================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission File Number 1-11991
T/F PURIFINER, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 14-1708544
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3020 High Ridge Road, Suite 100,
Boynton Beach, Florida 33426
(Address of principal executive offices) (Zip Code)
(561) 547-9499
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
-------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares
outstanding of each of the issuer's classes of common equity, as of the
latest practicable date: October 15, 1996: 1,535,450.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
T/F Purifiner, Inc.
Condensed Balance Sheet
September 30, 1996
(Unaudited)
Assets
Current assets:
Cash $ 118,790
Trade accounts receivable, net 156,758
Inventories 272,390
Prepaid expenses and other current assets 41,009
-----------
Total current assets 588,947
Property and equipment, net 147,020
Patents and trademarks, net 287,082
Costs in excess of net assets acquired, net 134,990
Other assets 163,101
-----------
$ 1,321,140
Liabilities and capital deficiency
Current liabilities:
Accounts payable - trade $ 146,130
Accrued expenses 342,091
Customer deposits and other 171,645
Accrued interest and other payables-related parties 3,246
Current portion of notes payable and capital lease obligations 7,554
Shareholder loans 502,026
-----------
Total current liabilities 1,172,692
Notes payable and capital lease obligations 14,519
Other notes payable and accrued interest 427,152
Deferred rent 20,809
Liability to equity investee 16,493
-----------
Total liabilities 1,651,665
Contingencies
Capital deficiency:
Common Stock, $.001 par value 1,520
Preferred Stock, $.001 par value --
Additional paid-in-capital 2,716,872
Accumulated deficit (3,048,917)
-----------
(330,525)
-----------
$ 1,321,140
===========
See accompanying notes to condensed financial statements.
1
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Operations
For the Three and Nine Months Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 315,146 378,528 $ 1,083,733 $ 1,219,825
Cost of sales 141,138 201,097 522,096 694,966
----------- ----------- ----------- -----------
Gross profit 174,008 177,431 561,637 524,859
Operating expenses:
Selling 153,341 273,567 484,557 625,777
General and administrative 143,148 178,235 387,840 503,629
Deferred profit -- (7,117) -- 12,323
----------- ----------- ----------- -----------
296,489 444,685 872,397 1,141,729
----------- ----------- ----------- -----------
Operating loss (122,481) (267,254) (310,760) (616,870)
Interest expense 9,497 7,018 18,549 24,417
----------- ----------- ----------- -----------
Net loss $ (131,978) $ (274,272) $ (329,309) $ (641,287)
=========== =========== =========== ===========
Loss per common share $ (.12) $ (.19) $ (.30) $ (.50)
=========== =========== =========== ===========
Weighted average common shares outstanding 1,117,200 1,450,998 1,104,261 1,283,067
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Changes
in Redeemable Common Stock and Capital Deficiency
(Unaudited)
<TABLE>
<CAPTION>
Redeemable
Common Stock Common Stock Additional Total
------------ ------------------- Paid-In- Accumulated Subscription Capital
Shares Amount Shares Amount Capital Deficit Receivables Defieiency
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 - $ - 1,117,200 $ 1,117 $962,375 $(2,407,630) $(7,000) $(1,451,138)
Proceeds from sale of
redeemable Common Stock,
net 157,377 594,000 - - (20,544) - - (20,544)
Issuance of Common Stock
to acquire D.B. Filters - - 36,309 36 136,964 - - 137,000
Accrued interest on redeemable
Common Stock - 30,335 - - (30,335) - - (30,335)
Collection of subscription
receivables - - - - - - 7,000 7,000
Other issuances of Common
Stock - - 7,895 8 39,467 - - 39,475
Proceeds from sale of Common
Stock, net - - 81,200 81 390,118 - - 390,199
Issuance of Common Stock in
exchange for notes payable - - 120,313 120 601,445 - - 601,565
Issuance of stock options - - - - 13,205 - - 13,205
Expiration of redeemable
common stock put option (157,377) (624,335) 157,377 158 624,177 - - 624,335
Net loss - - - - - (641,287) - (641,287)
---------------------------------------------------------------------------------------------
Balance at September 30, 1996 - $ - 1,520,294 $1,520 $2,716,872 $(3,048,917) $ - $(330,525)
=============================================================================================
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Cash Flows
Nine Months ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Operating activities $ (329,309) $ (641,287)
Net loss
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 4,145 12,021
Issuances of Common Stock and options -- 27,679
Depreciation and amortization of property and equipment 21,336 24,712
Changes in operating assets and liabilities:
Trade accounts receivable, net (5,406) (72,626)
Inventories (36,735) (102,763)
Prepaid expenses and other current assets 1,955 (33,060)
Other assets (13,097) (5,839)
Accounts payable - trade 28,707 (17,527)
