ARGAN INC — Proxy Solicitation & Information Statement 2001

Aug 6, 2001

DEF 14A 1 formdef14a01874_08282001.htm sec document SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the registrant |X| Filed by a party other than the registrant || Check the appropriate box: || Preliminary Proxy Statement || Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)2) |X| Definitive Proxy Statement || Definitive Additional Materials || Soliciting Material Under Rule 14(a)-12 Puroflow Incorporated -------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if Other Than the Registrant) Payment of Filing Fee (Check the appropriate box): |X| No fee required. || Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: -------------------------------------------------------------------------------- (5) Total fee paid: -------------------------------------------------------------------------------- || Fee paid previously with preliminary materials: -------------------------------------------------------------------------------- || Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. -------------------------------------------------------------------------------- (1) Amount Previously Paid: -------------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: -------------------------------------------------------------------------------- (3) Filing Party: -------------------------------------------------------------------------------- (4) Date Filed: August 6, 2001 To Our Stockholders: On behalf of your Company's Board of Directors, I cordially invite you to attend the Annual Meeting of Stockholders to be held on Tuesday, August 28, 2001, at 10:00 a.m., local time, at the Airtel Plaza Hotel, 7277 Valjean Avenue, Van Nuys, California 91406. The accompanying Notice of Meeting and Proxy Statement cover the details of the matters to be presented. A copy of the Company's Annual Report on Form 10-KSB for the fiscal year ended January 31, 2001 is included with this mailing. Regardless of whether you plan to attend the Annual Meeting, your vote is important. I urge you to participate by promptly completing and returning the enclosed proxy card as soon as possible. You may revoke your proxy and vote in person if you decide to attend the Annual Meeting. We appreciate your continued support. Cordially, PUROFLOW INCORPORATED Michael H. Figoff President and Chief Executive Officer PUROFLOW INCORPORATED 16559 Saticoy Street Van Nuys, California 91406 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS AUGUST 28, 2001 To the Stockholders of PUROFLOW INCORPORATED: NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the "Annual Meeting") of Puroflow Incorporated, a Delaware corporation (the "Company"), will be held at the Airtel Plaza Hotel on August 28, 2001 at 10:00 a.m., local time, or any adjournment or postponement thereof, for the following purposes, all as more fully described in the attached Proxy Statement: (1) To elect seven (7) members of the Board of Directors for one year or until their successors are elected and qualified. (2) To adopt the 2001 Stock Option Plan. (3) To approve a one for fifteen reverse stock split of the Company's issued and outstanding Common Stock. (4) To vote for the appointment of auditors, Rose, Snyder & Jacobs, for the fiscal year ended January 31, 2002. (5) To transact such other business as may properly come before the meeting or any adjournments thereof. Only stockholders of record at the close of business on June 29, 2001 shall be entitled to notice of and to vote at the Annual Meeting. A copy of the Company's Annual Report for the fiscal year ended January 31, 2001 is enclosed. The Board of Directors appreciates and welcomes stockholder participation in the Company's affairs. You are earnestly requested to complete, sign, date and return the accompanying proxy card in the enclosed envelope provided for that purpose (to which no postage need be affixed if mailed in the United States), whether or not you expect to attend the Annual Meeting in person. The proxy is revocable by you at any time prior to its exercise and will not affect your right to vote in person in the event you attend the Annual Meeting. The prompt return of the proxy card will be of assistance in preparing for the Annual Meeting and your cooperation in this respect will be greatly appreciated. By Order of the Board of Directors, Sandy Yoshisato Corporate Secretary Van Nuys, California August 6, 2001 -------------------------------------------------------------------------------- YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. -------------------------------------------------------------------------------- PUROFLOW INCORPORATED 16559 Saticoy Street Van Nuys, California 91406 PROXY STATEMENT OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON AUGUST 28, 2001 INTRODUCTION This Proxy Statement and the accompanying proxy card are being furnished to the stockholders of Puroflow Incorporated, a Delaware corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company for use in voting at the Annual Meeting of Stockholders to be held at the Airtel Plaza Hotel, 7277 Valjean Avenue, Van Nuys, California 91406, on August 28, 2001 at 10:00 a.m., local time (together with any and all adjournments or postponements thereof, the "Annual Meeting"). This Notice of Annual Meeting and Proxy Statement, together with the accompanying proxy card and Annual Report to Stockholders of the Company for the fiscal year ended January 31, 2001 (including the financial statements contained therein), are first being mailed or delivered to stockholders of the Company on or about [ ]. QUORUM AND VOTING AGENDA FOR MEETING At the Annual Meeting, the holders of outstanding shares of common stock, par value $0.01 per share, of the Company (the "Common Stock") will be asked to consider and vote upon: (i) the election of seven (7) Directors to serve for a term of one year or until their respective successors are duly elected and qualified ("Proposal 1"); (ii) the adoption of the 2001 Stock Option Plan ("Proposal 2"); (iii) the amendment to the Company's Certificate of Incorporation to effect a reverse stock split of the Company's issued and outstanding Common Stock, whereby the Company will issue one new share of Common Stock in exchange for each fifteen shares of the outstanding Common Stock ("Proposal 3"); (iv) the appointment of Rose, Snyder & Jacobs, certified public accountants, as independent auditors of the Company for the fiscal year ending January 31, 2002 ("Proposal 4"); and (v) such other proposals as may properly be presented for the Annual Meeting. RECORD DATE The record date for the Annual Meeting is June 29, 2001. Only stockholders of record as of the close of business on that date are entitled to notice of and to vote at the Annual Meeting. VOTING STOCK The only class of stock entitled to be voted at the Annual Meeting is the Company's Common Stock. At the close of business on the record date, there were 7,399,091 shares of Common Stock outstanding and entitled to vote at the Annual Meeting, and the holders of these shares will be entitled to one vote per share. QUORUM The By-laws of the Company provide that holders of more than 50% of the shares outstanding and entitled to vote must be represented at the Annual Meeting either in person or by proxy. ADJOURNED MEETING If a quorum is not present at the scheduled time of the Annual Meeting, the stockholders who are represented may adjourn the Annual Meeting until a quorum is present. The time and place of the adjourned Annual Meeting will be announced at the time the adjournment is taken, and no other notice will be given. An adjournment will have no effect on the business that may be conducted at the Annual Meeting. TABULATION OF VOTES The votes will be tabulated and certified by two inspectors of election appointed by the Company. RETURNING YOUR PROXY CARD A proxy will not be valid unless the completed enclosed proxy card is received by the Company prior to commencement of the Annual Meeting. If the enclosed proxy card is properly executed and returned to the Company, then your shares will be voted in accordance with the instructions contained therein. Any stockholder who executes and returns a proxy may revoke it at any time before it is voted at the Annual Meeting by: (i) delivering written notice of such revocation to the Company (attention: Corporate Secretary) prior to the commencement of the Annual Meeting; (ii) submitting a duly executed proxy bearing a later date which relates to the same shares; or (iii) attending and voting such shares at the Annual Meeting. Mere attendance at the Annual Meeting will not, in and of itself, revoke an otherwise valid proxy. Whether or not you attend the Annual Meeting, your vote is important. Accordingly, you are urged to sign and return the accompanying proxy card regardless of the number of shares you own. Shares can be voted at the Annual Meeting only if the holder is present or represented by proxy. VOTE REQUIRED AND METHOD OF COUNTING VOTES With respect to Proposal 1 (the election of directors), stockholders may vote in favor of all nominees, withhold their votes as to all nominees, or withhold their votes as to specific nominees. Checking the box on the proxy card that withholds authority to vote for a nominee is the equivalent of abstaining. The seven nominees who receive the greatest number of votes cast for the election of directors by shares entitled to vote and present in person or by proxy at the Annual Meeting will be elected directors. In an uncontested plurality election such as this, abstentions have no effect, since approval by a percentage of the shares present or outstanding is not required. With respect to Proposal 2 (the adoption of the 2001 Stock Option Plan), stockholders may vote in favor of the proposal, against the proposal, or abstain from voting. The affirmative vote of the majority of shares present in person or by proxy and entitled to vote at the Annual Meeting is required for approval of Proposal 2. Broker non-votes and abstentions are not included in the tabulation of the voting results on the adoption of the 2001 Stock Option Plan and, therefore, do not have the effect of votes in opposition in such tabulation. With respect to Proposal 3 (the reverse stock split), stockholders may vote in favor of the proposal, against the proposal, or abstain from voting. The affirmative vote of a majority of the outstanding shares of Common Stock is required for approval of Proposal 3, so an abstention or broker non-vote will have the same effect as a vote against Proposal 3. With respect to Proposal 4 (the ratification of independent auditors), stockholders may vote in favor of the proposal, against the proposal, or abstain from voting. The affirmative vote of the majority of shares present in person or by proxy and entitled to vote at the Annual Meeting is required for approval of Proposal 4. Broker non-votes and abstentions are not included in the tabulation of the voting results on the ratification of independent auditors and, therefore, do not have the effect of votes in opposition in such tabulation. Brokers who hold shares for the accounts of their clients may vote such shares either as instructed by their clients, or if no instructions are received, in their own discretion if permitted by the stock exchange or other organization of which they are members. Members of the New York Stock Exchange 2 are permitted to vote a client's proxy in their own discretion as to the election of directors and ratification of independent auditors (each, a "discretionary proposal") if their client has not furnished them with voting instructions prior to the Annual Meeting. When a broker is empowered by a client to vote that client's shares on some but not all of the proposals at a meeting, the missing votes are referred to as "broker non-votes." Those shares will be included in determining the presence of a quorum at the Annual Meeting. Broker non-votes will not, however, be considered "present" for purposes of voting on any non-discretionary proposal, and they will therefore have no impact on the outcome of such proposals. If you sign the proxy card but do not make specific choices, the proxy holder will vote your shares as recommended by the Board of Directors as follows: o "FOR" the election of all nominees for directors, o "FOR" the adoption of the 2001 Stock Option Plan, o "FOR" the reverse stock split, and o "FOR" ratification of the selection of independent auditors. If any other business that is unknown a reasonable time before the solicitation properly comes before the stockholders for a vote at the Annual Meeting, your shares will be voted in accordance with the discretion of the holders of the proxy. