U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-SB
General Form for Registration of Securities
of Small Business Issuers Under Section 12(b)
or 12(g) of the Securities Act of 1934
T/F PURIFINER, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
DELAWARE 14-1708544
- ------------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3020 HIGH RIDGE ROAD, SUITE 100, BOYNTON BEACH, FL 33426
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(561) 547-9499
- --------------------------------------------------------------------------------
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
- ----------------------------------- ---------------------------------------
- ----------------------------------- ---------------------------------------
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, .001 PAR VALUE
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
<PAGE>
PART I
All discussions herein give effect to a 100:1 forward stock split effected on
June 15, 1995 and a 57:1 forward stock split for all stockholders of record as
of July 1, 1996, except as otherwise specifically set forth. Except as otherwise
specifically described herein, the term "Company" refers to T/F Purifiner, Inc.
and T/F Systems, Inc., as described more fully below.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Company owns the rights to manufacture, market and distribute
worldwide the PurifinerTM, a bypass oil purification system that is compatible
for use with substantially all internal combustion engines, generators and other
types of equipment which use oil for their lubrication needs. The PurifinerTM is
a bypass ultra filtration system which cleans oil by continuously removing solid
and liquid contaminants from the oil through a filtration and evaporation
process. The PurifinerTM has been used successfully to substantially extend oil
drain intervals and the time between engine overhauls to up to three times
longer than historical overhaul intervals. The Company also manufactures (with
one exception) and sells the disposable replacement filter elements ("Elements")
for the PurifinerTM.
By continuously cleaning the oil and allowing for extended drain
intervals, the PurifinerTM has had a demonstrable effect on extending engine
life, reducing oil purchase, disposal and maintenance costs and service time,
while significantly reducing the necessity for the disposal and storage of new
and used oil, thereby enabling users to overcome environmental concerns
associated with such disposal and storage. Additionally, based upon customer
statements, extensive testing done by Southwest Research Institute, an
independent third party testing labratory, on an improved heavy duty engine oil
that supports improved fuel efficiency from the use of this new oil, and the
general recognition that operating an engine with cleaner oil will decrease
engine energy losses due to friction, wear, and oil viscosity fluctuations, the
Company believes that end users shall experience improved fuel economy.
BACKGROUND AND FORMATION OF T/F PURIFINER, INC.
The patents to the oil purification system that, after further
development, have evolved into the current PurifinerTM units, were issued in the
early 1980's. The owners of such patents unsuccessfully attempted to market and
sell the original system under various other tradenames. This was due to what is
believed to be the lack of acceptance by potential customers of the concept of
2
<PAGE>
extended drain intervals and the environmental benefits related thereto, absence
of acceptance and endorsement by engine and vehicle manufacturers, disbelief
that the product was effective and could provide benefits in a cost effective
manner and inadequate capitalization and management experience of these
companies.
In 1987, T/F Systems, Inc., a Delaware corporation ("Systems"), of which
Richard C. Ford and Willard H. Taylor (deceased) were equal stockholders,
obtained certain limited distribution rights to the PurifinerTM in several
states from Refineco Manufacturing Company, Inc. ("Refineco"), then located in
Oakland Park, Florida (of which Byron Lefebvre, currently an employee and a
Director of the Company, was then the President). In 1988, Systems obtained an
option to acquire the exclusive manufacturing and marketing rights to the
PurifinerTM in the event Refineco, and subsequently, Purifiner Distribution
Corporation of Chicago, Illinois, was unable to meet its commitment to supply
Purifiners(TM) to Systems. As a result of a default by the manufacturer in
meeting this supply commitment, Systems obtained the manufacturing and marketing
rights to the PurifinerTM in 1990.