Accrued expenses 32,436 176,733
Customer deposits and other 71,137 37,475
Accrued interest and other payables - related parties 20,139 (58,417)
Deferred rent 2,474 (1,484)
----------- -----------
Net cash used in operating activities (202,218) (654,393)
Investing activities
Patents and trademarks (72,076) (183,302)
Purchases of property and equipment (15,656) (69,644)
Increase in other assets -- (33,362)
Acquisition of DB Filters -- (1,275)
----------- -----------
Net cash used in investing activities 87,732 (287,583)
Financing activities
Increase in deferred issuance costs (4,273) (92,300)
Proceeds from redeemable and other Common Stock, net -- 976,155
Collection of subscription receivables -- 7,000
Proceeds from notes payable 470,000 225,000
Payment on notes payable and capital lease obligations (168,911) (34,996)
Proceeds from shareholder loans 65,5000 16,000
Payment on shareholder loans (67,500) (51,213)
Borrowing from investee -- 25,000
Repayment to investee -- (41,612)
----------- -----------
Net cash provided by financing activities 294,816 1,029,034
----------- -----------
Increase in cash 4,866 87,058
Cash at beginning of period 998 31,732
----------- -----------
Cash at end of period $ 5,864 $ 118,790
=========== ===========
</TABLE>
During 1996, the Company entered into a capital lease obligation in the amount
of approximately $7,500. See Notes 3, 8, and 9 for description of non-cash
issuances of Common Stock.
See accompanying notes to condensed financial statements.
4
<PAGE>
T/F Purifiner, Inc.
Notes to Condensed Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION AND COMPANY
The unaudited condensed financial statements as of September 30, 1996 and for
the three and nine month periods ended September 30, 1995 and 1996 are unaudited
and, in the opinion of management, include all adjustments (consisting only of
normal and recurring adjustments) necessary for a fair presentation of financial
position and results of operations for these interim periods. Such interim
financial statements have been prepared on the basis of presentation as more
fully described in the Company's annual financial statements and should be read
in conjunction with the Company's audited financial statements which are
included in the Company's Form 10-SB. The results of operations for the nine
month period ended September 30, 1996 is not necessarily indicative of the
results to be expected for the entire year.
The Company has incurred recurring losses from operations since inception, which
has resulted in continuing cash flow difficulties and the continuing need for
additional financing. These factors raise substantial doubt about the Company's
ability to continue as a going concern. In order to continue as a going concern,
the Company must obtain additional financing, which it is endeavoring to do
through the issuance of additional securities.
Subsequent to September 30, 1996, the Company received gross proceeds from the
private sale of shares of its Common Stock of approximately $562,000 and expects
to complete additional financings. However, there is no assurance that the
Company can complete its proposed issuances or that it can obtain adequate
additional financing from other sources or that profitable operations can be
sustained. The financial statements do not include any adjustments relating to
the recoverability of recorded asset amounts that might be necessary as a result
of the above uncertainty.
At September 30, 1996, deferred issuance costs of approximately $109,000,
included in other assets, represent costs incurred by the Company in connection
with the Company's planned issuances of securities. Such costs will be charged
directly against the net proceeds of the related offering if it is successfully
completed or will be expensed if the offering is abandoned.
2. INVENTORIES
At September 30, 1996, inventories consist of the following:
Raw materials $121,878
Finished goods 146,512
Supplies 4,000
---------
$272,390
=========
5
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
3. SHAREHOLDER LOANS
During 1994, the Company and its principal shareholder instituted legal action
against the estate of a former 50% owner of the Company ("the Estate"). This
litigation sought a declaratory judgment approving the dilution of the Estate's
interest in the Company from 50% to approximately 10% as a result of the
issuance of additional Common Stock in 1994 to the principal shareholder and his
children. Subsequently, the beneficiaries of the Estate filed counterclaims
against the Company and its principal shareholder and his children seeking
declaratory relief, cancellation of additional stock issuances by the Company,
an injunction against further issuances, appointment of a receiver and damages
against Ford individually. In June 1995, the Estate demanded repayment of the
non interest bearing shareholder loans due to the Estate for which there were no
stated due dates ($502,026 at September 30, 1996). In September 1996, the
Company entered into an Agreement in Partial Settlement of T/F Purifiner, Inc.