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of June 29, 2001 regarding the beneficial ownership of Common Stock by (A) each person known by the Company to own beneficially more than five percent of the Common Stock, (B) each director and director nominee of the Company, (C) each of the "Named Executive Officers" (as defined in "Executive Compensation - Summary Compensation Table"), and (D) all executive officers, directors and director nominees of the Company as a group. Unless otherwise indicated, the address of each person named in the table below is c/o Puroflow Incorporated, 16559 Saticoy Street, Van Nuys, California 91406. NUMBER OF SHARES PERCENTAGE BENEFICIALLY BENEFICIALLY NAME OWNED (1) OWNED --------- ----- Steel Partners II, L.P. (Warren G. Lichtenstein - Sole Voting Power) 2,219,000 (2) 30.0% Reuben M. Siwek 362,750 (3) 4.9% David S. Nagelberg 459,350 (4) 6.2% Michael H. Figoff 197,000 (5) 2.6% George Solymar 334,650 (6) 4.5% Robert A. Smith 76,000 (7) 1.0% Dale Livingston 21,000 (8) * Dr. Tracy Kent Pugmire 31,000 (9) * Wayne Conner 25,000 (10) * Travis Bradford 0 (2) 0 Glen Kassan 0 (2) 0 Joshua Schechter** 0 (2) 0 All directors, director nominees and executive officers as a group (nine persons) 2,569,000 34.7% * Less than 1% ** Denotes nominee for election as director at the Annual Meeting. (1) As used in this table, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship or otherwise has or shares (i) the power to vote, or direct the voting of, such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. In addition, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days of the date shown above. (2) Based upon a Form 4 filed jointly with the Securities and Exchange Commission (the "Commission") by Steel Partners II, L.P. and Warren Lichtenstein. The business address of Steel Partners II, L.P. and Messrs. Lichtenstein and Bradford is 150 East 52nd Street, 21st Floor, New York, New York 10022. (3) Includes 70,000 shares of Common Stock owned by estate of Martha Siwek. Mr. Siwek disclaims beneficial ownership of the shares owned by estate of Martha Siwek. (4) Based upon a Schedule 13G filed with the Commission by Mr. Nagelberg. Includes 99,250 shares owned by The Nagelberg Family Trust over which Mr. Nagelberg and his spouse, as trustees, share voting and 3 dispositive power. The business address of Mr. Nagelberg is c/o M.H. Meyerson & Co., Inc., P.O. Box 2142, Rancho Santa Fe, California 92067-2142. (5) Includes options to purchase 55,000 shares of Common Stock, which are exercisable within 60 days hereof. (6) The business address of Mr. Solymar is 2203 Crescent Avenue, Montrose, California 91020. (7) Includes options to purchase 10,000 shares of Common Stock, which are exercisable within 60 days hereof. (8) Includes options to purchase 12,600 shares of Common Stock, which are exercisable within 60 days hereof. (9) Includes options to purchase 10,000 shares of Common Stock, which are exercisable within 60 days hereof. (10) Includes options to purchase 21,000 shares of Common Stock, which are exercisable within 60 days hereof. 4 PROPOSAL 1: ELECTION OF DIRECTORS Directors of the Company are elected annually at the annual meeting of stockholders. Their respective terms of office continue until their successors have been duly elected and qualified in accordance with the Company's By-laws. There are no family relationships among any of the directors or executive officers of the Company. The Board nominated Michael H. Figoff, Robert A. Smith, Dr. Tracy Kent Pugmire, Warren G. Lichtenstein, Travis Bradford, Glen Kassan and Joshua Schechter for election to the Board at the Annual Meeting. At the Annual Meeting, seven directors are to be elected to serve for a term of one year and until their respective successors are duly elected and qualified. The designated representatives named in the enclosed proxy card intend to vote for the election to the Board of Directors each of the seven nominees named in the table below to serve until the 2002 Annual Meeting of Stockholders and until their successors shall be duly elected and qualified, unless the proxy card is marked to expressly indicate otherwise. Should any of such nominees be unable or unwilling to accept such election (which the Board of Directors does not anticipate), then the designated representatives named in the enclosed proxy card will vote for the election of such other person as the Board of Directors may recommend. Proxies cannot be voted for a greater number of persons than the number of nominees named. INFORMATION CONCERNING DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS The following table sets forth information regarding the directors, the director nominees and the executive officers of the Company as of June 29, 2001. NAME AGE POSITIONS WITH THE COMPANY ---- --- -------------------------- Michael H. Figoff(1) 58 Director, CEO and President Robert A. Smith(1) 60 Director, Vice Chairman of the Board Dr. Tracy Kent Pugmire(1) 70 Director Warren G. Lichtenstein(1) 36 Director Travis Bradford(1) 29 Director, Acting Chairman of the Board Glen Kassan 57 Director Nominee Joshua Schechter 28 Director Nominee Wayne Conner 53 Vice President of Engineering Dale Livingston 62 Vice President of Operations ------------------------------ (1) Indicates current member of the Board of Directors standing for re-election at the Annual Meeting. The business experience of each of the persons listed above for at least five years is as follows: MICHAEL H. FIGOFF has served as President and Chief Executive Officer and Director of the Company since May 1995. Mr. Figoff joined the Company in 1988 and has previously served as its Executive Vice President and Director of Marketing. Prior to joining the Company, Mr. Figoff served in various capacities with Lockheed Martin, Textron, Fairchild and Ferranti International. ROBERT A. SMITH has served as a Director of the Company since July 1994. Mr. Smith had been President of Microsource Incorporated, a subsidiary of Giga-Tronics, from October 1998 until May 2001 and currently serves as Microsource's Vice Chairman. Previously, Mr. Smith served as President of the Industrial Products Group of Haskel International Inc. from February 1995 to January 1998; President and Chief Executive Officer of Industrial Tools Inc. from January 1994 to February 1995; President of Engineered Filtration Company from October 1992 to January 1994; President of Puroflow Corporation, a wholly-owned subsidiary of the Company, from February 1991 to October 1992; and President of RTS Systems Incorporated from May 1988 to February 1991, when the company was acquired by Telex Communications, Inc. Mr. Smith served as President of Purolator Technologies Inc. from 1980 to 1988 and served as the General Manager of the Filter Division of HR Textron Inc. from 1964 to 1980. DR. TRACY KENT PUGMIRE has served as a Director of the Company since June 1991. Since April 1992, Dr. Pugmire has served as an independent technical consultant. Dr. Pugmire currently provides consulting services to Spincraft, a Division of Standex International, and is involved with the design and fabrication of the X-33 and X-34 rocket vehicles. Previously, Dr. Pugmire was 5 Executive Vice President of ARDE Inc. and worked as a Program Manager for several companies including TRW Space Systems Division, Technion Inc., AVCO Missile and Space Systems (now a division of Textron), General Electric Space Sciences Laboratory, and Boeing Propulsion and Mechanical Systems Department. WARREN G. LICHTENSTEIN has served as a Director of the Company since September 16, 1999. Mr. Lichtenstein has been the Chairman of the Board, Secretary and the Managing Member of Steel Partners, L.L.C., the general partner of Steel Partners II, L.P., since January 1, 1996. Prior to such time, Mr. Lichtenstein was the Chairman and a director of Steel Partners, Ltd., the general partner of Steel Partners Associates, L.P., which was the general partner of Steel Partners II, L.P. from 1993 until prior to January 1, 1996. Mr. Lichtenstein was the acquisition/risk arbitrage analyst at Ballantrae Partners, L.P., a private investment partnership formed to invest in risk arbitrage, special situations and undervalued companies, from 1988 to 1990. Mr. Lichtenstein has served as a Director of WebFinancial Corporation, a consumer and commercial lender, since 1996 and as its President and Chief Executive Officer since December 1997. He has served as a Director of Gateway Industries, Inc., a provider of database development and Web site design and development services, since 1994 and as Chairman of the Board since 1995. He has served as President, Chief Executive Officer and Director of CPX Corp., a company with no significant business operations, since June 23, 1999 and as its Secretary and Treasurer since May 3, 2001. Mr. Lichtenstein is also a Director of the following publicly held companies: Tandycrafts, Inc., a manufacturer of picture frames and framed art, ECC International Corp, a manufacturer and marketer of computer-controlled simulators for training personnel to perform maintenance and operator procedures on military weapons, US Diagnostic Inc., an operator of outpatient medical diagnostic imaging and related facilities, and as Chairman of the Board of Aydin Corporation from October 5, 1998 until its sale to L-3 Communications Corporation in April 1999. TRAVIS BRADFORD has been a strategic and operational consultant for over 10 years. He has been a Vice President of Steel Partners Services, Ltd., a management and advisory company that provides services to Steel Partners II, L.P., since June 1999. From March 1997 to May 1999, he was a member of Holding Capital Group, LLC, an equity investment group. Mr. Bradford received his B.B.A. in Finance from Georgia State University in 1992, and his M.B.A. in Finance and Management from Stern School of Business at New York University in 1996. He also attended the Ph.D. program at the University of Chicago studying finance and economics. GLEN KASSAN has served as Executive Vice President of Steel Partners Services, Ltd. since June 2001 and as Vice President since October 1999. Mr. Kassan has served as Vice President, Chief Financial Officer and Secretary of Gateway Industries, Inc. since June 2000. He has also served as Vice President, Chief Financial Officer and Secretary of WebFinancial Corporation since June 2000. From 1997 to 1998, Mr. Kassan served as Chairman and Chief Executive Officer of Long Term Care Services, Inc., a privately owned healthcare services company which Mr. Kassan co-founded in 1994 and initially served as Vice Chairman and Chief Financial Officer. Mr. Kassan is currently a Director of Tandycrafts, Inc. and the Chairman of the Board of US Diagnostic Inc. JOSHUA SCHECHTER has served as an Associate of Steel Partners Services, Ltd. since July 2001. From March 1998 to June 2001, Mr. Schechter was an Associate in the corporate finance group at Imperial Capital, LLC, an investment banking firm. From August 1997 to February 1998, he was a Senior Analyst at Leifer Capital, Inc., an investment banking firm. From January 1996 to June 1997, Mr. Schechter was a Tax Consultant with Ernst & Young LLP. Mr. Schechter received his B.B.A. and M.A. in Professional Accounting from the University of Texas at Austin in 1995. WAYNE CONNER has over 30 years of filtration experience and has been the Vice President of Engineering of the Company since July 1997. From 1990 to 1994, Mr. Conner served as Senior Project Engineer - New Product Development for the Hydraulic Filter Division of Parker Hannifin Corporation. Mr. Conner also served in various capacities with Purolator Technologies Inc. DALE LIVINGSTON has been the Vice President of Operations of the Company since February 1998. From August 1995 until February 1998, Mr. Livingston served as Director of Operations of the Company, and from October 1989 until August 1995, he served as Production Manager of the Company. Mr. Livingston previously served in various capacities with Parker Hannifin Corporation, Hydraulic Research/Textron, Talley Corporation, The Marquardt Company and Teleflex Control Systems. Each of the director nominees has consented to serve as a director and, if elected, intends to discharge his duties as director of the Company in compliance with all applicable legal requirements, including the general fiduciary obligations imposed upon corporate directors. 