In February 1988, T/F Purifiner, Inc. was incorporated in Delaware under
the name "Econology Systems, Inc." On October 16, 1990, its name was changed to
"T/F Purifiner, Inc." T/F Purifiner, Inc. was inactive until 1991, when it
obtained the distribution and marketing rights to the PurifinerTM by virtue of
an assignment from Systems (at the time owned equally by Messrs. Ford and
Taylor). However, System's ownership of the rights to the PurifinerTM were
contested in court as to other third parties who were also manufacturing and
marketing a device similar to the PurifinerTM in the marketplace, and using the
PurifinerTM trademark. Eventually, the court ruled in favor of Systems with
respect to its manufacturing and marketing rights, and in May 1993, all appeals
by the other parties were exhausted. During the time of this litigation T/F
Purifiner continued to market the PurifinerTM, but with limited success due to
various factors, including the pending litigation and the actions by these other
parties in the marketplace.
Prior to December 31, 1995, T/F Purifiner, Inc. was the exclusive
distributor and Systems was the exclusive manufacturer for the PurifinerTM. On
December 31, 1995, T/F Purifiner purchased all of the operating assets and
assumed all of the operating liabilities of Systems (except for any benefits
related to a delay damage judgment awarded in December 1994 (currently on
appeal) against the parties discussed above and except for liabilities related
to certain stockholder advances made to Systems by Ford and Taylor) in exchange
for any claims T/F Purifiner had in the delay damage award. Accordingly, T/F
Purifiner currently owns all manufacturing rights previously owned by Systems.
Prior to his death in May 1993, Mr. Taylor was the primary financial
partner to Mr. Ford, although Messrs. Taylor and Ford each owned 50% of the
3
<PAGE>
issued and outstanding capital stock of the Company and each contributed equal
amounts of working capital to the Company. Subsequent to his death, the business
activities and growth of the Company have been hampered by insufficient capital,
notwithstanding Mr. Ford's continued investment in the Company.
STRATEGY
Since the PurifinerTM has had limited acceptability in the marketplace,
the Company's strategy has been to obtain product credibility by overcoming long
held beliefs that oil needs to be regularly changed in accordance with
recommended guidelines. As the Company was striving to obtain credibility for
the PurifinerTM, the concept of extended oil replacement intervals was becoming
more readily accepted. The Company believes that this acceptance was due, in
part, to the introduction of longer life oils and the realization by consumers,
as well as vehicle and engine manufacturers and oil companies, of the cost,
warranty, environmental and other benefits of such extensions.
The Company has expanded its distribution network and direct marketing
activities, primarily focused in the heavy duty truck marketplace, and
internationally. To date the Company has approximately 135 U.S. and Canadian
distributors, of which approximately 80 are active distributors, and
approximately 17 international distributors. The Company also formed a foreign
joint venture effective January 1, 1996 to market the Purifiner(TM) through
Europe, the Middle East, the former Soviet Union, Egypt, and South Africa. See
"TF Purifiner Ltd." Additionally, the Company recently entered into a written
Memorandum of Understanding with a private company in India to distribute the
Company's products in India, Nepal, Sri-Lanka and Burma and to manufacture such
products for these markets and for export.
The Company plans on continuing to expand its distribution channels
throughout the world, as well as the number of market segments on which it
focuses. The Company also plans to employ additional direct sales personnel to
establish additional distributors and to market its products to certain national
and other accounts in conjunction with its distributors. The Company also plans
to enter into additional joint ventures in various parts of the world that would
manufacture and/or market its products.
The Company has entered into discussions with two major oil companies to
form strategic alliances for the purpose of marketing the PurifinerTM with
certain of their products. The Company also plans to target original equipment
manufacturers ("OEM") for original placement of the PurifinerTM on OEM products.
See "Marketing."
There can be no assurance that the Company will be able to successfully
implement its strategy.
