ARGAN INC — Annual Report 2002

Apr 30, 2002

10KSB 1 form10ksb05190_01312002.htm sec document SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2002 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File No. 0-5622 PUROFLOW INCORPORATED -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-1947195 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10616 Lanark Street, Sun Valley, California 91352 ------------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 504-4000 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 $0.15 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] Registrant's revenues for the fiscal year ended January 31, 2002 were approximately $7,236,000. The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $2,500,583 as of March 31, 2002, 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, 2002: 494,306 Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] The Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on August 13, 2002 is hereby incorporated by reference into Part III of this Form 10-KSB. PUROFLOW INCORPORATED 2002 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS Page PART I ITEM 1. Description of Business.......................................... 1 ITEM 2. Description of Properties........................................ 4 ITEM 3. Legal Proceedings................................................ 4 ITEM 4. Submission of Matters to a Vote of Security Holders.............. 4 PART II ITEM 5. Market for Common Equity and Related Stockholder Matters........ 5 ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 6 ITEM 7. Financial Statements............................................. 8 ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 8 PART III ITEM 9. Directors and Executive Officers of the Registrant............... 9 ITEM 10. Executive Compensation........................................... 9 ITEM 11. Security Ownership of Certain Beneficial Owners and Management.......................................... 9 ITEM 12. Certain Relationships and Related Transactions................... 9 PART IV ITEM 13. Financial Statements, Exhibits, Lists and Reports on Form 8-K.... 9 Signatures....................................................... 10 PART I ITEM 1. DESCRIPTION OF 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. On January 31, 2002 the Company discontinued its QCCC operations and this operation will be phased out over fiscal year 2003. 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 10616 Lanark Street, Sun Valley, California, 91352. The Company's telephone number is (818) 504-4000. Consolidated within a single, 43,000 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's marketing activity is conducted 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. Government Contracts The United States government is consistently within the Company's top ten sales 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 13.3%, respectively, of net sales for fiscal 2001 and 2002. 1 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 can be 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 2002, the Company incurred research and development expenditures of approximately $131,000 and $137,600, 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 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 which is being re-established in the new Sun Valley California facility. QCCC's facility has a Class 10,000 clean room. Replacement Parts The Company is a leading supplier of aftermarket products used in jet aircraft, turboshaft powered aircraft, and helicopters. Utilizing highly successful reverse engineering techniques, the Company produces "generic plain wrap" products for use in the aftermarket at a substantial reduction in cost to the distributor and end-user. The Company utilizes exclusive agreements with its distributor base which assists them to dominate, on a part number base, a particular market segment. The preponderance of future Company sales will continue to be within its core filtration product line. Aftermarket applications 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. Environmental Laws The Company engineers, manufactures and assembles its products at its facility in Sun Valley, California. The Company believes that this facility, as well as the QCCC facility in Commerce, California comply in all material respects with all environmental and regulatory laws pertaining to the handling and storage of hazardous substances. The cost associated with this effort is minimal. 2 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 59% of net sales during fiscal years 2001 and 2002 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. Backlog As of February 28, 2001 and February 28, 2002, the Company had a backlog of approximately $8,587,000 and $7,165,000, respectively. Approximately $3,464,000 of the Company's backlog at February 28, 2002 is scheduled to be shipped in the current fiscal year. The backlog figures include firm purchase orders and, with respect to airbag filters, four-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 month and their best estimate, for planning purposes, of their requirements for the following three-month period. These rolling four-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, 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 are 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, 2002, 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. 