Issues ("Agreement") which released the Company, with prejudice, from all
litigation pending or contemplated by the Taylor Family, the beneficiaries of
the Estate, and individually, against the Company related to any actions taken
by the Company before the date of the Agreement. In return, the Company agreed
to repay the Estate's loans of $502,026 as follows: $167,342 due 90 days after
any equity financings which raise in excess of $5,000,000 of gross proceeds;
$167,342 on the first and second anniversaries of such equity financings. If the
equity financings are less than $5,000,000 the amount of the periodic debt
repayment will be reduced and the term extended proportionately. The Estate has
agreed not to commence any action for loan repayment as long as the Company is
in compliance with the Agreement and raises gross proceeds of at least
$2,000,000 within one year of the Agreement. Since it is uncertain as to whether
the Company will be able to raise at least $2,000,000, the loans due to the
Estate have been classified as current in the accompanying September 30, 1996
balance sheet.
On July 31, 1996, a related party noteholder received 19,908 shares of Common
Stock in exchange for his shareholder loans and unpaid interest in the aggregate
amount of $99,540. On August 1, 1996, the Company's principal shareholder
received 100,405 shares of Common Stock in exchange for his shareholder loans in
the aggregate amount of $502,026.
4. NOTES PAYABLE
In September 1996, the Company issued unsecured notes payable in the aggregate
amount of $200,000 to several parties, $100,000 of which bear interest at 10%
per annum. The principal and interest on these notes ($200,036 at September 30,
1996) are repayable upon receipt by the Company of sufficient funds from the
sale of its equity securities and, accordingly, have been classified as
long-term borrowings. Subsequent to September 30, 1996, an additional
non-interest note payable was issued to one of these parties in the amount of
$50,000. See Note 11.
6
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
5. CONTINGENCIES
During 1995, the Company commenced a patent infringement case against a
competitor. The competitor subsequently asserted certain counterclaims against
the Company and certain of its employees. The ultimate outcome of these
counterclaims cannot currently be determined at this time but the Company
believes it has meritorious defenses and will eventually prevail in these
actions.
In April 1996, the Company became a party to an action filed by a former
independent contractor claiming certain commissions and other damages due him
pursuant to an agreement. Pursuant to the agreement, as ordered by the court,
the Company will resolve this case through arbitration and, although the
ultimate outcome of this matter cannot be determined at this time, the Company
believes it has meritorious defenses and will eventually prevail in this matter.
6. JOINT VENTURE
Effective January 1, 1996, the Company entered into a joint venture agreement
whereby such venture, TF Purifiner Ltd. ("Ltd"), will sell and distribute the
Company's product in Europe, the Middle East and certain African countries. The
Company has an approximate 45% interest in Ltd's operations (50% voting
interest) and is accounting for Ltd using the equity method. The Company is not
required to fund Ltd and will sell product to Ltd until such time as Ltd decides
to exercise its rights under the agreement to manufacture the Company's
products. Ltd was initially capitalized with approximately $88,000 provided by
one of its shareholders. In December 1995 and July 1996, Ltd advanced the
Company approximately $51,000 and $25,000, respectively, to be used to fund
certain patent and trademark filings for the venture's exclusive territory. At
September 30, 1996, approximately $16,500 remained unexpended. For the nine
months ended September 30, 1996, the Company had sales of approximately $248,000
to Ltd, at negotiated prices. At September 30, 1996, approximately $12,300 has
been recorded as unrealized intercompany profit related to the inventory sold to
Ltd which is included in Ltd's inventory at September 30, 1996.
At September 30, 1996, summarized financial information of Ltd is as follows:
Total assets $363,000
Total liabilities (1) 630,000
Total revenues 218,000
Gross profit 81,000
Net loss (267,000)
(1) Includes $559,000 of loans due to one of Ltd's foreign shareholders.