4
<PAGE>
PRODUCTS
The PurifinerTM is manufactured in six different sizes ranging from 8 to
240 quarts, the use of which is dependent on the oil sump capacity of the engine
or equipment on which it is placed. The PurifinerTM can also be used in
multiples for larger oil sumps. The PurifinerTM can easily be installed by
qualified personnel for use with engines and other equipment, typically in 1 1/2
to 2 hours. The Company has also developed a "Hydraulic Batch System" ("HBS")
which is mounted on a hand cart, to give it mobility. The HBS was developed
primarily to allow users to clean 55 gallon drums of used hydraulic oils thereby
enabling the users to reduce their oil purchases, as well as the high costs of
storing and disposing of used oil in compliance with environmental regulations.
The HBS consists primarily of two 60-quart PurifinersTM, a preheater, pump and
other miscellaneous parts.
Each of the PurifinersTM are compatible with substantially all standard
and synthetic oils on the market and work with engines using gasoline, diesel,
propane or natural gas. The PurifinerTM (except for the HBS) cannot be used on
engines without a pressurized lubricating system, such as an outboard boat motor
where the oil mixes with the fuel.
The PurifinerTM consists of a canister that can be mounted on the
firewall, fender well or the frame of a vehicle and other convenient locations,
depending on the particular application, The canister inlet is either connected
to the engine's oil pressure sending unit or a pressure line for hydraulic
applications and the outlet is connected to the sump. The canister houses the
Element and an evaporation chamber which is heated by an enclosed heating
element. Under pressure from the engine or equipment, engine oil enters the
canister via a metering jet that regulates the flow of oil to approximately
three and six gallons per hour, depending on the size of the PurifinerTM. The
oil slowly passes through the Element where solid contaminants in the oil are
trapped. The Element contains compacted long strand natural cotton fibers that
retain solid particles as small as approximately one micron in size. A normal
paper oil filter will typically remove particles down to 25-40 microns in size.
According to a paper published by the Society of Automotive Engineers in its SAE
Paper No. 660081 dated January 1966, "[f]iltering the used oil through a 5
micron filter did not significantly reduce the wear rate; however, when the oil
was filtered through a 1 micron filter, there was a significant reduction." The
100% natural cotton filtering media also absorbs water and traps sulfur and
neutralizes the acids that are left in the oil by conventional paper filters.
The slow rate of speed at which the oil passes through the Element helps ensure
maximum contaminant retention.
The PurifinerTM also removes liquid contaminants, such as water, fuel and
coolant from the oil. The oil flows slowly over the diffuser plate located in
5
<PAGE>
the dry heated evaporation chamber where it is heated to a temperature of
approximately 200 degrees Fahrenheit, except for the HBS which is slightly
higher. The heating element is sealed in stainless steel and completely isolated
from direct contact with the oil for safety. The liquid contaminants are thereby
evaporated and then vented out of the PurifinerTM before they can recondense in
the oil. These gases and water vapor are vented back into the induction system
and are consumed in the combustion process. On hydraulic applications, the water
vapor is vented into the atmosphere. The cleaned oil then flows back to the
engine crankcase via gravity. These processes continue whenever the equipment or
engine is operating.
The Company also manufactures and distributes replacement Elements for the
PurifinerTM. The Company generally recommends that for all PurifinersTM, the
Element be replaced at the engine manufacturer's recommended/approved periodic
oil change interval, (except that with respect to one model currently used
primarily for gasoline applications only, the Company generally recommends that
the Element be replaced every ten thousand miles/250 hours, when used for
gasoline powered automobiles and vans). The useful life of oil and the Element
is dependent on several factors, including the quality of the oil used, type of
fuel, condition of engine, and the type and operating environment of the
equipment. Accordingly, the above Element change intervals may vary. All
Elements can be changed and an oil sample taken in approximately five to ten
minutes by the customer.