6 VOTE REQUIRED Approval of Proposal 1 to elect seven directors requires the affirmative vote of a plurality of the shares of Common Stock represented in person or by proxy at the Annual Meeting. The seven director nominees are Michael H. Figoff, Robert A. Smith, Dr. Tracy Kent Pugmire, Warren G. Lichtenstein, Travis Bradford, Glen Kassan and Joshua Schechter. The Board of Directors recommends that stockholders vote FOR each of these seven director nominees. INFORMATION CONCERNING MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES AND DIRECTOR COMPENSATION The business affairs of the Company are managed under the direction of the Board of Directors. Members of the Board are informed about the Company's affairs through presentations, reports and documents distributed to them, through operating and financial reports routinely presented at meetings of the Board of Directors and committee meetings, and through other means. In addition, directors of the Company discharge their duties throughout the year not only by attending meetings of the Board of Directors but also through personal meetings and other communications, including telephone contact with management and others regarding matters of interest and concern to the Company. During the fiscal year ended January 31, 2001, the Company's Board of Directors held one meeting and acted by unanimous written consent three times. Each director attended the Board meeting and committee meetings, to the extent they were a member of such committee, held during the fiscal year ended January 31, 2001. BOARD COMMITTEES The Board of Directors has a standing Audit Committee and Compensation Committee, which each met once during the fiscal year ended January 31, 2001. The Audit and Compensation Committees do not meet on a regular basis, but only as circumstance require. The members of the Audit and Compensation Committees are appointed by the Board of Directors. The Company does not currently have a nominating committee. Nominations to the Board of Directors are made by the entire Board. REPORT OF THE AUDIT COMMITTEE The Audit Committee held a meeting on May 21, 2001 in order to review and discuss the audited financial statements with management and to discuss with the independent auditors the matters required to be discussed by SAS 61. The Audit Committee has also received the written disclosures and the letter from Rose, Snyder & Jacobs, the Company's independent auditors, required by Independence Standards Board Standard No. 1 and has discussed with Rose, Snyder & Jacobs the independent auditor's independence. Based on the Audit Committee's discussions with management and Rose, Snyder & Jacobs and its review of the audited financial statements and disclosure from the independent auditors, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-KSB for the year ended January 31, 2001 for filing with the Commission. Submitted by the Audit Committee Robert A. Smith Dr. Tracy K. Pugmire An Audit Committee charter is in the process of being drawn and will be incorporated in the next Proxy Statement. A new Audit Committee will be elected by the Board of Directors after the Annual Meeting. COMPENSATION COMMITTEE. The Compensation Committee recommends to the Board of Directors compensation of the Company's executive officers and other key personnel, reviews new or existing compensation programs and periodically reviews management perquisites and other benefits. The current members of the Compensation Committee are Mr. Smith and Dr. Pugmire. A new Compensation Committee will be elected by the Board of Directors after the Annual Meeting. 7 DIRECTOR COMPENSATION Each outside director of the Company receives a $2,500 annual fee, plus $300 for each formal meeting attended. Directors are also reimbursed for reasonable expenses actually incurred in connection with attending each formal meeting of the Board of Directors or any committee thereof. The Company's outside directors are currently Messrs. Smith, Lichtenstein, Bradford and Dr. Pugmire. If all the director nominees are elected at the Annual Meeting, the Company's outside directors will be Messrs. Smith, Lichtenstein, Bradford, Kassan, Schechter and Dr. Pugmire. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors and executive officers and persons who beneficially own more than 10% of the Company's Common Stock (collectively, the "Reporting Persons") to file with the Commission (and, if such security is listed on a national securities exchange, with such exchange), various reports as to ownership of such Common Stock. Such Reporting Persons are required by Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of copies of Section 16(a) reports and representations received by the Company from Reporting Persons, and without conducting any independent investigations of its own, the Company believes that no Reporting Person failed to timely file Forms 3, 4, and 5 with the Commission during the fiscal year ended January 31, 2001. 8 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following summary compensation table sets forth the aggregate compensation paid to or earned by the President and Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company (other than the President and Chief Executive Officer) whose total annual salaries and bonuses exceeded $100,000 for the year ended January 31, 2001 (the "Named Executive Officers"). Annual Compensation ------------------- Long-Term Compensation Awards Securities Name and Fiscal Underlying All Other Principal Position Year Salary($) Bonus ($) Options/SARs Compensation ($) (1) ------------------ ---- --------- --------- ------------ --------------------- Michael H. Figoff 2001 165,000 - - 27,101 President and Chief 2000 165,000 - - 22,894 Executive Officer 1999 160,875 - - 19,827 Wayne Conner 2001 106,391 - - 7,813 Vice President of 2000 103,858 - - 7,849 Engineering 1999 98,458 10,000 5,000 6,469 Dale Livingston 2001 102,400 - - 6,554 Vice President of 2000 99,542 - - 6,590 Operations 1999 94,292 5,000 5,000 5,093 -------------------------------- (1) Represents Company-reimbursed automobile expenses of such executive and life and disability insurance premiums paid by the Company. OPTION/SAR GRANTS IN FISCAL YEAR No options were granted to any of the Named Executive Officers during the fiscal year ended January 31, 2001. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The following table provides certain information regarding stock option ownership and exercises by the Named Executive Officers, as well as the number and assumed value of exercisable and unexercisable options held by those persons at January 31, 2001. Number of Securities Value of Unexercised In Underlying Unexercised The Money Options/SARs Name Options/SARs at 01/31/01 at 01/31/01($) ---- ------------------------ -------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- Michael Figoff 55,000 0 0 0 Wayne Conner 21,000 4,000 0 0 Dale Livingston 12,600 4,000 0 0 ------------------------ (1) Value of unexercised "in-the-money" options is equal to the difference between the closing bid price per share of the Common Stock on the OTC Bulletin Board at January 31, 2001 ($0.58) and the option exercise price per share multiplied by the number of shares subject to options. EMPLOYMENT AGREEMENTS On March 1, 1993, the Company entered into an employment agreement with Michael Figoff pursuant to which Mr. Figoff agreed to serve as the Executive Vice President of the Company for a term of five years at an annual base salary of $95,000. Effective February 14, 1994, Mr. Figoff's annual base salary was increased to $104,500. Mr. Figoff was appointed President of the Company in February 1995, and was appointed President and Chief Executive Officer in May 1995. In April 1997, Mr. Figoff's annual base salary was increased to $165,000. On June 9, 1998, the Company extended Mr. Figoff's employment agreement for a term of five years at an annual base salary of $165,000. 9 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In August 1998, the Board authorized the issuance of one million shares of Common Stock to certain officers, directors and employees of the Company. Each purchaser was permitted to purchase not less than 10,000 shares and no more than 200,000 shares at a price of $.75 per share. Twenty percent of the purchase price was payable in cash. The balance of the purchase price was payable over the course of three years following the date of purchase pursuant to 5% promissory notes executed by each purchaser. In March 2000, the Company agreed to retire the remaining indebtedness under such notes of Reuben Siwek, Robert Smith, Michael Figoff and certain other officers and employees of the Company, in exchange for the retirement of 731,030 of the shares which they had purchased in such transaction. Reuben M. Siwek, the former Chairman of the Board of Directors of the Company, renders legal services to the Company. The Company incurred expenses of approximately $53,636, $72,257 and $83,078 during the fiscal years ended January 31, 2001, 2000, and 1999, respectively, for legal services rendered by Mr. Siwek. 