7
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
7. REDEEMABLE COMMON STOCK
During the nine months ended September 30, 1996, the Company sold 157,377 shares
of its Common Stock for gross proceeds of $594,000. The subscription agreements
provided that if the Company had not registered any amount of class of its
Common Stock under the Securities Act of 1933 or the Securities and Exchange Act
of 1934, as amended, within two years, the shareholders would have an option to
put the shares back to the Company at their original purchase price plus 10% per
annum from the date of issuance. Accordingly, such Common Stock was being
treated as Redeemable Common Stock until the expiration of the put options and
the redemption price was being accreted at the rate of 10% and charged to
additional paid in capital. On September 28, 1996, the Company registered Common
Stock under the Securities Act of 1934, as amended, and, therefore, the put
option expired and such Common Stock was no longer redeemable and has been
classified accordingly in the accompanying September 30, 1996 balance sheet.
8. ACQUISITION OF DB FILTERS
On May 20, 1996, the Company acquired all the common stock of DB Filters, Inc.,
an inactive company which has been subsequently dissolved ("DB Filters"), for
$1,275 in cash and 36,309 shares of its Common Stock with an estimated fair
value of approximately $137,000. DB Filters was owned by two employees of the
Company, one of which was a Director. DB Filter's only assets, at the time of
the acquisition, were the future royalties related to the Company's then patent
pending filter technology and certain restricted, as defined, North American
filter manufacturing rights. The Company accounted for this acquisition using
the purchase method of accounting and assigned all of its purchase price to cost
in excess of net assets acquired and is amortizing such costs using the straight
line method over 15 years. DB Filters had no material assets or liabilities at
December 31, 1994 and 1995 and no material operations in 1994, 1995 and from
January 1, 1996 to May 20, 1996.
9. COMMON STOCK
On July 1, 1996, the Board of Directors of the Company approved an increase in
authorized Common Stock from 100,000 to 20,000,000, approved a change in the par
value of Common Stock from $.01 par value to $.001 par value and approved a 57
to 1 stock split distribution for common shareholders of record on such date. In
July 1996, the Board of Directors of the Company approved the authorization of
up to 500,000 shares of preferred stock (none issued or outstanding at September
30, 1996). All share and per share data presented in the accompanying financial
statements have been restated to reflect the above actions.
On July 31, 1996, the Company issued 5,000 shares of its Common Stock to one of
its law firms in payment for professional services rendered.
8
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
(Unaudited)
9. COMMON STOCK (CONTINUED)
On August 3, 1996, the Company issued 2,895 shares of its Common Stock for
nominal consideration to certain employees, distributors, a not-for-profit
environmental group, and other parties for past services and support given to
the Company which has been recorded based upon the estimated fair value of such
Common Stock as determined by the Board of Directors ($5 per share). See Note
11.
10. STOCK OPTION PLAN
On July 31, 1996, the Company's Board of Directors approved the adoption of a
stock option plan (the "1996 Option Plan"), which provides for the granting of
both incentive and non-qualified stock options to key personnel, including
officers, directors, consultants and advisors to the Company, based upon the
determination of the Board of Directors. As of September 30, 1996, stock options
were granted under the 1996 Option Plan to purchase 650,000 shares of the
Company's Common Stock at an exercise price equal to $5 (the estimated fair
value as determined by the Board of Directors) and $15 per share, or 110% of
such fair value ($5.50 per share) for certain shareholders. These stock options
expire from 1997 to 2006. At September 30, 1996, 283,210 shares are currently
exercisable and 366,790 shares will become excercisable from 1996 to 2000. At
September 30, 1996, 650,000 shares of Common Stock have been reserved for
issuance under the 1996 Option Plan. The effect of these options have not been
included in the Company's computation of loss per share since the Company's
Common Stock has not had a fair market value in excess of their exercise prices
for three consecutive months.
During the three months ended September 30, 1996, the Company expensed $13,205
related to the issuance of stock options to various consultants and the Board of
Advisors based upon the estimated fair value of such stock options. The Company
uses the intrinsic method to account for stock options issued to employees and
Directors.
11. SUBSEQUENT EVENTS
On October 4, 1996, a noteholder received 15,156 shares of Common Stock in
exchange for his outstanding loan and unpaid interest in the aggregate amount of
$227,340. Accordingly, such note has been classified as a long-term liability at
September 30, 1996.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Form 10-SB.
GENERAL
The Company was formed in 1988, and commenced limited operations in 1991 when it
obtained worldwide manufacturing and marketing rights to the Purifiner(R)
products. From 1993 to 1995, the Company's revenues grew from approximately
$583,000 to $1,480,000.