The Company estimates that the current costs of an oil and full flow
filter change (assuming a person does not do the oil change himself or herself)
ranges from $15.00 and up for automobiles, from $100 and up for heavy duty
trucks and from $200 and up per engine for diesel powered marine engines. These
costs vary, based upon, among other things, the type of application and engines,
labor and oil costs and costs of waste oil disposal. Depending on the size of
the Purifiner Element, the current suggested prices for retail end-users of the
Elements range from approximately $13.00 to $50.00 and the cost of an oil
analysis purchased through the Company currently ranges from approximately
$10.00 to $16.50 per sample.
The Company has recently received approval from the United States Patent
Office for a patent on a new Element (the "TFP Filter Plus"), which contains
pelletized chemicals being added to the filtering media. The chemicals are
antioxidants which will reduce the amount of oxidation, stabilize the alkalinity
and further help reduce the acid build-up of the oil, which is especially
important on new engines built since enactment of the Clear Air Act of 1992,
which requires tighter specifications for diesel engines. As these engines
consume less oil, the amount of makeup oil that is added and replenishes the
consumed additives in older engines has decreased. The TFP Filter Plus
compensates for this factor.
6
<PAGE>
When the Element is changed, make-up oil is added to replace any oil
retained in the used Element or consumed in the normal engine combustion process
and also to replenish the oil's additives. The Company's performance warranties,
for product used in the United States and Canada, generally require the user to
take a small sample of the used oil for submission to an oil testing laboratory
at the same intervals that the OEM recommends/approves for an oil change, but at
least once a year. See "Warranties." The PurifinerTM has an oil sample valve to
expedite the taking of the oil sample. Often, there may be local independent oil
testing laboratories to test oil samples and a number of larger users of the
PurifinerTM have access to other testing facilities. The Company also sells
prepaid oil sample kits and has oral arrangements with Ana Laboratories, Inc. in
New Jersey and United Testing Group, Inc., a subsidiary of Top Source
Technologies, Inc., with facilities in Atlanta, Georgia, Chicago, Illinois, and
Reno, Nevada, to test samples sent to them via the Company's prepaid kits (There
are other independent testing laboratories available to perform testing of the
oil samples other than those described above). The current customer cost of
testing an oil sample ranges from de minimis (if a customer has access to a
testing facility) to approximately $16.50. The cost of an oil sample may exceed
$16.50 in certain foreign countries.
Users must maintain a record of the laboratory oil analysis results in
order for the Company's warranties to remain in effect. Management believes that
the risk of losing the manufacturers' warranties encourages customers to
complete the oil analysis and replace Elements in a timely manner, making the
PurifinerTM more effective and stimulating recurring Element sales. The Company
is also in the process of patenting a new oil flow meter which will enable the
user to visually determine when to change the Element. The oil analysis also
helps the Company monitor customer satisfaction, and should a problem arise with
a particular application, the Company and the customer can work together to
address the problem and find a solution on a timely basis. Finally, oil analysis
has been analogized to blood samples for humans, in that through proper analysis
other problems occurring within the engine or equipment, apart from oil
contamination, can be diagnosed and corrective action taken before incurring
significant problems. To date, there have been no significant problems with
existing PurifinersTM or warranty claims, although there can be no assurances
that such a trend will continue. Due to the sometimes prohibitive cost of oil
analysis and generally more frequent recommended/approved oil change intervals
for engines used in certain countries outside the United States and Canada,
primarily due to the poor quality of oil and fuel used, not all performance
warranties for PurifinerTM products (whether offered by the Company or by the
Company's distributors) used outside the United States and Canada require oil
analysis at the OEM recommended/approved oil change intervals.
7
<PAGE>
The PurifinerTM has no moving parts and consequently requires no
significant ongoing maintenance. The PurifinerTM has an in-line pre-strainer to
prevent the metering jet from becoming clogged by large contaminant particles.