10 PROPOSAL NO. 2: TO ADOPT THE 2001 STOCK OPTION PLAN On July 19, 2001, the Board of Directors of the Company adopted the 2001 Stock Option Plan (the 2001 Plan), which is set forth in ANNEX A to this Proxy Statement. The 2001 Plan will not become effective unless it is approved by the holders of record of a majority of the shares of Common Stock present in person or represented by proxy at the Annual Meeting. The 2001 Plan is intended to assist the Company in securing and retaining employees, directors, officers, consultants and advisors (the "Optionees") by allowing them to participate in the ownership and growth of the Company through the grant of incentive and nonqualified stock options. The granting of such options serves as partial consideration for and gives the Optionees an additional inducement to remain in the service of the Company and its subsidiaries and provides them with an increased incentive to work towards the Company's success. Shares of Common Stock may be issued under the 2001 Plan upon the exercise of incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options. The Board of Directors believes it is in the Company's and its stockholders' best interests to approve the 2001 Plan because it would (i) allow the Company to grant options which facilitates the benefits of the additional incentive inherent in the ownership of Common Stock by the Optionees and helps the Company retain the services of these Optionees and (ii) enable compensation received under the 2001 Plan to qualify as "performance-based" for purposes of Section 162(m) of the Code with respect to those options for which qualification for such exception is intended. ADMINISTRATION The 2001 Plan will be administered by a Stock Option Committee (the "2001 Option Committee"), consisting of not less than two members of the Board of Directors appointed by the Board of Directors. The 2001 Option Committee will select the employees, directors, officers, consultants and advisors who will be granted options to purchase shares of Common Stock under the 2001 Plan and, subject to the provisions of the 2001 Plan, will determine the terms and conditions and number of shares of Common Stock subject to each such option. The 2001 Option Committee will also make any other determinations necessary or advisable for the administration of the 2001 Plan. The determinations by the 2001 Option Committee will be final and conclusive. In the event that for any reason the 2001 Option Committee is unable to act or if the 2001 Option Committee at the time of any grant, award or other acquisition under the 2001 Plan does not consist of two or more Non-Employee Directors (as such term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended), or if there shall be no such committee, then the plan shall be administered by the Board of Directors, provided that options granted to the Company's chief executive officer or to any of the Company's other four most highly compensated officers that are intended to qualify as performance based compensation under Section 162(m) of the Code may only be granted by such 2001 Option Committee. Options granted under the 2001 Plan shall vest and become exercisable at such times as shall be determined by the 2001 Option Committee. The 2001 Plan will terminate on July 18, 2011, but may be terminated by the Board of Directors at any time before that date. SHARES SUBJECT TO THE 2001 PLAN The shares of Common Stock to be issued under the 2001 Plan will be either currently authorized but unissued shares of Common Stock, treasury stock or previously issued shares held by any subsidiary of the Company. An aggregate of 500,000 shares of Common Stock (or 33,333 shares of Common Stock if Proposal 3 is approved) have been reserved for issuance under the 2001 Plan. The number of shares of Common Stock available under the 2001 Plan will be subject to adjustment to prevent dilution in the event of a stock split, combination of shares, stock dividend or certain other events. Shares of Common Stock subject to unexercised Options that expire or are terminated prior to the end of the period during which options may be granted will be restored to the aggregate number of shares of Common Stock available for issuance under the 2001 Plan. OPTIONS Upon the grant of an option to purchase shares of Common Stock to an employee, the 2001 Option Committee will fix the number of shares of the Company's Common Stock that the optionee may purchase upon exercise of such option and the price at which the shares may be purchased. The option price for incentive options shall not be less than 100% of the "fair market value" of the 11 shares of Common Stock at the time such option is granted; provided, however, that with respect to an incentive stock option in the case of an optionee, who, at the time such option is granted, owns more than 10% of the voting stock of the Company or its subsidiaries, then the purchase price per share shall be at least 110% of the fair market value. "Fair market value" is deemed to be the closing price of shares of Common Stock on such date, on the New York Stock Exchange ("NYSE"), or if the shares of Common Stock are not listed on the NYSE, in the principal market in which such shares of Common Stock are traded. The aggregate fair market value of shares of Common Stock (determined at the time the incentive stock option is granted) subject to incentive stock options granted to an Optionee under all stock option plans of the Company, and of the Company's subsidiaries (if any), that become exercisable for the first time by such Optionee during any calendar year may not exceed $100,000. The option price for nonqualified options shall not be less than 80% of the fair market value of the shares of Common Stock at such time such option is granted; provided, however, that if an option granted to the Company's chief executive officer or to any of the Company's other four most highly compensated officers is intended to qualify as performance-based compensation under Section 162(m) of the Code, the exercise price of such option shall not be less than 100% of the fair market value of such share of stock on the date the option is granted. The maximum number of shares of Common Stock that may be subject to options granted under the 2001 Plan to any individual in any calendar year shall not exceed 200,000. Payment of the exercise price for shares of Common Stock subject to options may be made with cash, check or such other instrument as may be acceptable to the Company. Full payment for shares of Common Stock exercised must be made at the time of exercise. FEDERAL INCOME TAX CONSEQUENCES Incentive Stock Options. Incentive stock options granted under the 2001 Plan are intended to be "incentive stock options" as defined by Section 422 of the Code. Under present law, the grantee of an incentive stock option will not realize taxable income upon the grant or the exercise of the incentive stock option and the Company will not receive an income tax deduction at either such time. If the grantee does not sell the shares acquired upon exercise of an incentive stock option within either (i) two years after the grant of the incentive stock option or (ii) one year after the date of exercise of the incentive stock option, the gain upon a subsequent sale of the shares will be taxed as long-term capital gain. If the grantee, within either of the above periods, disposes of the shares acquired upon exercise of the incentive stock option, the grantee will recognize as ordinary income an amount equal to the lesser of (i) the gain realized by the grantee upon such disposition or (ii) the difference between the exercise price and the fair market value of the shares on the date of exercise. In such event, the Company would be entitled to a corresponding income tax deduction equal to the amount recognized as ordinary income by the grantee. The gain in excess of such amount recognized by the grantee as ordinary income would be taxed as a long-term capital gain or short-term capital gain. Non-Qualified Stock Options. Upon exercise of a non-qualified stock option granted under the 2001 Plan, the grantee will recognize ordinary income in an amount equal to the excess of the fair market value of the shares received over the exercise price of such shares. The Company will be allowed a federal income tax deduction for the amount recognized as ordinary income by the grantee upon the grantee's exercise of the option. Summary of Tax Consequences. The foregoing outline is no more than a summary of the federal income tax provisions relating to the grant and exercise of options under the 2001 Plan. 12 The Board of Directors believes it is in the Company's best interests to approve the 2001 Plan which would allow the Company to continue to grant options under the 2001 Plan to secure for the Company the benefits of the additional incentive inherent in the ownership of shares of the Company's Common Stock by directors, consultants and advisors and to help the Company secure and retain the services of directors, consultants and advisors and to enable compensation under the 2001 Plan to qualify as "performance-based" for purposes of Section 162(m) of the Code. Section 162(m) of the Code provides that a publicly traded company may not deduct for federal income tax purposes compensation paid to the chief executive officer or any of the four most highly compensated other officers ("Covered Employees") to the extent such compensation exceeds $1,000,000 in any one tax year, unless the payments, among other things, are made based upon the attainment of objective performance goals established by a committee of the Board of Directors, comprised solely of two or more outside directors, and based upon business criteria and other material terms approved by stockholders of such publicly traded company. The 2001 Plan is designed so that options may be granted to Covered Employees in a manner considered performance-based and hence fully deductible. If such stockholder approval is not obtained as may be necessary in order to satisfy the requirements of Section 162(m) of the Code, it is possible that options granted under the 2001 Plan to Covered Employees may not be fully deductible for federal tax purposes. VOTE REQUIRED Approval of Proposal 2 to adopt the 2001 Plan requires the affirmative vote of a majority of the shares of Common Stock represented in person or by proxy at the Annual Meeting. The Board of Directors recommends that the stockholders vote FOR Proposal 2. 13 PROPOSAL 3: APPROVAL OF THE REVERSE STOCK SPLIT The Board of Directors believes it would be in the best interests of the Company and its stockholders to effect a reverse stock split of each fifteen shares of the Company's issued and outstanding Common Stock into one new share of Common Stock (the "Reverse Stock Split"). In this regard, the Board has unanimously approved, and recommends to stockholders that they approve, the Reverse Stock Split, as described herein. The Reverse Stock Split will be effected by the filing of an amendment to the Company's Certificate of Incorporation, which contains the changes relating to the Reverse Stock Split, substantially as set forth in ANNEX B to this Proxy Statement. If the Reverse Stock Split is approved, each fifteen shares of the Company's Common Stock would be changed into one share of Common Stock. The par value of the Common Stock would be changed to $.15 per share (from $.01 per share). Fractional shares of Common Stock will not be issued as a result of the Reverse Stock Split. Instead, the Company will pay each holder of a fractional interest an amount in cash equal to the then market value of such fractional interest. Such market value will be determined by calculating the average closing price of the Common Stock on the OTC Bulletin Board for the ten business days prior to the date the Reverse Stock Split amendment is filed with the Secretary of State of the State of Delaware. The per share exercise price and the number of shares issuable upon exercise of outstanding options will be adjusted accordingly. For example, the Company currently has outstanding options to purchase approximately 161,600 shares of Common Stock at an average exercise price of $0.63 per share. If the Reverse Stock Split is approved, and assuming no other grants of options or exercises of outstanding options, the Company will have outstanding options to purchase approximately 10,773 shares of Common Stock at an average exercise price of $9.45 per share. Dissenting stockholders have no appraisal rights under Delaware law, the Company's Certificate of Incorporation or the Company's By-laws in connection with the approval of the Reverse Stock Split amendment and the consummation of the Reverse Stock Split. PURPOSES OF THE REVERSE STOCK SPLIT The Board of Directors believes that the Reverse Stock Split may improve the marketability and liquidity of the Common Stock because the anticipated increase in the per share price of the Common Stock should reduce the reluctance of many brokerage firms and institutional investors to recommend the Common Stock to their clients or to otherwise hold it in their own portfolios. The Board of Directors believes that some of the practices of the securities industry which may tend to discourage individual brokers within those firms from dealing in lower-priced stocks or lending funds (i.e. providing margin) to facilitate the purchase of such stocks, have affected the per share price of the Common Stock. Some of those practices involve time-consuming procedures which make dealing in lower-priced stocks less appealing economically. Furthermore, the brokerage commission on a sale of lower-priced stock may also represent a higher percentage of the sale price than the actual brokerage commission on a higher-priced issue. The Board of Directors believes that a decrease in the number of issued and outstanding shares of Common Stock, in the absence of any material alteration in the proportionate economic interest in the Company held by its individual stockholders, should proportionately increase the market value of the outstanding shares. However, the Board makes no assurance that the market value of the Common Stock will rise in proportion to the reduction in the number of outstanding shares resulting from the Reverse Stock Split. Accordingly, there can be no assurance that the foregoing objectives will be achieved or that the market price of the Common Stock resulting upon implementation of the proposed Reverse Stock Split will be maintained for any period of time or that such market price will approximate fifteen times the market price before the proposed Reverse Stock Split. 