The growth in the Company's revenues is primarily due to the increasing
acceptance of the Company's products by the marketplace. This acceptance is the
result of various factors, including the increased credibility of the product as
a result of its commercial relationship with well-known entities and the growing
desire of users to reduce maintenance costs, extend engine life and preserve the
environment.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's statements of
operations.
Percentage of Revenues
----------------------
Nine Months
Ended September 30,
-------------------
1995 1996
---- ----
Net sales 100% 100%
Operating costs and expenses:
Cost of sales 48 57
Selling expenses 45 51
General and administrative expenses 36 41
Other - 1
----- -----
Total operating costs and expenses 129 150
----- -----
Operating loss (29)% (50)%
===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1995
Net Sales. Net sales increased by 13% from $1,083,733 in the first nine months
of 1995 to $1,219,825 in the first nine months of 1996. This increase was
primarily attributable to increasing sales made to existing and new domestic and
international customers in 1996 in comparison to the comparable period of 1995,
including approximately $248,000 of sales to Ltd., the Company's newly formed
joint venture in 1996. Approximately, $12,300 of intercompany profit on these
sales have been deferred at September 30, 1996.
10
<PAGE>
Effective October 15, 1996, the Company implemented a new product pricing
strategy to reduce the Company's selling prices to enable end users to obtain a
significantly improved return on investment. The Company believes this new
strategy will promote the sale of the Company's products and result in increased
long-term revenues from unit and replacement filter sales and provide the
Company with the ability to reduce its product costs, primarily through volume
purchase discounts, utilization of excess fixed manufacturing capacity and
improved production processes. If the Company does not realize these cost
savings, its gross margin will be adversely effected. Various merchandise
credits will be issued by the Company, if certain conditions are met by its
distributors, in the fourth quarter of 1996 as a result of this price reduction.
These merchandise credits will have an adverse effect on the Company's results
of operations in such period. The Company has not completed the detailed
analysis to determine the exact amount of these merchandise credits, however,
mangement believes such amounts will not be in excess of $100,000.
Cost of Sales. Cost of sales increased by 33% from $522,096 in the first nine
months of 1995 to $694,966 in the first nine months of 1996. This increase is
primarily attributable in part to the 13% increase in sales between the
comparable periods as well as 20% of the first nine month sales of 1996 being
made to Ltd. at substantially lower prices than the Company's existing exclusive
international distributor pricing and a 9% increase in sales to other
international distributors at prices less than sales to domestic and Canadian
distributors. Finally, the Company's gross margin decreased from 51.8% to 43%,
substantially all due to the sales made to Ltd. in the first nine months of 1996
at these lower sales prices and the increase in sales to international
distributors. To the extent additional sales are made by the Company to Ltd., or
if its international distributors account for an increasing proportion of sales
the Company's aggregate gross margin will be adversely affected as compared to
prior periods.
Selling Expenses. Selling expenses increased by 29% from $484,557 in the first
nine months of 1995 to $625,777 in the first three months of 1996. The primary
reason for this increase was due to increases in other selling expenses such as
salaries for new personnel, commissions, brochures and catalogs, consulting,
travel and trade show expenses in the first nine months of 1996 versus the
comparable period of 1995. As a percentage of revenues, selling expenses
increased from 44.7% in 1995 to 51.3% in 1996.
General and Administrative Expenses. General and administrative expenses
increased by 29.9% from $387,840 in the first nine months of 1995 to $503,629 in
the first nine months of 1996 and as a percent of revenues increased from 35.8%
to 41.2%. This dollar increase was generally due to the increased level of
business activity, specifically including increases in personnel, legal,
accounting and auditing expenses.
Operating Loss. As a result of the foregoing, the Company's operating loss
increased from $310,760 in the first nine months of 1995 to $616,870 in the
first nine months of 1996.
Interest Expense. Interest expense increased by 30.1% from $18,549 for the first
nine months of 1995 to $24,147 for the first nine months of 1996. This change
resulted from an increase in average short and long term borrowings outstanding
in the first nine months of 1996 versus the comparable period for 1995. The
increase in loans was used to finance a portion of the Company's activities in
1995 and 1996.
11
<PAGE>
Net Loss. As a result of the foregoing, the Company's net loss increased from
$329,309 for the first nine months of 1995 to $641,287 for the first nine months
of 1996.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's capital requirements in connection with its business
activities have been and will continue to be significant. The Company has been
dependent upon available cash generated from operations, the proceeds of sales
of its securities to investors and stockholders and other loans to fund its
activities. The Company's auditors report included an explanatory paragraph
which stated that because the Company has sustained recurring operating losses,
a working capital deficiency, negative cash flows from operating activities and
a stockholders capital deficiency, these factors raise substantial doubt about
the Company's ability to continue as a going concern.