3 Insurance The Company maintains general liability, automobile, aircraft products, product liability, workers' compensation, and employer's liability insurance coverage. The Company is engaged in various businesses which could expose it to claims for injury, resulting from the failure of products sold by it. 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. During the last decade, the Company has not been a party to any product liability claim. 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. DESCRIPTION OF PROPERTIES The following table sets forth information as to the location and general character of the facility of the Registrant: Location Principal Use Approximate Sq. Ft. Lease Exp. Date ==================================================================================================================== 10616 Lanark Street Headquarters and manufacturing facility for 43,000 March 14, 2012 (1) Sun Valley, CA 91352 airbag components, government and aerospace filtration. 6118 Ferguson Drive Administration and production facility for 10,000 January 31, 2004 (2) Commerce, CA 90040 Quality Controlled Cleaning Corporation. (1) The Company relocated in February 2002 from its Van Nuys facility to the Sun Valley location. The Sun Valley lease is for 120 months, with an optional right to terminate same following 36 months of the subject lease. (2) The Company's lease from Ferguson Properties, a California Partnership, was for 60 months, with an optional right to terminate same following the first 36 months of the subject lease. The Company has exercised its right to terminate the lease which will be effective in November 2002. ITEM 3. LEGAL PROCEEDINGS The Company is party to two legal proceedings, one as a plaintiff and one as a defendant, that have arisen in the normal course of business. In the single matter in which it is a defendant management believes it has substantial and meritorious defenses. Management further believes that this matter will not have a material adverse affect on the Company's results of operations, liquidity or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 4 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is traded on the National Association of Securities Dealers, Inc., Electronic Bulletin Board ("NASDAQ") System under the symbol PFLW. The following table sets forth the high and low bid quotations for the Common Stock for the periods indicated as reported by NASDAQ. These quotations represent inter-dealer prices and do not include retail markups, markdowns or commissions, and may not necessarily represent actual transactions. High Bid Low Bid ========== ======== Fiscal Year Ended January 31, 2001 9.71 8.69 1st Quarter............................. 9.32 8.04 2nd Quarter ............................ 9.78 8.36 3rd Quarter............................. 10.08 8.69 4th Quarter............................. Fiscal Year Ended January 31, 2002 1st Quarter............................. 10.31 8.44 2nd Quarter ............................ 10.05 7.65 3rd Quarter............................. 8.40 3.50 4th Quarter............................. 6.20 4.00 Fiscal Year Ended January 31, 2003 Two Months Ending March 31, 2002........ 5.70 5.05 (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, 2002, the closing bid price for the Company's Common Stock on the Bulletin Board System was $5.70 per share. As of March 31, 2002, the Company had approximately 167 stockholders of record. To date, Puroflow has not declared or paid cash dividends to its stockholders. Puroflow has no plans to declare and pay cash dividends in the near future. 5 ITEM 6. MANAGEMENT'S DISCUSSION AND 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 Chemical Process (CPI) division, including all the CPI assets it had acquired from Michigan Dynamics, Inc. 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 QCCC on January 31, 1999. The QCCC division was discontinued January 31, 2002 and will be phased out during fiscal year 2003. 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. 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 fiscal years ended January 31, 2001 and 2002: Year Ended January 31, 2001 2002 ----- ----- Net sales: 100.0% 100.0% ----- ----- Cost and expenses: Cost of goods sold 70.1 71.0 Selling, general and administrative 23.2 23.9 Other (income) expense 0.7 0.6 Income from continuing operations before income taxes 8.5 4.5 Provision for income taxes Income (loss) from discontinued operations 3.4 1.8 Net loss (5.4) (9.9) ---- ---- (0.3)% (7.2)% 6 COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 2001 AND 2002 Net Sales Net sales decreased .3% to $7.2 million in fiscal 2002 as compared to $7.3 million in fiscal 2001. This was due to a decrease in high performance filters sold through the Company's commercial distribution network which experienced a significant downturn in the