ARGAN INC — Interim / Quarterly Report 2002

Dec 12, 2002

10QSB 1 a2096181z10qsb.htm 10QSB QuickLinks -- Click here to rapidly navigate through this document TOC_END

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended October 31, 2002

Commission File Number 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.)
10616 Lanark Street, Sun Valley, California (Address of executive offices)	91352 (ZIP Code)

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Registrant's telephone number, including area code: (818) 504-4000

Securities registered pursuant to Section 12(g) of the Act:

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Common Stock	Shares Outstanding
Common Stock, $.15 Par Value	494,306

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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 ý No o

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PUROFLOW INCORPORATED Consolidated Balance Sheets (Unaudited)

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	October 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 302,849	$	123,330
Accounts receivable net of allowance for doubtful accounts of $35,000 at October 31, 2002 and $48,000 at January 31, 2002	1,033,822		1,088,187
Inventories	2,022,997		2,159,755
Deferred tax benefit	145,235		145,235
Prepaid expenses and other current assets	121,460		123,986
TOTAL CURRENT ASSETS	3,626,363		3,640,493
PROPERTY & EQUIPMENT
Leasehold improvements	290,883		63,914
Machinery and equipment	3,705,580		3,669,356
Tooling and dies	401,165		397,205
Construction in progress	—		106,854
	4,397,628		4,237,329
Less accumulated depreciation and amortization	3,683,170		3,546,793
NET PROPERTY AND EQUIPMENT	714,458		690,536
Deferred tax benefit	589,985		589,985
Other assets	29,722		29,722
TOTAL ASSETS	$ 4,960,528	$	4,950,736
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit	$ 228,751	$	510,000
Accounts payable	336,639		402,773
Accrued expenses	341,487		516,664
Current portion of long-term debt	71,762		17,133
Current portion of capital lease	1,645		6,299
TOTAL CURRENT LIABILITIES	980,284		1,452,869
Long-term debt	200,769		18,473
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share authorized—500,000 shares—issued none	—		—
Common stock, par value $.15 per share
Authorized—12,000,000 shares, 494,306 shares outstanding at October 31, 2002 and 494,306 shares outstanding at January 31, 2002	433,967		433,967
Additional paid-in capital	5,141,767		5,141,767
Accumulated deficit	(1,757,340	)	(2,057,421	)
Less:
Notes receivable from stockholders	(6,000	)	(6,000	)
Treasury stock at cost	(32,919	)	(32,919	)
TOTAL STOCKHOLDERS' EQUITY	3,779,475		3,479,394
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 4,960,528	$	4,950,736

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See accompanying notes to the consolidated financial statements.

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PUROFLOW INCORPORATED Consolidated Statements of Operations (Unaudited)

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	Three months ended October 31, — 2002	2001			Nine months ended October 31, — 2002	2001
Net revenue	$ 1,642,355	$	1,832,376		$ 4,998,921	$	5,786,231
Cost of goods sold	1,051,167		1,256,501		3,232,551		4,043,887
Gross profit	591,188		575,875		1,766,370		1,742,344
Selling, general and administrative expenses	508,643		454,670		1,483,387		1,288,726
Operating income	82,545		121,205		282,983		453,618
Interest expense	(7,120	)	(10,945	)	(21,587	)	(38,895	)
Other income	2,740		30		57,305		2,029
Amortization goodwill/non-compete	—		(16,768	)	—		(45,656	)
Income before taxes from continuing operations	78,165		93,522		318,701		371,096
Provision for income taxes	4,200		17,900		18,620		24,327
Income from continuing operations	73,965		75,622		300,081		346,769
Loss from discontinued operations	—		(16,117	)	—		(118,825	)
Net Income	$ 73,965	$	59,505		$ 300,081	$	227,944
Earnings per share:
Basic earnings per share, continuing operations	$ 0.15	$	0.15		$ 0.61	$	0.70
Basic earnings per share, discontinued operations	$ —	$	(0.03	)	$ —	$	(0.24	)
Total	$ 0.15	$	0.12		$ 0.61	$	0.46
Diluted earnings per share, continuing operations	$ 0.15	$	0.15		$ 0.61	$	0.70
Diluted earnings per share, discontinued operations	$ —	$	(0.03	)	$ —	$	(0.24	)
Total	$ 0.15	$	0.12		$ 0.61	$	0.46
Weighted average number of shares:
Basic	494,306		494,132		494,306		494,132
Diluted	494,499		494,926		494,719		495,165

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See accompanying notes to the consolidated financial statements.