At September 30, 1996, the Company had a working capital deficiency of $583,743
and its current ratio (current assets to current liabilities) was .50, as
compared with a working capital deficiency of $894,117 and a current ratio of
.25 at December 31, 1995. At September 30, 1996, the Company had $118,790 of
cash. Outstanding short-term debt from lenders and shareholders was $509,580 at
September 30, 1996 and included a shareholder loan of $502,026 due to the Estate
of Willard Taylor (See Note 3 to the Notes to Financial Statements and "Part II
- - Item 1. Stockholder Litigation" relating to repayment terms to the Estate).
The balance of long term debt was $441,617 at September 30, 1996. See Note 10 to
the Notes to Financial Statements related to the repayment of $227,340 of long
term debt through the issuance of Common Stock subsequent to September 30, 1996.
Subsequent to September 30, 1996, the Company received gross proceeds of
approximately $562,000 from the sale of shares of its Common Stock, and obtained
an additional $50,000 loan (See Note 4 to the Notes to Financial Statements).
At September 30, 1996, the Company owed approximately $528,000 in current
liabilities to various trade and other unrelated creditors. Of this amount
approximately $324,000 was owed to various legal and other professional firms
for services provided to the Company. These professionals and vendors continue
to provide services to the Company; however, there can be no assurance that they
will continue to do so in the future while all or a portion of such amounts
remains outstanding. The Company has and intends to use a portion of the
proceeds described above and future financings to repay the amounts due to
creditors.
Consistent with industry practices, the Company may accept product returns or
provide other credits in the event that a distributor holds excess inventory of
the Company's products. The Company's sales are made on credit terms which vary
significantly depending on the nature of the sale. In addition, the Company does
not hold collateral to secure payment from its United States and Canadian
distributors. Therefore, a default in payment by one or more of the Company's
United States and Canadian distributors or customers could adversely affect the
Company's business, results of operations and financial condition. The Company
believes it has established sufficient reserves to accurately reflect the amount
12
<PAGE>
or likelihood of product returns or credits and uncollectible receivables.
However, there can be no assurance that actual returns and uncollectible
receivables will not exceed the Company's reserves. Any significant increase in
product returns or uncollected accounts receivable beyond reserves could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company has not experienced material product returns or
uncollectible receivables in the past.
Sales of the Company's products will depend principally on end user demand for
such products. The oil filtration industry has historically been competitive
and, as is typically the case with innovative products, the ultimate level of
demand for the Company's products is subject to a high degree of uncertainty.
Developing market acceptance, particularly worldwide, for the Company's existing
and proposed products will require substantial marketing efforts and the
expenditure of a significant amount of funds to inform customers of the
perceived benefits and cost advantages of its products.
The Company is not currently generating sufficient revenues to fund its existing
and planned expansion of its operations. Accordingly, the Company has embarked
and is implementing plans to raise additional capital, including its most recent
offerings. The Company intends to use such additional financing to increase its
marketing and sales efforts, such as the hiring of additional sales personnel
and related costs, implementation of advertising, promotional and marketing
programs, and fleet testing programs. Additionally, the Company intends to hire
additional manufacturing, operating, and administrative personnel and acquire
additional capital equipment and leasehold improvements to meet expected
production increases, as well as to assist in the implementation of the
Company's planned Indian manufacturing joint venture.
The above is not an all inclusive listing of the Company's planned expenditures.
In the event that the proceeds from future offerings or financings are not
received, the Company will not be able to implement its current plans. The
inability to obtain additional financing when needed, would have a material
adverse effect on the Company, including possibly requiring the Company to
curtail or cease its operations.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations.
However, any significant decrease in the price for oil or labor, environmental
compliance costs, and engine replacement costs could adversely impact the
Company's end users cost/benefit analysis as to the use of the Company's
products.