past year due to a slowing U.S. economy. This was offset by an increase in airbag products. Gross Margin Gross margin as a percentage of net sales was 29.0% in fiscal 2002 compared to 30.1% in fiscal 2001. The decrease in the margin is attributable to an increase in the volume of airbag products sold which traditionally are a lower margin product than the high performance filters segment. Selling, General and Administrative Selling, general and administrative expense for continuing operations were $1.7 million or 23.9% of sales in fiscal 2002 as compared to $1.5 million in fiscal 2001 or 20.9% of sales. The increase is attributable to an increase in the Company's investment in its information technology systems, in addition to a general increase in both legal fees and salaries. Interest Expense Interest expense decreased to $46,979 in fiscal 2002 as compared to $61,940 in fiscal 2001. This was due to the combination of the Company maintaining a lower line of credit in addition to the payoff of a bank overdraft. Provision for Income Taxes The Company's effective tax rate was 40.0 percent for fiscal 2002 and fiscal 2001. This was due to recognition of tax benefits of $126,000 in fiscal 2002 and $63,000 in fiscal 2001 recorded for the discontinuance of the QCCC and International operations. The net effect of the income tax expense after recording this tax provision was $130,000 for fiscal 2002 and $248,000 for fiscal 2001. 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 2002, cash increased from $8,250 at January 31, 2001 to $123,330 at January 31, 2002. The Company's financial condition remained strong, with a ratio of current assets to current liabilities of 2.6:1 at January 31, 2001 and 2.5:1 at January 31, 2002. The Company generated cash from operating activities of $409,720 which consisted primarily of the cash generated by the reduction in receivables. Cash used in investing activities of $144,953 was the investments made to purchase plant equipment and the construction of both the new facility and a clean room. Net cash used for financing activities of $149,687 included $75,067 to pay the principal balance of an outstanding notes payable, $34,698 to pay a bank overdraft and $34,000 to pay down the Company's credit line. The Company maintains a revolving credit line of $1,000,000 with an interest rate of .25% above prime. 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 $3,600,000; (ii) a ratio of current and non-current liabilities (less subordinated debt) to net worth of not more than 0.50 to 1.00; and (iii) working capital of not less than $2,000,000. As of January 31, 2002 the Company was in compliance with all of its covenants. Subsequent to the 2002 year-end, the Company re-structured its credit facility that is comprised of two revolving credit agreements with one bank. The new structure is not contingent on the Company's level of accounts receivable and offers a revolving $1,000,000 line of credit. One agreement is a $250,000 term note that is payable over four years that expires in March 2006, and the other is a $750,000 line of credit that expires in December 2002. The agreements provide for borrowings at prime plus 0.25% per annum and they contain the same restrictive covenants as above. 7 The Company anticipates that it will spend approximately $225,000 for capital expenditures during fiscal year 2003. This is expected to include investments in the construction of a clean room, information systems and manufacturing equipment. With its present capital resources, available credit from its revolving credit facility and cash flow from operations, the Company believes that it should have sufficient resources to meet its operating needs for the next twelve months and to provide for debt maturities and capital expenditures. EFFECTS OF INFLATION ON BUSINESS Management believes that inflation has not had a material effect on the Company's operations. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations." SFAS 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. Puroflow does not expect the adoption of SFAS 141 to have a material effect on its financial condition or results of operations. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which requires the discontinuance of goodwill amortization. SFAS 142 is required to be applied for fiscal years beginning after December 15, 2001, with certain early adoption permitted. Puroflow expects to adopt SFAS 142 for its first fiscal quarter of 2003, and does not expect the adoption to have a material effect on its financial condition or results of operations. In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. Puroflow is in the process of assessing the effect of adopting SFAS 144, which will be effective for Puroflow's 2003 fiscal year. FORWARD-LOOKING STATEMENTS This Form 10-KSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, (including without limitation, the Company's future gross profit, selling, general and administrative expenses, the Company's financial position, working capital and seasonal variances in the Company's operations, as well as general market conditions) though the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-KSB will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. ITEM 7. FINANCIAL STATEMENTS 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 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 8 PART III ITEM 9. 