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PUROFLOW INCORPORATED Statements of Consolidated Cash Flows (Unaudited)

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	Nine Months Ended October 31, — 2002	2001
CASH AT BEGINNING OF PERIOD	$ 123,330	$	8,250
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	300,081		227,944
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	136,377		143,613
Amortization of goodwill / non-compete	—		45,656
Provision for losses on accounts receivable	—		23,000
Changes in operating assets and liabilities:
Accounts receivable	54,365		305,775
Inventories	136,758		(122,846	)
Prepaid expenses and other current assets	2,526		34,481
Deferred tax benefit	—		16,000
Accounts payable & accrued expenses	(241,311	)	(384,155	)
Net cash provided by operating activities	388,796		289,468
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(160,299	)	(76,901	)
Net cash used for investing activities	(160,299	)	(76,901	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft	—		(34,698	)
Principal payments on capital lease	(4,654	)	—
Payment of long-term debt	—		(54,200	)
Payment on credit facility	(44,324	)	(24,000	)
Net cash used for financing activities	(48,978	)	(112,898	)
NET INCREASE IN CASH	179,519		99,669
CASH AT END OF PERIOD	$ 302,849	$	107,919

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See accompanying notes to the consolidated financial statements.

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PUROFLOW INCORPORATED AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity (Unaudited)

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Balance at January 31, 2001	COMMON STOCK PAR VALUE — $ 433,967	ADDITIONAL PAID-IN CAPITAL — $ 5,141,767	ACCUMULATED DEFICIT TOTAL — $ (1,538,533	)	NOTES RECEIVABLE FROM STOCKHOLDERS AND TREASURY STOCK — $ (38,919	)	TOTAL — $ 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
Net Income			$ 125,067				$ 80,288
Balance at April 30, 2002	$ 433,967	$ 5,141,767	$ (1,932,354	)	$ (38,919	)	$ 3,604,461
Net Income			$ 101,049				$ 101,049
Balance at July 31, 2002	$ 433,967	$ 5,141,767	$ (1,831,305	)	$ (38,919	)	$ 3,705,510
Net Income			$ 73,965				$ 73,965
Balance at October 31, 2002	$ 433,967	$ 5,141,767	$ (1,757,340	)	$ (38,919	)	$ 3,779,475

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PUROFLOW INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) October 31, 2002, January 31, 2002, and October 31, 2001

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

The consolidated balance sheet at the end of the preceding fiscal year has been derived from the audited consolidated balance sheet contained in the Company's annual report on Form 10-K for the fiscal year ended January 31, 2002 (The "Form 10-KSB") and is presented for comparative purposes. All other financial statements are unaudited. In the opinion of management, all adjustments that include only normal recurring adjustments necessary to present fairly the financial position, results of operations and changes in financial positions for all periods presented have been made. The results of operations for interim periods are not necessarily indicative of the operating results for the full year.

Footnote disclosures normally included in financial statements prepared in accordance with the generally accepted accounting principles have been omitted in accordance with the published rules and regulations of the Securities and Exchange Commission.

The consolidated financial statements and notes thereto should be read in conjunction with management's discussion and analysis of financial condition and results of operations, contained in the Company's annual report on Form 10-KSB for the year ended January 31, 2002.

NOTE 2—INVENTORIES

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis, and consist of the following items:

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	October 31, 2002	January 31, 2002
Raw materials and purchased parts	$ 1,180,736	$ 1,417,418
Work in process	455,096	376,047
Finished goods and assemblies	387,165	366,290
Totals	$ 2,022,997	$ 2,159,755

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NOTE 3—STOCKHOLDERS' EQUITY

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.

