 277,164 | 7,520,929 | $ .04 | ||
| EFFECT OF DILUTIVE SECURITIES | |||||
| Stock options | 14,532 | -0- | |||
| Diluted earnings (loss) per share | $ 277,164 | 7,535,461 | $ .04 | ||
| YEAR ENDED JANUARY 31, 2000 | |||||
| Basic earnings (loss) per share | $ (822,790 | ) | 8,118,738 | $ (0.10 | ) |
| EFFECT OF DILUTIVE SECURITIES | |||||
| Stock options | 0 | ||||
| Diluted earnings per share | $ (822,790 | ) | 8,118,738 | $ (0.10 | ) |
end of user-specified TAGGED TABLE
Basic earnings per share is based on the weighted average number of shares outstanding. Diluted earnings per share include the effect of common stock equivalents when dilutive.
NOTE 11RETIREMENT 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, 2001 and January 31, 2000, the Company contributed $8,427 and $9,399 to the Plan respectively. The Company's maximum contribution is limited to 1 / 2 of 1% of the employee's compensation.
NOTE 12BUSINESS 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 excess of $500,000 up to a maximum of $800,000 in the year ending January 31, 2000. The full amount of the contingency was realized and $150,000 was recorded as additional goodwill during the year ended January 31, 2000.
F-13
ZEQ.=2,SEQ=27,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=149276,FOLIO='F-13',FILE='DISK030:[01WLA8.01WLA1378]FI1378A.;5',USER='TOSBORNA',CD='27-APR-2001;12:10'
NOTE 13SEGMENT REPORTING
User-specified TAGGED TABLE
| 2001 | ||||
|---|---|---|---|---|
| NET SALES | ||||
| Aerospace | $ 5,687,664 | $ | 4,552,556 | |
| QCCC | 350,616 | 751,219 | ||
| Airbags | 1,572,383 | 1,718,784 | ||
| $ 7,610,663 | $ | 7,022,559 | ||
| OPERATING INCOME | ||||
| Aerospace | $ 523,092 | $ | (266,921 | ) |
| QCCC | (102,314 | ) | 184,688 | |
| Airbags | 92,327 | (212,027 | ) | |
| $ 513,105 | $ | (294,260 | ) |
end of user-specified TAGGED TABLE
NOTE 14DISCONTINUED OPERATIONS
As of January 31, 2001 the Company elected to shut down its International Division and all operations have been reclassified under loss from discontinued operations in fiscal year 2001 and 2000. The Company has provided for its estimated loss on the International Division during the phase-out period which expects will end on or about April 30, 2001. The provision is $211,000 ($126,000 net of related taxes) and is included in accrued expenses. The following presents the results of operations for discontinued operations for the years ending January 31,
User-specified TAGGED TABLE
| Revenues | 2001 — $ 623,829 | 2000 — $ 1,424,764 | ||
|---|---|---|---|---|
| Operating Loss | $ (268,816 | ) | $ (25.587 | ) |
| Tax Benefit | $ 95,526 | $ -0- | ||
| Loss from discontinued operations | $ (173,290 | ) | $ (25,587 | ) |
end of user-specified TAGGED TABLE
At January 31, 2001 the balance sheet includes assets for discontinued operations of approximately $184,000 which approximates the net realizable value of accounts receivable and inventories less the estimated loss expected during the phase-out period.
F-14
ZEQ.=3,SEQ=28,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=97191,FOLIO='F-14',FILE='DISK030:[01WLA8.01WLA1378]FI1378A.;5',USER='TOSBORNA',CD='27-APR-2001;12:10' Generated by Merrill Corporation (www.merrillcorp.com) TOC_END
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:
User-specified TAGGED TABLE
| 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 10 th Street, Santa Monica, California * |
| 10.4 | Lease Agreement dated August 1, 1985 for premises at 1648 10 th Street, Santa Monica, California * |
| 10.5 | Lease Agreement dated November 10, 1992 for premises at 1558 10 th 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 ** |
insert table folio ZEQ.=1,SEQ=29,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=958955,FOLIO='blank',FILE='DISK030:[01WLA8.01WLA1378]HA1378A.;14',USER='TOSBORNA',CD='27-APR-2001;12:19' end of table folio
| 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 ** |
| 21 | Subsidiaries of the Company |
end of user-specified TAGGED TABLE User-specified TAGGED TABLE
| * | 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. |
end of user-specified TAGGED TABLE ZEQ.=2,SEQ=30,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1",CHK=549314,FOLIO='blank',FILE='DISK030:[01WLA8.01WLA1378]HA1378A.;14',USER='TOSBORNA',CD='27-APR-2001;12:19' Generated by Merrill Corporation (www.merrillcorp.com)
QuickLinks
TOC_BEGIN PUROFLOW INCORPORATED 2001 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS TOC_BEGIN PART I ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. PENDING LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS, COMMON STOCK PRICE RANGE, AND DIVIDEND POLICY ITEM 6. SELECTED FINANCIAL DATA TOC_BEGIN PART III PART IV SIGNATURES PUROFLOW INCORPORATED TOC_BEGIN PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, 2001 and 2000 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended January 31, 2001 and 2000 TOC_BEGIN PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended January 31, 2001 and 2000 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended January 31, 2001 and 2000 TOC_BEGIN PUROFLOW INCORPORATED INDEX TO EXHIBITS SEQ=,FILE='QUICKLINK',USER=DMALONE,SEQ=,EFW="2046799",CP="PUROFLOW INCORPORATED",DN="1" TOCEXISTFLAG