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 10. 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 11. 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 12. 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 13. FINANCIAL STATEMENTS, EXHIBITS, LISTS AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The following financial statements (including notes thereto and the Independent Auditors' Report with respect thereto), are filed as part of this annual report on Form 10-KSB starting on page F-1 hereof: Independent Auditors' Reports. Consolidated Balance Sheets at January 31, 2001 and 2002. Consolidated Statements of Operations for each of the two years in the period ended January 31, 2002. Consolidated Statements of Stockholders' Equity for each of the two years in the period ended January 31, 2002. Consolidated Statements of Cash Flows for each of the two years in the period ended January 31, 2002. Notes to Consolidated Financial Statements. (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 None 9 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 25, 2002 ------------------------------------------ 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 25, 2002 ------------------------------------------ Michael H. Figoff President/Chief Executive Officer Director By: /s/Travis Bradford April 25, 2002 ------------------------------------------ Travis Bradford Vice Chairman of the Board By: /s/Tracy K. Pugmire April 25, 2002 ------------------------------------------ 25, 2002 Dr. Tracy K. Pugmire Director By: /s/Warren Lichtenstein April 25, 2002 ------------------------------------------ 25, 2002 Warren Lichtenstein Director By: /s/Robert A. Smith April 25, 2002 ------------------------------------------ 25, 2002 Robert A. Smith Director By: /s/Josh Schechter April 25, 2002 ------------------------------------------ 25, 2002 Josh Schechter Director 10 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, 2002 and 2001, 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 accounting standards generally accepted in the United States. 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, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Rose, Snyder & Jacobs A Corporation of Certified Public Accountants Encino, California March 28, 2002 F-1 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, 2001 and 2002 2001 2002 ------------------- ------------------ CURRENT ASSETS: Cash, Note 7 $ 8,250 $ 123,330 Accounts receivable, net of allowance for doubtful accounts of $25,000 at January 31, 2001 and $48,000 at January 31, 2002 1,704,567 1,088,187 Deferred tax benefit, current, Note 5 136,528 145,235 Inventories, Note 1 2,016,792 2,159,755 Prepaid expenses and deposits 114,068 123,986 ------------------- ------------------ TOTAL CURRENT ASSETS 3,980,205 3,640,493 ------------------- ------------------ PROPERTY AND EQUIPMENT -Note 1 Leasehold improvements 62,834 63,914 Machinery and equipment 3,622,541 3,669,356 Tooling and dies 376,307 397,205 Construction in progress - 106,854 ------------------- ------------------ 4,061,682 4,237,329 Less accumulated depreciation and amortization 3,366,441 3,546,793 ------------------- ------------------ NET PROPERTY AND EQUIPMENT 695,241 690,536 ------------------- ------------------ DEFERRED TAX BENEFIT, NOTE 5 590,165 589,985 OTHER ASSETS, NOTE 1 339,762 29,722 ------------------- ------------------ TOTAL ASSETS $ 5,605,373 $ 4,950,736 =================== ================== CURRENT LIABILITIES: Line of credit, Note 2 $ 544,000 $ 510,000 Notes payable, current, Note 3 48,000 17,133 Current portion of capital lease, Note 3 - 6,299 Bank overdraft 34,698 - Accounts payable 506,207 402,773 Accrued expenses 429,986 516,664 ------------------- ------------------ TOTAL CURRENT LIABILITIES 1,562,891 1,452,869 ------------------- ------------------ LONG TERM DEBT, Note 3 44,200 18,473 COMMITMENTS AND CONTINGENCIES Note 6 STOCKHOLDERS' EQUITY, Note 4 and Note 9 Preferred stock, par value $.10 per share Authorized - 33,333 shares. Issued - None Common stock, par value $.15 per share Authorized - 800,000 shares. Outstanding 493,273 shares at January 31, 2001 and 494,306 shares at January 31, 2002 433,967 433,967 Additional paid-in capital 5,141,767 5,141,767 Accumulated deficit (1,538,533) (2,057,421) Less: Notes receivable from stockholders (6,000) (6,000) Treasury stock at cost (32,919) (32,919) ------------------- ------------------ TOTAL STOCKHOLDERS' EQUITY 3,998,282 3,479,394 ------------------- ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,605,373 $ 4,950,736 =================== ================== See independent auditors' report and notes to the financial statements. F-2 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended January 31, 2001 and 2002 Years ended January 31, 2001 2002 ----------- ----------- Net sales $ 7,260,046 $ 7,236,058 Cost of goods sold 5,071,239 