On August 27, 2001 at a duly called meeting of the stockholders, stockholders voted in favor of an amendment authorizing a fifteen to one reverse stock split. On October 8, 2001 the Board initiated this "Reverse Stock Split" where every share issued and outstanding prior to the effective date (October 8, 2001) shall be reclassified and continued as one-fifteenth of one share of common stock, without any action on the part of the holder.

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NOTE 4—NET INCOME PER SHARE

Reconciliation of basic and diluted earnings per share:

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	INCOME	SHARES	PER-SHARE AMOUNT
Nine Months Ended October 31, 2002
Basic earnings per share	$ 300,081	494,306	$ 0.61
Effect of Dilutive Securities Stock options	—	413
Diluted earnings per share	$ 300,081	494,719	$ 0.61
Nine Months Ended October 31, 2001
Basic earnings per share	$ 227,944	494,132	$ 0.46
Effect of Diluted Securities Stock options	—	1,033
Diluted earnings per share	$ 227,944	495,165	$ 0.46

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Basic earnings per share has been determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share has been determined using the weighted average number of common shares and equivalents (representing the dilutive effect of stock options) outstanding during the period. The Company's net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share.

NOTE 5—LINE OF CREDIT

The Company has a $1,000,000 credit facility made up of two credit agreements with the bank. 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 these loan agreements contain certain restrictive covenants, including maintenance of minimum working capital, net worth, and ratios of current liabilities and debt to net worth.

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 revolving line of credit that expires in December 2002. The Company was in compliance with all of its covenants on the credit facility at October 31, 2002.

NOTE 6—INCOME TAXES

The company complies with Financial Accounting Standards No. 109, Accounting for Income Taxes. The company will use loss carryforwards to offset future income tax liability.

NOTE 7—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 balance of the provision is $220,681 at October 31, 2002 and is included in accrued expenses.

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NOTE 8—SEGMENT REPORTING

Due to the discontinuance of the Quality Controlled Cleaning Corporation business segment, the Company operates in only one business segment.

NOTE 9—RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued Statement of Financial Standards No. 142 (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. The Company does not expect the adoption of SFAS 142 to have a material effect on its financial condition or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company does not expect the adoption of SFAS 143 to have a material effect on its financial condition or results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (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. The Company does not expect the adoption of SFAS 144 to have a material effect on its financial condition or results of operations.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3). The principal difference between SFAS 146 and EITF 94-3 relates to SFAS 146's requirements for the timing of recognizing a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3 a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company does not expect the adoption of SFAS 146 to have a material effect on its financial condition or results of operations.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-QSB 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-QSB 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.

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Results of Operations

Net Revenues

Net revenues were $1,642,355 for the three months ended October 31, 2002 compared to $1,832,376 for the three months ended October 31, 2001. The 10.4% decrease is due primarily to a decline in the volume of air bag products sold. Net revenues were $4,998,921 for the nine months ended October 31, 2002 compared to $5,786,231 for the nine months ended October 31, 2001. The 13.6% decrease is due primarily to the combination of the decline in air bag products sold combined with lower revenues of its distributor based filtration products due to the industry downturn which began in the second half of 2001.

Gross Margin

Gross margin as a percentage of net revenues was 36.0% for the three months ended October 31, 2002 compared to 31.4% for the three months ended October 31, 2001. The 4.6% increase in gross margin was attributable to the higher concentration of high performance filtration products sold which traditionally are a higher margin product than the airbag products. Gross margin as a percentage of net revenues for the nine months ended October 31, 2002 was 35.3% compared to 30.1% for the nine months ended October 31, 2001. The 5.2% increase in gross margin was due to the combination of a more favorable product mix combined with the associated improved manufacturing utilization.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $508,643 or 31.0% of net revenues for the three months ended October 31, 2002 compared to $454,670 or 24.8% of net revenues for the three months ended October 31, 2001. The $53,973 increase is due to an increase in selling and marketing compensation and travel expenses related to the additional sales representatives hired to support its filtration product line. Selling, general and administrative expenses were $1,483,387 or 29.7% of net revenues for the nine months ended October 31, 2002 compared to $1,288,726 or 22.3% of net revenues for the nine months ended October 31, 2001. The $194,661 increase was primarily due to the increase in compensation expenses for selling and marketing and the increase in legal and discretionary expenses for general and administration.