14 POTENTIAL EFFECTS OF THE REVERSE STOCK SPLIT Pursuant to the Reverse Stock Split, each holder of fifteen shares of Common Stock, par value $.01 per share ("Old Common Stock"), immediately prior to the effectiveness of the Reverse Stock Split would become the holder of one share of Common Stock, par value $.15 per share ("New Common Stock"), after consummation of the Reverse Stock Split. Although the Reverse Stock Split will not, by itself, impact the Company's assets or prospects, the Reverse Stock Split could result in a decrease in the aggregate market value of the Company's equity capital. The Board of Directors believes that this risk is outweighed by the benefits of the Reverse Stock Split. If approved, the Reverse Stock Split will result in some stockholders owning "odd-lots" of less than 100 shares of Common Stock. Brokerage commissions and other costs of transactions in odd-lots are generally somewhat higher than the costs of transactions in "round-lots" of even multiples of 100 shares. INCREASE OF SHARES OF COMMON STOCK AVAILABLE FOR FUTURE ISSUANCE As a result of the Reverse Stock Split, there will be a reduction in the number of shares of Common Stock issued and outstanding, or held as treasury shares, and an associated increase in the number of authorized shares which would be unissued and available for future issuance after the Reverse Stock Split (the "Increased Available Shares"). The Increased Available Shares could be used for any proper corporate purpose approved by the Board of Directors of the Company including, among others, future financing transactions. Because the Reverse Stock Split will create the Increased Available Shares, the Reverse Stock Split may be construed as having an anti-takeover effect. Although neither the Board of Directors nor the management of the Company views the Reverse Stock Split as an anti-takeover measure, the Company could use the Increased Available Shares to frustrate persons seeking to effect a takeover or otherwise gain control of the Company. EFFECTIVENESS OF THE REVERSE STOCK SPLIT The Reverse Stock Split, if approved by the Company's stockholders, would become effective (the "Effective Date") upon the filing with the Secretary of State of the State of Delaware of a Certificate of Amendment of the Company's Certificate of Incorporation in substantially the form of the Reverse Stock Split Amendment attached to this Proxy Statement as ANNEX B. It is expected that such filing will take place on or shortly after the date of the Annual Meeting, assuming the stockholders approve the Reverse Stock Split. However, the exact timing of the filing of such Certificate of Amendment will be determined by the Board of Directors based upon its evaluation as to when such action will be most advantageous to the Company and its stockholders, and the Board of Directors reserves the right to delay the Reverse Stock Split Amendment for up to twelve months following stockholder approval thereof. In addition, the Board of Directors reserves the right, notwithstanding stockholder approval and without further action by the stockholders, to elect not to proceed with the Reverse Stock Split Amendment if, at any time prior to filing such Reverse Stock Split Amendment, the Board of Directors, in its sole discretion, determines that it is no longer in the best interests of the Company and its stockholders. Commencing on the Effective Date, each Old Common Stock certificate will be deemed for all corporate purposes to evidence ownership of the reduced number of shares of Common Stock resulting from the Reverse Stock Split and any cash which may be payable in lieu of fractional shares. As soon as practicable after the Effective Date, stockholders will be notified as to the effectiveness of the Reverse Stock Split and instructed as to how and when to surrender their certificates representing shares of Old Common Stock in exchange for certificates representing shares of New Common Stock (and, if applicable, cash in lieu of fractional shares). On the Effective Date, the interest of each stockholder of record who owns fewer than fifteen shares of Common Stock will thereby be terminated, and he, she or it will have no right to vote as a stockholder or share in the assets of any future earnings of the Company. 15 FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material anticipated Federal income tax consequences of the Reverse Stock Split to stockholders of the Company. It should be noted that this summary is based upon the Federal income tax laws currently in effect and as currently interpreted. This summary does not take into account possible changes in such laws or interpretations, including any amendments to applicable statutes, regulations and proposed regulations, or changes in judicial or administrative rulings, some of which may have retroactive effect. The summary is provided for general information only, and does not purport to address all aspects of the range of possible Federal income tax consequences of the Reverse Stock Split and is not intended as tax advice to any person. In particular, and without limiting the foregoing, this summary does not account for or consider the Federal income tax consequences to stockholders of the Company in light of their individual investment circumstances or to holders subject to special treatment under the Federal income tax laws (for example, life insurance companies, regulated investment companies, and foreign taxpayers). This summary does not discuss any consequence of the Reverse Stock Split under any state, local or foreign tax laws. No ruling from the Internal Revenue Service or opinion of counsel will be obtained regarding the Federal income tax consequences to the stockholders of the Company in connection with the Reverse Stock Split. ACCORDINGLY, EACH STOCKHOLDER IS ENCOURAGED TO CONSULT ITS TAX ADVISER REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PROPOSED REVERSE STOCK SPLIT TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAXES, AND ANY OTHER TAX LAWS. The Board of Directors believes that the Reverse Stock Split would be a tax-free recapitalization to the Company and its stockholders. If the Reverse Stock Split qualifies as a recapitalization described in Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the "Code"), (i) no gain or loss will be recognized by a stockholder of Common Stock who exchanges its Common Stock for new Common Stock, except that a holder of Common Stock who receives cash proceeds from the sale of fractional shares of Common Stock will recognize a gain or loss equal to the difference, if any, between such proceeds and the basis of its Common Stock allocated to its fractional share interests, and such gain or loss, if any, will constitute capital gain or loss if its fractional share interests are held as capital assets at the time of their sale, (ii) the tax basis of the New Common Stock received by holders of Common Stock will be the same as the tax basis of the Common Stock exchanged therefore, less the tax basis allocated to fractional share interests and (iii) the holding period of the new Common Stock in the hands of holders of New Common Stock will include the holding period of their Common Stock exchanged therefore, provided that such Common Stock was held as a capital asset immediately prior to the exchange. CONCLUSION The Board of Directors has considered this Proposal and believes that the Reverse Stock Split of the Company's issued and outstanding shares of Common Stock is in the best interests of its stockholders. The Board of Directors recommends that the stockholders vote FOR Proposal 3. 16 PROPOSAL 4: RATIFICATION OF INDEPENDENT AUDITORS Rose, Snyder & Jacobs has acted as the independent auditors of the Company since November 1995, and has acted in such capacity in connection with the preparation of the Company's audited consolidated financial statements for the year ended January 31, 2001 and the report contained therein, which is included in the Company's Annual Report to Stockholders accompanying this Proxy Statement. As independent auditors for the Company, Rose, Snyder & Jacobs is responsible for auditing the accounts of the Company and providing other audit and accounting services to the Company in connection with filings with the Commission. In June 2001, the Board of Directors approved the appointment of Rose, Snyder & Jacobs as the Company's independent auditors for the year ending January 31, 2002. The stockholders are being asked to ratify the appointment of Rose, Snyder & Jacobs as independent auditors for the year ending January 31, 2002. A representative of Rose, Snyder is expected to be present at the Annual Meeting and available to respond to appropriate questions. Such representative also will have the opportunity, if desired, to make a statement to the stockholders. AUDIT FEES: Audit fees billed to the Company by Rose, Snyder & Jacobs during the Company's 2001 fiscal year for review of the Company's annual financial statements and those financial statements included in the Company's quarterly reports on Form 10-QSB totaled approximately $48,650. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: The Company did not engage Rose, Snyder & Jacobs to provide advice to the Company regarding financial information systems design and implementation during the fiscal year ended January 31, 2001. ALL OTHER FEES: Fees billed to the Company by Rose, Snyder & Jacobs during the Company's 2001 fiscal year for all other non-audit services rendered to the Company, including tax related services totaled approximately $10,200. REQUIRED AFFIRMATIVE VOTE Ratification of the appointment of Rose, Snyder & Jacobs as independent auditors of the Company for the year ending January 31, 2002 requires the affirmative vote of holders of a majority of the shares of Common Stock represented in person or by proxy at the Annual Meeting. The Board of Directors recommends that the stockholders vote FOR Proposal 4. STOCKHOLDER PROPOSALS Proposals submitted for consideration at any future meeting of stockholders must comply with Rules 14a-8 and 14a-4(c) promulgated by the Commission pursuant to the Exchange Act. Stockholder proposals requested to be included in the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders must comply with Rule 14a-8 and must be received by the Company at its principal executive offices, 16559 Saticoy Street, Van Nuys, California 91406 (Attn: Corporate Secretary), no later than April 6, 2002 to be included in the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders. The Company has chosen April 6, 2002 because it is at least 120 days prior to August 6, 2002. Rule 14a-4(c)(1) governs a company's use of its discretionary proxy voting authority with respect to a stockholder proposal that is not addressed in a company's proxy statement. Under this rule, if a proponent of a proposal fails to notify a company at least 45 days prior to the month and day of mailing of the prior year's proxy statement, or, if a company's annual meeting date has changed by more than 30 days from the prior year, within such other reasonable time frame (the "Notice Date"), the company will be allowed to use its discretionary voting authority when the proposal is raised at the meeting, even if that proposal is not discussed in the company's proxy statement. If notice of a proposal is timely received by the company, then under Rule 14a-4(c)(2), the company may exercise its discretionary proxy voting authority on such proposal if the company includes a discussion of the proposal in its proxy statement and discloses therein how it intends to vote on the matter. Notwithstanding the 17 previous sentence, a company may not exercise its discretionary proxy voting authority if the proponent of such proposal notifies the company of its intent to solicit proxies for such proposal and in fact delivers a proxy statement to stockholders in connection therewith. OTHER MATTERS The Company had not received any notice of a stockholder proposal prior to the mailing of this Proxy Statement, and the Board of Directors does not know of any other matters that are to be presented for consideration at the Annual Meeting. Should any other matters properly come before the Annual Meeting, including any proposal made by a stockholder, the persons named in the accompanying proxy card or their substitutes will vote such proxy on behalf of the stockholders they represent in accordance with their best judgment, as permitted by Rule 14a-4(c). SOLICITATION OF PROXIES Proxies are being solicited by and on behalf of the Board of Directors. The Company will bear the costs of preparing and mailing the proxy materials to its stockholders in connection with the Annual Meeting. The Company will solicit proxies by mail and the directors and certain officers and employees of the Company may solicit proxies personally or by telephone, facsimile or telegraph. These persons will receive no additional compensation for such services but will be reimbursed by the Company for reasonable out-of-pocket expenses. The Company will request brokers, dealers, banks and their nominees to solicit proxies from their clients, where appropriate, and will reimburse them for reasonable out-of-pocket expenses related thereto. ADDITIONAL INFORMATION The Company will make available to any stockholder, without charge, upon a written request therefore, copies of the Company's Annual Report on Form 10-KSB for the year ended January 31, 2001. Any such request should be directed to Puroflow Incorporated, 16559 Saticoy Street, Van Nuys, California 91406, Attention: Corporate Secretary. FOR THE BOARD OF DIRECTORS SANDY YOSHISATO CORPORATE SECRETARY Van Nuys, California August 6, 2001 18 ANNEX A PUROFLOW INCORPORATED 2001 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN. This 2001 Stock Option Plan (the "Plan") is intended as an incentive, to retain in the employ of and as directors, officers, consultants and advisors to PUROFLOW INCORPORATED, a Delaware corporation (the "Company") and any Subsidiary of the Company, within the meaning of Section 424(f) of the United States Internal Revenue Code of 1986, as amended (the "Code"), persons of training, experience and ability, to attract new employees, directors, officers, consultants and advisors whose services are considered valuable, to encourage the sense of proprietorship and to stimulate the active interest of such persons in the development and financial success of the Company and its Subsidiaries. It is further intended that certain options granted pursuant to the Plan shall constitute incentive stock options within the meaning of Section 422 of the Code (the "Incentive Options") while certain other options granted pursuant to the Plan shall be nonqualified stock options (the "Nonqualified Options"). Incentive Options and Nonqualified Options are hereinafter referred to collectively as "Options." The Company intends that the Plan meet the requirements of Rule 16b-3 ("Rule 16b- 3") promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and that transactions of the type specified in subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of the Company pursuant to the Plan will be exempt from the operation of Section 16(b) of the Exchange Act. Further, the Plan is intended to satisfy the performance-based compensation exception to the limitation on the Company's tax deductions imposed by Section 162(m) of the Code with respect to those Options for which qualification for such exception is intended. In all cases, the terms, provisions, conditions and limitations of the Plan shall be construed and interpreted consistent with the Company's intent as stated in this Section 1. 2. ADMINISTRATION OF THE PLAN. The Board of Directors of the Company (the "Board") shall appoint and maintain as administrator of the Plan a Committee (the "Committee") consisting of two or more directors who are "Non-Employee Directors" (as such term is defined in Rule 16b-3) and "Outside Directors" (as such term is defined in Section 162(m) of the Code), which shall serve at the pleasure of the Board. The Committee, subject to Sections 3 and 5 hereof, shall have full power and authority to designate recipients of Options, to determine the terms and conditions of respective Option agreements (which need not be identical) and to interpret the provisions and supervise the administration of the Plan. -A1- The Committee shall have the authority, without limitation, to designate which Options granted under the Plan shall be Incentive Options and which shall be Nonqualified Options. To the extent any Option does not qualify as an Incentive Option, it shall constitute a separate Nonqualified Option. Subject to the provisions of the Plan, the Committee shall interpret the Plan and all Options granted under the Plan, shall make such rules as it deems necessary for the proper administration of the Plan, shall make all other determinations necessary or advisable for the administration of the Plan and shall correct any defects or supply any omission or reconcile any inconsistency in the Plan or in any Options granted under the Plan in the manner and to the extent that the Committee deems desirable to carry into effect the Plan or any Options. The act or determination of a majority of the Committee shall be the act or determination of the Committee and any decision reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority at a meeting duly held. Subject to the provisions of the Plan, any action taken or determination made by the Committee pursuant to this and the other Sections of the Plan shall be conclusive on all parties. In the event that for any reason the Committee is unable to act or if the Committee at the time of any grant, award or other acquisition under the Plan of Options or Stock as hereinafter defined does not consist of two or more Non-Employee Directors, or if there shall be no such Committee, then the Plan shall be administered by the Board, and references herein to the Committee (except in the proviso to this sentence) shall be deemed to be references to the Board, and any such grant, award or other acquisition may be approved or ratified in any other manner contemplated by subparagraph (d) of Rule 16b-3; provided, however, that options granted to the Company's Chief Executive Officer or to any of the Company's other four most highly compensated officers that are intended to qualify as performance-based compensation under Section 162(m) of the Code may only be granted by the Committee. 3. DESIGNATION OF OPTIONEES. The persons eligible for participation in the Plan as recipients of Options (the "Optionees") shall include employees, officers and directors of, and consultants and advisors to, the Company or any Subsidiary; provided that Incentive Options may only be granted to employees of the Company and the Subsidiaries. In selecting Optionees, and in determining the number of shares to be covered by each Option granted to Optionees, the Committee may consider the office or position held by the Optionee or the Optionee's relationship to the Company, the Optionee's degree of responsibility for and contribution to the growth and success of the Company or any Subsidiary, the Optionee's length of service, age, promotions, potential and any other factors that the Committee may consider relevant. An Optionee who has been granted an Option hereunder may be granted an additional Option or Options, if the Committee shall so determine. -A2- 4. STOCK RESERVED FOR THE PLAN. Subject to adjustment as provided in Section 7 hereof, a total of 500,000 shares of the Company's Common Stock, $.01 par value per share (the "Stock"), shall be subject to the Plan. The maximum number of shares of Stock that may be subject to options granted under the Plan to any individual in any calendar year shall not exceed 200,000, and the method of counting such shares shall conform to any requirements applicable to performance-based compensation under Section 162(m) of the Code. The shares of Stock subject to the Plan shall consist of unissued shares, treasury shares or previously issued shares held by any Subsidiary of the Company, and such amount of shares of Stock shall be and is hereby reserved for such purpose. Any of such shares of Stock that may remain unsold and that are not subject to outstanding Options at the termination of the Plan shall cease to be reserved for the purposes of the Plan, but until termination of the Plan the Company shall at all times reserve a sufficient number of shares of Stock to meet the requirements of the Plan. Should any Option expire or be canceled prior to its exercise in full or should the number of shares of Stock to be delivered upon the exercise in full of an Option be reduced for any reason, the shares of Stock theretofore subject to such Option may be subject to future Options under the Plan, except where such reissuance is inconsistent with the provisions of Section 162(m) of the Code. 5. TERMS AND CONDITIONS OF OPTIONS. Options granted under the Plan shall be subject to the following conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) Option Price. The purchase price of each share of Stock purchasable under an Incentive Option shall be determined by the Committee at the time of grant, but shall not be less than 100% of the Fair Market Value (as defined below) of such share of Stock on the date the Option is granted; provided, however, that with respect to an Optionee who, at the time such Incentive Option is granted, owns (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, the purchase price per share of Stock shall be at least 110% of the Fair Market Value per share of Stock on the date of grant. The purchase price of each share of Stock purchasable under a Nonqualified Option shall not be less than 80% of the Fair Market Value of such share of Stock on the date the Option is granted; provided, however, that if an option granted to the Company's Chief Executive Officer or to any of the Company's other four most highly compensated officers is intended to qualify as performance-based compensation under Section 162(m) of the Code, the exercise price of such Option shall not be less than 100% of the Fair Market Value (as such term is defined below) of such share of Stock on the date the Option is granted. The exercise price for each Option shall be subject to adjustment as provided in Section 7 below. "Fair Market Value" means the closing price of publicly traded shares of Stock on the principal securities exchange on which shares