5,137,157 ----------- ----------- Gross profit 2,188,807 2,098,901 Selling, general and administrative expenses 1,517,863 1,728,216 ----------- ----------- Operating income 670,944 370,685 Other income and (expense) Other income 10,999 2,092 Interest expense (61,940) (46,979) ----------- ----------- Income before tax from continuing operations 620,003 325,798 Income tax expense 248,000 130,000 ----------- ----------- Net income from continuing operations $ 372,003 $ 195,798 ----------- ----------- Loss from discontinued operations, Note 11 (268,129) (154,686) Loss from disposal of discontinued operations, Note 11 (126,000) (560,000) ----------- ----------- Net loss $ (22,126) $ (518,888) =========== =========== Basic earnings per share, continuing operations $ 0.74 $ 0.40 Basic earnings per share, discontinued operations $ (0.79) $ (1.45) ----------- ----------- Total $ (0.04) $ (1.05) =========== =========== Diluted earnings per share, continuing operations $ 0.74 $ 0.40 Diluted earnings per share, discontinued operations $ (0.78) $ (1.45) ----------- ----------- Total $ (0.04) $ (1.05) =========== =========== Weighted average number of shares, basic 501,395 493,273 =========== =========== Weighted average number of shares, diluted 502,364 494,306 =========== =========== See independent auditors' report and notes to the financial statements. F-3 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended January 31, 2001 and 2002 NOTES RECEIVABLE FROM COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS STOCK PAID-IN DEFICIT AND TREASURY PAR VALUE CAPITAL TOTAL STOCK TOTAL ============= ========== =========== ============= ============ 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 8 (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 Net loss -- -- (518,888) -- (518,888) ----------- ----------- ----------- ----------- ----------- Balance at January 31, 2002 $ 433,967 $ 5,141,767 $(2,057,421) $ (38,919) $ 3,479,394 =========== =========== =========== =========== =========== See independent auditors' report and notes to the financial statements. F-4 PUROFLOW INCORPORATED AND SUBSIDIARIES C6ONSOLIDATED STATEMENTS OF CASH FLOWS Years ended January 31, 2001 and 2002 Years ended January 31, 2001 2002 --------- --------- CASH AT BEGINNING OF YEAR $ 56,829 $ 8,250 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (22,126) (518,888) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 273,655 490,392 Provision for losses on accounts receivable 33,142 55,459 Changes in operating assets and liabilities: Advances to officers & employees 975 -- Accounts receivable (145,262) 560,921 Inventories (275,704) (142,963) Prepaid expenses and deposits (6,604) (9,918) Deferred taxes (2,366) (8,527) Accounts payable and accrued expenses 182,610 (16,756) --------- --------- Net cash provided by operating activities 38,320 409,720 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (68,397) (144,953) --------- --------- Net cash used for investing activities (68,397) (144,953) CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft 34,698 (34,698) Advances (payments) on credit line 44,000 (34,000) Principal payments on capital lease -- (5,922) Principal payments on notes payable (97,200) (75,067) --------- --------- Net cash used for financing activities (18,502) (149,687) --------- --------- NET INCREASE (DECREASE) IN CASH (48,579) 115,080 --------- --------- CASH AT END OF YEAR $ 8,250 $ 123,330 ========= ========= See independent auditors' report and notes to the financial statements. F-5 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION ------------ Puroflow Incorporated was organized on May 15, 1961 under the laws of the State of Delaware. Puroflow Incorporated and its wholly owned subsidiaries (together referred therein as the "Company") specializes primarily in designing and manufacturing automotive airbag filters and high performance filters. The Company is located in Sun Valley, 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 and this corporation has been discontinued. (See Note 11). INVENTORIES ----------- Inventories are stated at the lower of cost of market on a first-in, first-out basis, and consist of the following items: January 31, January 31, 2001 2002 ================ =============== Raw materials and purchased parts $ 1,263,199 $ 1,417,418 Work in progress 394,580 376,047 Finished goods 359,013 366,290 ------------- ------------- Total $ 2,016,792 $ 2,159,755 ============= ============= 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 Tooling and dies 5 years Leasehold improvements 5 years 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. CASH FLOWS ---------- For the purpose of the statement of cash flows, the Company considers cash equivalents to include cash only and to exclude any near-cash short-term investments. ESTIMATES --------- Generally accepted accounting principles require that financial statements include estimates by management in the valuation of certain assets and liabilities. The Company's management estimates the reserve for doubtful accounts, the reserve for obsolete inventory, the useful lives of property and equipment and