QUARTERLY FLUCTUATIONS
The Company's operating results may fluctuate significantly from period to
period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the Company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company and its competitors, technological factors,
variations in sales by product and distribution channel, and competitive
pricing. Consequently, the Company's product revenues may vary significantly by
quarter and the Company's operating results may experience significant
fluctuations.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Stockholder Litigation
- ----------------------
On August 26, 1994, the Company and its principal stockholder, Richard C. Ford
("Ford"), filed an action against the representatives of the Estate of Willard
Taylor in the Circuit Court for the Seventeenth Judicial Circuit in Broward
County, Florida. The suit sought a declaratory judgment essentially to confirm
the validity of various issuance's of Common Stock to Ford and members of his
family by the Company in 1994. Prior to the Common Stock issuances, the Company
obtained an independent appraisal of the value of its Common Stock, and the
Fords paid a purchase price consistent with that valuation. The representatives
of the Estate of Willard Taylor have contested the validity of the Common Stock
issuances and the constitution of the Board of Directors, and filed a
counterclaim seeking to invalidate the issuances and the constitution of the
Board of Directors, claiming a breach of fiduciary duty and requesting the
appointment of a receiver.
Additionally, in June 1995, the Estate demanded repayment of its advances to the
Company in the amount of $502,026 (and $268,742 of advances made to T/F Systems,
Inc. which have not been assumed by the Company pursuant to the purchase of
assets of T/F Systems, Inc.), although no litigation related to this demand has
been filed to date. Management of the Company believes that such advances are
not currently due to the Estate and will contest the required time of repayment
of such advances if any suit related thereto is commenced by the Estate. In a
separate related action, the Estate is also seeking repayment of certain loans
made to Richard C. Ford by Willard Taylor prior to Mr. Taylor's death in the
principal amount of $508,250 which, in turn, were also advanced to the Company
by Ford. On September 19, 1996, Mr. Ford and the Estate reached an agreement as
to the repayment of such personal loans and unpaid accrued interest and such
legal action was dismissed with prejudice.
In September 1996, the Company entered into an Agreement in Partial Settlement
of T/F Purifiner, Inc. Issues ("Agreement") which released the Company, with
prejudice, from all litigation pending or contemplated by the Taylor Family, the
beneficiaries of the Estate, against the Company related to any actions taken by
the Company before the date of the Agreement. In return, the Company agreed to
repay the Estate's loans of $502,026 as follows: $167,342 due 90 days after any
equity financings which raise in excess of $5,000,000 of gross proceeds;
$167,342 on the first and second anniversaries of such equity financings. If the
equity financings are less than $5,000,000 the amount of the periodic debt
repayment will be reduced and the term extended proportionately. The Estate has
agreed not to commence any action for loan repayment as long as the Company is
in compliance with the Agreement and raises gross proceeds of at least
$2,000,000 within one year of the Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Company was held on August 28, 1996.
At the meeting:
14
<PAGE>
1) The following persons were elected as Directors of the Company to serve
until the next Annual Meeting and until their successors are duly elected
and qualified.
Name Votes For Abstentions
---- --------- -----------
Richard C. Ford 1,052,334 258,552
Richard J. Ford 1,052,334 258,552
Byron Lefebvre 1,052,334 258,552
2) The Company's 1996 Stock Option Plan ("Plan"), which reserves an aggregate
of 650,000 shares of Common Stock for issuance pursuant to options granted
under the Plan, was ratified.
Votes For 1,052,334
Abstentions 258,552
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
Exhibit 27 - Financial Data Schedule (Electronic filing only)
b) Reports on Form 8-K.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
T/F PURIFINER, INC.
(Registrant)
Date: November 8, 1996 By /s/ Richard C. Ford
------------------------
Richard C. Ford
President
Date: November 8, 1996 By /s/ Stephen J. Hauser
------------------------
Stephen J. Hauser,
Vice President, Chief Operating
Officer and Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF T/F PURIFINER, INC. FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996 , AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 118,790
<SECURITIES> 0
<RECEIVABLES> 166,758
<ALLOWANCES> 10,000
<INVENTORY> 272,390
<CURRENT-ASSETS> 588,947
<PP&E> 260,568
<DEPRECIATION> 113,548
<TOTAL-ASSETS> 1,321,140
<CURRENT-LIABILITIES> 1,172,692
<BONDS> 0
0
0
<COMMON> 1,520
<OTHER-SE> (332,045)
<TOTAL-LIABILITY-AND-EQUITY> 1,321,140
<SALES> 1,219,825
<TOTAL-REVENUES> 1,219,825
<CGS> 694,966
<TOTAL-COSTS> 694,966
<OTHER-EXPENSES> 1,141,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,417
<INCOME-PRETAX> (641,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> (641,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (641,287)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