of Stock are listed (if the shares of Stock are so listed), or on the NASDAQ Stock Market (if the shares of Stock are regularly quoted on the NASDAQ Stock Market), or, if not so listed or regularly quoted, the mean between the closing bid and asked prices of publicly traded shares of Stock in the -A3- over-the-counter market, or, if such bid and asked prices shall not be available, as reported by any nationally recognized quotation service selected by the Company, or as determined by the Committee in a manner consistent with the provisions of the Code. Anything in this Section 5(a) to the contrary notwithstanding, in no event shall the purchase price of a share of Stock be less than the minimum price permitted under the rules and policies of any national securities exchange on which the shares of Stock are listed. (b) Option Term. The term of each Option shall be fixed by the Committee, but no Option shall be exercisable more than ten years after the date such Option is granted and in the case of an Incentive Option granted to an Optionee who, at the time such Incentive Option is granted, owns (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, no such Incentive Option shall be exercisable more than five years after the date such Incentive Option is granted. (c) Exercisability. Subject to Section 5(j) hereof, Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. Upon the occurrence of a "Change in Control" (as hereinafter defined), the Committee may accelerate the vesting and exercisability of outstanding Options, in whole or in part, as determined by the Committee in its sole discretion. In its sole discretion, the Committee may also determine that, upon the occurrence of a Change in Control, each outstanding Option shall terminate within a specified number of days after notice to the Optionee thereunder, and each such Optionee shall receive, with respect to each share of Company Stock subject to such Option, an amount equal to the excess of the Fair Market Value of such shares immediately prior to such Change in Control over the exercise price per share of such Option; such amount shall be payable in cash, in one or more kinds of property (including the property, if any, payable in the transaction) or a combination thereof, as the Committee shall determine in its sole discretion. For purposes of the Plan, a Change in Control shall be deemed to have occurred if: (i) a tender offer (or series of related offers) shall be made and consummated for the ownership of 50% or more of the outstanding voting securities of the Company, unless as a result of such tender offer more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the shareholders of the Company (as of the time immediately prior to the commencement of such offer), any employee benefit plan of the Company or its Subsidiaries, and their affiliates; (ii) the Company shall be merged or consolidated with another corporation, unless as a result of such merger or consolidation more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the shareholders of the Company (as of the time immediately -A4- prior to such transaction), any employee benefit plan of the Company or its Subsidiaries, and their affiliates; (iii) the Company shall sell substantially all of its assets to another corporation that is not wholly owned by the Company, unless as a result of such sale more than 50% of such assets shall be owned in the aggregate by the shareholders of the Company (as of the time immediately prior to such transaction), any employee benefit plan of the Company or its Subsidiaries and their affiliates; or (iv) a Person (as defined below) shall acquire 50% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record), unless as a result of such acquisition more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the shareholders of the Company (as of the time immediately prior to the first acquisition of such securities by such Person), any employee benefit plan of the Company or its Subsidiaries, and their affiliates. For purposes of this Section 5(c), ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(I)(i) (as in effect on the date hereof) under the Exchange Act. In addition, for such purposes, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (A) the Company or any of its Subsidiaries; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportion as their ownership of stock of the Company. (d) Method of Exercise. Options to the extent then exercisable may be exercised in whole or in part at any time during the option period, by giving written notice to the Company specifying the number of shares of Stock to be purchased, accompanied by payment in full of the purchase price, in cash, or by check or such other instrument as may be acceptable to the Committee. As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may be made at the election of the Optionee (i) in the form of Stock owned by the Optionee (based on the Fair Market Value of the Stock on the trading day before the Option is exercised) which is not the subject of any pledge or security interest, (ii) in the form of shares of Stock withheld by the Company from the shares of Stock otherwise to be received with such withheld shares of Stock having a Fair Market Value on the date of exercise equal to the exercise price of the Option, or (iii) by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any shares surrendered to the Company is at least equal to such exercise price and except with respect to (ii) above, such method of payment will not cause a disqualifying disposition of all or a portion of the Stock received upon exercise of an Incentive Option. An Optionee shall have the right to dividends and other rights of a stockholder with respect to shares of Stock purchased upon exercise of an Option at such time as the Optionee has given -A5- written notice of exercise and has paid in full for such shares and (ii) has satisfied such conditions that may be imposed by the Company with respect to the withholding of taxes. (e) Non-transferability of Options. Options are not transferable and may be exercised solely by the Optionee during his lifetime or after his death by the person or persons entitled thereto under his will or the laws of descent and distribution. The Committee, in its sole discretion, may permit a transfer of a Nonqualified Option to (i) a trust for the benefit of the Optionee or (ii) a member of the Optionee's immediate family (or a trust for his or her benefit). Any attempt to transfer, assign, pledge or otherwise dispose of, or to subject to execution, attachment or similar process, any Option contrary to the provisions hereof shall be void and ineffective and shall give no right to the purported transferee. (f) Termination by Death. Unless otherwise determined by the Committee, if any Optionee's employment with or service to the Company or any Subsidiary terminates by reason of death, the Option may thereafter be exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, for a period of one year after the date of such death or until the expiration of the stated term of such Option as provided under the Plan, whichever period is shorter. (g) Termination by Reason of Disability. Unless otherwise determined by the Committee, if any Optionee's employment with or service to the Company or any Subsidiary terminates by reason of total and permanent disability, any Option held by such Optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after 60 days after the date of such termination of employment or service or the expiration of the stated term of such Option, whichever period is shorter; provided, however, that, if the Optionee dies within such 60-day period, any unexercised Option held by such Optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year after the date of such death or for the stated term of such Option, whichever period is shorter. (h) Termination by Reason of Retirement. Unless otherwise determined by the Committee, if any Optionee's employment with or service to the Company or any Subsidiary terminates by reason of Normal or Early Retirement (as such terms are defined below), any Option held by such Optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after 60 days after the date of such termination of employment or service or the expiration of the stated term of such Option, whichever period is shorter; provided, however, that, if the Optionee dies within such 60-day period, any unexercised Option held by such Optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year after the date of such death or for the stated term of such Option, whichever period is shorter. -A6- For purposes of this paragraph (h) "Normal Retirement" shall mean retirement from active employment with or service to the Company or any Subsidiary on or after the normal retirement date specified in the applicable Company or Subsidiary pension plan or if no such pension plan, age 65, and "Early Retirement" shall mean retirement from active employment with or service to the Company or any Subsidiary pursuant to the early retirement provisions of the applicable Company or Subsidiary pension plan or if no such pension plan, age 55. (i) Other Termination. Unless otherwise determined by the Committee, if any Optionee's employment with or service to the Company or any Subsidiary terminates for any reason other than death, Disability or Normal or Early Retirement, the Option shall thereupon terminate, except that the portion of any Option that was exercisable on the date of such termination of employment or service may be exercised for the lesser of 30 days after the date of termination or the balance of such Option's term if the Optionee's employment or service with the Company or any Subsidiary is terminated by the Company or such Subsidiary without cause (the determination as to whether termination was for cause to be made by the Committee). The transfer of an Optionee from the employ of or service to the Company to the employ of or service to a Subsidiary, or vice versa, or from one Subsidiary to another, shall not be deemed to constitute a termination of employment or service for purposes of the Plan. (j) Limit on Value of Incentive Option. The aggregate Fair Market Value, determined as of the date the Incentive Option is granted, of Stock for which Incentive Options are exercisable for the first time by any Optionee during any calendar year under the Plan (and/or any other stock option plans of the Company or any Subsidiary) shall not exceed $100,000. (k) Incentive Option Shares. A grant of an Incentive Option under this Plan shall provide that (a) the Optionee shall be required as a condition of the exercise to furnish to the Company any payroll (employment) tax required to be withheld, and (b)if the Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any share or shares of Stock issued to him upon exercise of an Incentive Option granted under the Plan within the two-year period commencing on the day after the date of the grant of such Incentive Option or within a one-year period commencing on the day after the date of transfer of the share or shares to him pursuant to the exercise of such Incentive Option, he shall, within 10 days after such disposition, notify the Company thereof and immediately deliver to the Company any amount of United States federal, state and local income tax withholding required by law. 6. TERM OF PLAN. No Option shall be granted pursuant to the Plan on or after July 19, 2011, but Options theretofore granted may extend beyond that date. -A7- 7. CAPITAL CHANGE OF THE COMPANY. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares reserved for issuance under the Plan and in the number and option price of shares subject to outstanding Options granted under the Plan, to the end that after such event each Optionee's proportionate interest shall be maintained as immediately before the occurrence of such event. The Committee shall, to the extent feasible, make such other adjustments as may be required under the tax laws so that any Incentive Options previously granted shall not be deemed modified within the meaning of Section 424(h) of the Code. 8. PURCHASE FOR INVESTMENT. Unless the Options and shares covered by the Plan have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the Company has determined that such registration is unnecessary, each person exercising an Option under the Plan may be required by the Company to give a representation in writing that he is acquiring the shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. 9. TAXES. The Company may make such provisions as it may deem appropriate, consistent with applicable law, in connection with any Options granted under the Plan with respect to the withholding of any taxes (including income or employment taxes) or any other tax matters. 10. EFFECTIVE DATE OF PLAN. The Plan shall be effective on July 19, 2001, provided however that the Plan shall subsequently be approved by majority vote of the Company's stockholders not later than July 18, 2002. 11. AMENDMENT AND TERMINATION. The Board may amend, suspend, or terminate the Plan, except that no amendment shall be made that would impair the rights of any Optionee under any Option theretofore granted without the Optionee's consent, and except that no amendment shall be made which, without the approval of the stockholders of the Company would: (a) materially increase the number of shares that may be issued under the Plan, except as is provided in Section 7; (b) materially increase the benefits accruing to the Optionees under the Plan; -A8- (c) materially modify the requirements as to eligibility for participation in the Plan; (d) decrease the exercise price of an Incentive Option to less than 100% of the Fair Market Value per share of Stock on the date of grant thereof or the exercise price of a Nonqualified Option to less than 80% of the Fair Market Value per share of Stock on the date of grant thereof; or (e) extend the term of any Option beyond that provided for in Section 5(b). The Committee may amend the terms of any Option theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Optionee without the Optionee's consent. The Committee may also substitute new Options for previously granted Options, including options granted under other plans applicable to the participant and previously granted Options having higher option prices, upon such terms as the Committee may deem appropriate. 12. GOVERNMENT REGULATIONS. The Plan, and the grant and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies, national securities exchanges and interdealer quotation systems as may be required. 13. GENERAL PROVISIONS. (a) Certificates. All certificates for shares of Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, or other securities commission having jurisdiction, any applicable Federal or state securities law, any stock exchange or interdealer quotation system upon which the Stock is then listed or traded and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. (b) Employment Matters. The adoption of the Plan shall not confer upon any Optionee of the Company or any Subsidiary any right to continued employment or, in the case of an Optionee who is a director, continued service as a director, with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or any Subsidiary to terminate the employment of any of its employees, the service of any of its directors or the retention of any of its consultants or advisors at any time. (c) Limitation of Liability. No member of the Board or the Committee, or any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination or interpretation taken or made in good faith with -A9- respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. (d) Registration of Stock. Notwithstanding any other provision in the Plan, no Option may be exercised unless and until the Stock to be issued upon the exercise thereof has been registered under the Securities Act and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration in the United States. The Company shall not be under any obligation to register under applicable federal or state securities laws any Stock to be issued upon the exercise of an Option granted hereunder in order to permit the exercise of an Option and the issuance and sale of the Stock subject to such Option, although the Company may in its sole discretion register such Stock at such time as the Company shall determine. If the Company chooses to comply with such an exemption from registration, the Stock issued under the Plan may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Stock represented thereby, and the Committee may also give appropriate stop transfer instructions with respect to such Stock to the Company's transfer agent. PUROFLOW INCORPORATED July 19, 2001 -A10- ANNEX B CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PUROFLOW INCORPORATED Puroflow Incorporated, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation at a duly called meeting, duly adopted resolutions setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and proposing that said amendment be considered by the stockholders of the Corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Board of Directors declares that it is advisable to amend Article FOURTH of the Certificate of Incorporation of the Corporation as follows: "FOURTH: This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares of Common Stock this Corporation is authorized to issue is 12,000,000, par value $.15 per share, and the total number of shares of Preferred Stock this Corporation is authorized to issue is 500,000 shares of Preferred Stock, par value $.10 per share, with the Board of Directors being hereby authorized to fix or alter the rights, preferences, privileges and restriction granted to or imposed upon any series of such Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. The Board of Directors is also authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. Simultaneously with the effective date of the filing of this amendment to the Corporation's Certificate of Incorporation (the "Effective Date"), each share of Common Stock, par value $.01 per share, of the Corporation issued and outstanding or held as treasury shares immediately prior to the Effective Date (the "Old Common Stock") shall automatically be reclassified and continued (the "Reverse Split"), without any action on the part of the holder thereof, as one-fifteenth of one share of Common Stock. The Corporation shall not issue fractional shares on account of the Reverse Split. Holders of Old Common Stock who would otherwise be entitled to a fraction of a share on account of the Reverse Split shall receive, upon surrender of the stock certificates formerly representing shares of the Old Common Stock, in lieu of such fractional share, an amount in cash (the "Cash-in-Lieu Amount") equal to the then market value of such fractional interest. Such market value will be determined by calculating the average closing price of the Common Stock as quoted on the OTC Bulletin Board for the ten business days prior to the Effective Date. No interest shall be payable on the Cash-in-Lieu Amount." SECOND: That thereafter, the stockholders of the Corporation, at a duly called meeting of the stockholders, voted in favor of the amendment. B1 THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Puroflow Incorporated has caused this Certificate to be signed by Michael H. Figoff, its President and Chief Executive Officer, this _ day of _, 2001. PUROFLOW INCORPORATED By: _______ Michael H. Figoff President and Chief Executive Officer B2 PROXY PUROFLOW INCORPORATED This Proxy is Solicited on Behalf of the Board of Directors Annual Meeting of Stockholders August 28, 2001 The undersigned, revoking all other proxies previously given, hereby appoints Michael H. Figoff and Warren G. Lichtenstein, and each of them individually (with full power to act without the other and with power to appoint his substitute), as the undersigned's proxy to represent and to vote all of the shares of Common Stock of PUROFLOW INCORPORATED, a Delaware corporation (the "Company"), held of record by the undersigned on June 29, 2001 at the Annual Meeting of Stockholders to be held on August 28, 2001 at 10:00 a.m., local time, at the Airtel Plaza Hotel, 7277 Valjean Avenue, Van Nuys, California 91406, and at any and all adjournments or postponements thereof. THIS PROXY, WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 2, 3 AND 4. IF ANY OTHER MATTERS ARE PROPERLY BROUGHT BEFORE THE ANNUAL MEETING, THE PROXIES WILL VOTE ON THESE MATTERS AS THE PROXIES NAMED HEREIN MAY DETERMINE IN THEIR SOLE DISCRETION. PROPOSAL 1. Election of Directors MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW || FOR all nominees (The nominees are Michael H. Figoff, Robert A. Smith, Dr. Tracy Kent Pugmire, Warren G. Lichtenstein, Travis Bradford, Glen Kassan, and Joshua Schechter) || WITHHOLD AUTHORITY to vote for all nominees || FOR all nominees except as listed below (INSTRUCTION: To withhold authority to vote for any indvidual nominees, write that nominee's name on the lines set forth below) ----------------------------------------------------------------------------------------------------------------------------------- PROPOSAL 2. To adopt the 2001 Stock Option Plan. || FOR || AGAINST || ABSTAINING ----------------------------------------------------------------------------------------------------------------------------------- PROPOSAL 3. To approve a one for fifteen reverse stock split of the Company's issued and outstanding Common Stock. || FOR || AGAINST || ABSTAINING ----------------------------------------------------------------------------------------------------------------------------------- PROPOSAL 4. To vote for the appointment of auditors, Rose, Snyder & Jacobs, for the fiscal year ended January 31, 2002. || FOR || AGAINST || ABSTAINING ----------------------------------------------------------------------------------------------------------------------------------- o SEE HOUSEHOLDING ELECTION NOTICE || FOR || AGAINST ----------------------------------------------------------------------------------------------------------------------------------- If any amendments or variations to the matters referred to above or to any other matters identified in the Notice of Annual Meeting are proposed at the Annual Meeting or any if any other matters which are not now known to management should properly come before the Annual Meeting or any adjournments thereof, this Proxy confers discretaionary authority on the person voting the proxy to vote on such amendments or variations or such other matters in accordance with the best judgment of such person. The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders dated August 6, 2001, the Proxy Statement of the Company, dated August 6, 2001, and the Company's Annual Report to Stockholders for the year ended January 31, 2001, each of which is enclosed herewith. The undersigned hereby revokes any proxy to vote shares of Common Stock of the Company heretofore delivered by the undersigned in connection with the Annual Meeting. Dated --------------------------------- -------------------------------------- Signature -------------------------------------- Signature, if held jointly -------------------------------------- Title (if applicable) Please date, sign exactly as your name appears on this Proxy and promptly return in the enclosed envelpe. In the case of joint ownership, each joint owner must sign. When signing as guardian, executor, administrator, attorney, trustee, custodian, or in any other similar capacity, please give your full title. In the case of a corporation, sign in full corporate name by president or other authorized officer, giving title, and affix corporate seal. If a partnership, sign in partnership name by an authorized person.