the valuation allowance for deferred tax assets. Management uses its historical record and knowledge of its business in making these estimates. Accordingly, actual results may differ from estimates. See independent auditors' report F-6 RESEARCH AND DEVELOPMENT EXPENSES --------------------------------- Research and development expenditures are expensed as incurred and are approximately as follows for the years ended January 31, 2001 2002 ================== ===================== $ 131,000 $ 137,600 ================== ===================== 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, basic 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. That business has been discontinued (See Note 11) and the goodwill was written down to $0 in recognition of its impairment. That write down totaled $275,120 and is included in the loss on disposal of discontinued operations. 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. SEGMENT REPORTING ----------------- Due to the discontinuance of the Quality Controlled Cleaning Corporation business segment, the Company operates in only one business segment. NOTE 2 - LINE OF CREDIT The Company has a $1,000,000 revolving credit line maturing on December 17, 2002. 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, 2002, the Company was in compliance with all covenants on the line of credit. The balance outstanding was $544,000 and $510,000 at January 31, 2001 and 2002, respectively. Subsequent to the 2002 year-end, the Company re-structured its credit facility that is comprised of two revolving credit agreements with one bank. The new structure is not contingent on the Company's level of accounts receivable and offers a revolving $1,000,000 line of credit. One agreement is a $250,000 term note that is payable over four years that expires in March 2006, and the other is a $750,000 line of credit that expires in December 2002. The agreements provide for borrowings at prime plus 0.25% per annum and they contain the same restrictive covenants as above. The Company was in compliance with all of its covenants on the credit facility. See independent auditors' report F-7 NOTE 3 - LONG-TERM DEBT ----------------------- January 31, January 31, 2001 2002 =========== =========== Note payable to a bank bearing interest at prime plus 1.5% payable in principal monthly payments of $3,933, maturing in April 2003. $92,200 $17,133 Capital lease on a computer system with an imputed rate of interest of 9.2% with monthly payments of $693 maturing in July 2005 - 24,772 ----------- ------------ 92,200 41,905 Less current portion 48,000 23,432 ----------- ------------ Long-term debt $44,200 $18,473 =========== ============ Maturities of long-term debt is as follows: 2003 $ 23,432 2004 7,571 2005 7,513 2006 3,389 ------------- $ 41,905 ============= Assets under the capital lease totaled $30,694 at January 31, 2002. Interest paid in cash totaled as follows for the years ended January 31, 2001 2002 =============== ============= $ 61,940 $ 46,979 =============== ============= NOTE 4 - STOCK OPTION PLANS --------------------------- In August 2001, the Company implemented a new Incentive Stock Option Plan which provides options to purchase up to 33,333 shares of the Company's Common Stock for officers, directors, and key employees, at an exercise price equal to the fair market value on the date of grant as determined by the Board of Directors. The shares issued under the Option Plan shall become vested over periods up to three years. As of January 31, 2002, there were 33,333 option shares available for grant. Under a previous plan, the Company had issued stock options to certain officers, directors, and key employees to purchase shares of its Common Stock within prescribed periods at prices that varied between $3.75 to $12.15 per share. This plan was terminated upon the consummation of the August 2001 Incentive Stock Option Plan. As of January 31, 2002, there were options for 12,507 shares held and options for 10,868 shares available for exercise. 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 2002. See independent auditors' report F-8 NOTE 5 - INCOME TAXES --------------------- The following is a reconciliation of the tax provision, computed by applying the statutory federal income tax rates and the income tax provision per the financial statements for the years ended January 31, 2001 2002 ========= ======== Income tax provision at 34% $ 210,801 $ 110,771 Other 32,026 50,017 Benefit of net operating loss carryforwards -- -- --------- --------- Current federal tax provision, continuing operations 242,847 160,778 Tax benefit, discontinued operations (248,000) (126,000) Change in valuation allowance 5,173 (30,778) State franchise taxes 4,474 4,000 --------- --------- Provision for income tax $ 4,474 $ 4,000 ========= ========= During the years ended January, 31, 2002 and 2001, the Company paid cash income taxes of $4,000 and $4,800 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: 2001 2002 =========== =========== Allowance for doubtful accounts $ 10,710 $ 20,563 Allowance for inventory obsolescence 12,852 12,852 Vacation accrual 36,414 36,414 Inventory uniform