Operating Income

Operating income was $82,545 or 5.0% of net revenues for the three months ended October 31, 2002 compared to $121,205 or 6.6% of net revenues for the three months ended October 31, 2001. The $38,660 decrease in operating income is attributable to the lower net revenues recorded which were offset by the higher gross margins generated. In addition, higher selling and marketing compensation and travel costs contributed to the decline in operating income. Operating income was $282,983 or 5.7% of net revenues for the nine months ended October 31, 2002 compared to $453,618 or 7.8% of revenues for the nine months ended October 31, 2001. The $170,635 decrease in operating income was primarily due to the combination of the lower revenues generated in the first nine months of fiscal 2003 and the higher operating expenses.

Other Income

Other income was $2,740 for the three months ended October 31, 2002 compared to $30 for the three months ended October 31, 2001. This increase was due to the higher interest earned on the cash and cash equivalent balances. For the nine months ended October 31, 2002 other income was $57,305 compared to $2,029 for the nine months ended October 31, 2001. The $55,276 increase in other income was primarily due to an early exit payment made by the Company's former landlord for the relocation of the organization in February 2002.

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Financial Condition, Liquidity and Capital Resources

At October 31, 2002 and January 31, 2002, the Company had $302,849 and $123,330 respectively available in cash. The Company's financial condition remained strong, with a ratio of current assets to current liabilities of 3.7:1 at October 31, 2002 compared to 2.5:1 at January 31, 2002.

The Company generated cash from operating activities of $388,796 which consisted primarily of the income earned from operations in the first nine months of fiscal year 2003. In addition, the Company has reduced inventories by $136,758 and accounts receivable by $54,365 while reducing payables by $241,311 in the first nine months of fiscal year 2003.

Cash used for investing activities of $160,299 primarily represented the investment made in the construction of a new clean room in the Company's new facility. In addition, the Company has incurred costs for the leasehold improvements necessary in the development of the new facility that it occupies.

Net cash used for financing activities of $48,978 included $4,654 to pay the principal balance of an outstanding capital lease and $44,324 to pay down the principal balance of the new credit facility. At April 30, 2002, $250,000 of the line of credit was converted to a four-year term note.

With its present capital resources, available credit from its credit facilities and cash flow from operations, the Company believes that is should have sufficient resources to meet its operating needs for the next twelve months and to provide for debt maturities and capital expenditures.

PART ll—OTHER INFORMATION

ITEM 1. PENDING LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

None.

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SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed and on its behalf by the undersigned thereto, duly authorized.

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December 12, 2002	PUROFLOW INCORPORATED — By:	/s/ MICHAEL H. FIGOFF Michael H. Figoff President/Chief Executive Officer

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SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION

I, Michael H. Figoff, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Puroflow Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. User-specified TAGGED TABLE

Date: December 12, 2002
By:	/s/ MICHAEL H. FIGOFF Michael H. Figoff President and Chief Executive
Officer

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SARBANES-OXLEY ACT SECTION 906 CERTIFICATION

In connection with this quarterly report on Form 10-QSB of Puroflow Inc. for the period ended October 31, 2002, I, Michael H. Figoff, President and Chief Executive Officer of Puroflow Inc., hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

1. this Form 10-QSB for the period ended October 31, 2002 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in this Form 10-QSB for the period ended October 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of Puroflow Inc. User-specified TAGGED TABLE

Date: December 12, 2002
By:	/s/ MICHAEL H. FIGOFF Michael H. Figoff President and Chief Executive Officer

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TOC_BEGIN ITEM 1. PENDING LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES ITEM 3. DEFAULT UPON SENIOR SECURITIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K TOC_BEGIN SIGNATURE SEQ=,FILE='QUICKLINK',USER=MCREED,SEQ=,EFW="2096181",CP="PUROFLOW INCORPORATED",DN="1" TOCEXISTFLAG