capitalization 56,159 43,620 Loss on disposal of discontinued operations 90,393 101,786 Less valuation allowance (70,000) (70,000) ----------- ----------- Current 136,528 145,235 =========== =========== Tax loss carryforward 999,197 1,020,155 Depreciation and amortization (137,051) (163,590) Other 11,846 (13,531) Less valuation allowance (283,827) (253,049) ----------- ----------- Non-current $ 590,165 $ 589,985 =========== =========== Realization of the deferred benefit is contingent upon future taxable earnings. For the year ending January 31, 2002 the Company reduced its valuation allowance by $30,778. For the year ended January 31, 2001 the Company reduced its valuation allowance by $5,173. The Company estimates it has available net operating loss carryforwards of approximately $ 2,968,004 for federal income tax purposes and $ 124,823 for state income tax purposes at January 31, 2002. The Company's federal net operating loss carryforwards expire from 2008 to 2020, State net operating loss carryforwards expire in 2005. See independent auditors' report F-9 NOTE 6 - COMMITMENTS AND CONTINGENCIES -------------------------------------- OPERATING LEASES ---------------- The Company moved into a new facility under a non-cancelable lease agreement commencing December 2001 which expires in March 2012. The Company is committed to minimum payments under this lease as follows: Twelve Months Ending January 31, ================================ 2003 $ 262,500 2004 300,000 2005 300,000 2006 315,000 2007 324,000 Thereafter 1,696,500 ========== TOTAL $3,198,000 ========== Total rental expense under facility leases (including expenses) is as follows for the years ending January 31, 2001 2002 ========== =============== $384,840 $ 408,000 ========== =============== LEGAL MATTERS ------------- At January 31, 2002 the Company is party to two legal proceedings, one as a plaintiff and one as a defendant that have arisen in the normal course of business. In its single matter in which it is a defendant management believes it has substantial and meritorious defenses. Management further believes that this matter will not have a material adverse affect on the Company's results of operations, liquidity or financial position. NOTE 7 - CONCENTRATIONS ----------------------- MAJOR CUSTOMER INFORMATION -------------------------- Concentration of sales in the Company's three largest customers was $4,054,506 for the year ending January 31, 2001 and $4,465,971 for the year ending January 31, 2002. CONCENTRATION OF CREDIT RISK ---------------------------- Concentration of receivables due from the Company's largest customers was $804,207 for the year ending January 31, 2001 and $576,335 for the year ending January 31, 2002. The Company performs credit evaluations and analysis of amount due from its customers; however, the Company does not require collateral. Credit losses have been within management's expectations and an estimate of uncollectable accounts has been provided for in the financial statements. 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, 2002, the Company had cash in a bank in excess of federally insured limits of approximately $23,330. See independent auditors' report F-10 NOTE 8 - STOCKHOLDERS' EQUITY ----------------------------- On August 24, 1998, the Company issued an 8-K report stating that the Board of Directors has authorized the issuance of 66,667 shares of common stock for sale to directors, officers and employees. The Company sold 62,667 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. There is one remaining shareholder that the Company is pursuing to retire the shares and forgive the note. During the 3-month period from August 1, 1998 through October 31, 1998, the Company purchased 3,233 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 61,333 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 48,735 shares of common stock. NOTE 9 - EARNINGS PER SHARE --------------------------- Reconciliation of basic and diluted earnings per share for continuing operations: PER SHARE INCOME SHARES AMOUNT ======== ========= ========== YEAR ENDED JANUARY 31, 2001 -------------------------------------- Basic earnings (loss) per share $372,003 501,395 $ 0.74 EFFECT OF DILUTIVE SECURITIES ----------------------------- Stock options 969 -- -------- -------- -------- Diluted earnings (loss) per share $372,003 502,364 $ 0.74 ======== ======== ======== YEAR ENDED JANUARY 31, 2002 ----------------------------- Basic earnings (loss) per share $195,798 493,273 $ 0.40 EFFECT OF DILUTIVE SECURITIES ----------------------------- Stock options 1,033 -- -------- -------- -------- Diluted earnings per share $195,798 494,306 $ 0.40 ======== ======== ======== 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 10 - RETIREMENT PLAN ------------------------- The Company has a defined contribution 401(k) covering all employees who have completed one year of service. The Company makes "matching" contributions of 10% of the participant's deferral amount, limited to 5% of the participant's eligible compensation for the year. The Company may also make discretionary contributions to the plan based upon participant compensation and net profits. During the years ended January 31, 2001 and January 31, 2002, the Company contributed $ 8,427 and $8,161 to the Plan respectively. The Company's maximum contribution is limited to 1/2 of 1% of the employee's compensation. NOTE 11 - DISCONTINUED OPERATIONS --------------------------------- As of January 31, 2002 the Company elected to shut down its Quality Controlled Cleaning division and all operations have been reclassified under loss from discontinued operations in fiscal years 2001 and 2002. The Company has provided for its estimated loss on the Quality Controlled Cleaning division during the phase-out period which it expects will end during fiscal year 2003. The provision is $339,880 and is included in accrued expenses. 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. The division was completely shuttered during fiscal 2002 and no additional losses were realized beyond those provided for at January 31, See independent auditors' report F-11 2001. The amount provided for at January 31, 2001 was $211,000 and was included in accrued expenses at that date. The following presents the results of operations for discontinued operations for the years ending January 31, 2001 2002 -------------- ----------- Revenues $ 974,446 $ 179,421 ============== =========== Operating Loss $ (426,655) $(225,686) Tax Benefit $ 158,526 $ 71,000 -------------- ----------- Loss from discontinued operations $ (268,129) $(154,686) ============== ========== At January 31, 2002 the balance sheet includes assets for discontinued operations of approximately $30,000 which approximates the net realizable value of accounts receivable and inventories less the estimated loss expected during the phase-out period. 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. See independent auditors' report F-12 PUROFLOW INCORPORATED INDEX TO EXHIBITS This Index is filed in response to Item 13 and the following documents are filed as Exhibits in response to Item 13 as required by Item 601 of Regulation S-B: Exhibit Description No. ================================================================================ 3.1 Certificate of Incorporation(1) 3.2 Bylaws(1) 10.1 Asset Purchase Agreement dated September 29, 1992 between the Company and Engineered Magnetics, Inc. for sale of the CPI Division(5) 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.(2) 10.3 Lease Agreement dated April 6, 1984 for premises at 1631 10th Street, Santa Monica, California(1) 10.4 Lease Agreement dated August 1, 1985 for premises at 1648 10th Street, Santa Monica, California(1) 10.5 Lease Agreement dated November 10, 1992 for premises at 1558 10th Street, Santa Monica, California(5) 10.6 Employment Agreement dated March 1, 1993 between the Company and Joseph B. Jasso(5) 10.7 Employment Agreement dated March 1, 1993 between the Company and Michael H. Figoff(5) 10.8 Employment Agreement dated February 14, 1991 between the Company and Robert A. Smith(1) 10.9 1991 Key Employee Incentive Stock Option Plan(1) 10.10 Form of Stock Option Agreement under the 1991 Key Employee Incentive Stock Option Plan(1) 10.11 Form of Directors Stock Option Agreement dated July 9, 1987(1) 10.12 Form of Directors Stock Option Agreement dated February 14, 1991(1) 10.13 Letter Agreement and related note payable to Imperial Bank dated March 17, 1993(5) 10.14 Note payable to Imperial Bank dated March 17, 1993(5) 10.15 Security and Loan Agreement with Imperial Bank dated March 17, 1993(5) 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(5) 10.17 Lease dated January 13, 1992 between the Company and Jerome and Faith Pearlman(3) 10.18 Settlement Agreement with Stroock & Stroock & Lavan, special counsel to the Registrant, dated November 17, 1992(4) 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(6) 10.20 Note payable to Imperial Bank dated November 5, 1993(7) 10.21 Note payable to Imperial Bank dated November 5, 1993(7) 10.22 Security and Loan Agreement with Imperial Bank dated November 5, 1993(7) 10.23 Stipulation for immediate appointment of Receiver on behalf of Imperial Bank dated May 1, 1995(8) 10.24 Stipulation re: First Amendment to Order Appointing Receiver dated September 5, 1995(8) 10.25 First Amendment to Stipulation re: First Amendment to Order appointing Receiver dated January 16, 1996(8) 10.26 Sublease dated July 27, 1995 between Kaiser Marquardt and the Company with sublease guarantor Kaiser Aerospace and Electronics(8) 21 Subsidiaries of the Company (filed herewith) -------------------------------------------------------------------------------- (1) 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. (2) 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. (3) Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on April 29, 1992. (4) Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on December 15, 1992. (5) Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on May 15, 1993. (6) Incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on September 10, 1993. (7) Incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on December 12, 1993. (8) Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on April 25, 1996.