As long as the Elements are changed at the recommended/approved intervals or as
oil analysis dictates and other standard preventive maintenance procedures are
performed, the Company believes that the PurifinerTM can perform as designed in
excess of ten years (10 years is the material and workmanship warranty period
for the Purifiner(TM)). PurifinersTM used for hydraulic applications do not
require as frequent Element changes since hydraulic oil applications typically
do not contain the level of contaminants as other oil applications. In order to
maintain the Company's performance warranties, users must, among other things,
change the full flow filters once a year or every 50,000 to 60,000 miles/1500
hours, depending on the particular application of the PurifinerTM. The cost of
changing a full flow filter is part of the cost of an oil change, as discussed
above.
The Company has received acknowledgments from Deere & Company, Detroit
Diesel Corporation, Caterpillar, Inc., Ford Motor Company, Mack Trucks, Inc.,
Cummins Engine Company, Inc., Chrysler Motors Corporation, Mercedes Benz of
North American, Inc. and others, who have all stated that the installation and
use of the PurifinerTM does not void these manufacturer's warranties. Most
engine manufacturers will accept oil analysis as an alternative to their
recommended oil change intervals. Management believes that the existence of
other longer life oils in the marketplace which allow for extended oil drains
has been and will continue to exert continuing pressure on the use of oil
analysis as an acceptable alternative to engine manufacturer's recommended oil
change intervals, as well as the cost, environmental and other benefits obtained
from extended oil drain intervals.
MARKETING
The Company's products are expected to be marketed to numerous market
segments, including for use in trucking, marine, bus, recreational vehicle,
generator, construction, mining, industrial and hydraulic applications, and to
automotive and other users of engines or equipment that utilize up to 50 weight
oil for their lubricating needs.
To date, the Company has not expended any material amounts to advertise or
promote its products in the marketplace and has relied upon editorials, trade
shows and other methods to promote its products. In May 1995, the Company was
featured on CNN's FUTURE WATCH program, broadcast throughout the world, which
resulted in the addition of several new distributors and, more importantly,
added to the credibility of the Company's products. The Company was also
featured on CNN's EARTH MATTERS program in early 1996. Additionally, numerous
magazines, including BUSINESS WEEK, DEFENSE NEWS, EQUIPMENT TODAY, MOTOR TREND,
8
<PAGE>
CAR AND DRIVER and others have featured stories on the Company's products.
Additionally, during 1994 and subsequently, the Company's products have achieved
recognition from well known sources, including (i) certification by the
California Environmental Protection Agency's Department of Toxic Substances as a
"Pollution Prevention Technology", (ii) receipt of the State of Florida's 1995
Governor's New Product Award (Small Business Category), (iii) receipt of the
National Society of Professional Engineers 1996 New Product Award "for
innovative use of engineering principals and materials, improved function and
savings in use and benefit to the national economy" (Small Business Category);
and (iv) receipt of the World Trade Center's (Ft. Lauderdale, Florida) 1996
Award for Outstanding Achievement in International Trade (Manufacturing).
Management believes that such recognition has and will continue to enable the
Company to expand its distribution channels and increase the credibility and
acceptance of its products.
In February 1996, the PurifinerTM gained the support of the American
Oceans Campaign ("AOC"), a not-for-profit organization devoted to ensuring the
earth's waters are kept free of contamination and pollution. Management believes
that the association with AOC and similar groups will be a cost effective way to
promote the PurifinerTM and expand its distribution and direct sales. However,
no assurance can be given that such associations will be successful in promoting
the Company's products.
In April 1996, the Company formed strategic alliances with two companies
to help facilitate retrofit sales of the product at the end user level. First,
Leasing Services, Incorporated ("LSI"), whose principal offices are located in
Solana Beach, California and Boston, Massachusetts, is a national leasing
company that will provide lease financing to certain of the Company's users,
subject to normal credit considerations with respect to the user. While the
Company has had many successful evaluations, many customers have found the
up-front cost to be prohibitive for large scale retrofits. The use of lease
financing will enable the user to immediately benefit from a reduced maintenance
expense and pay for the PurifinerTM from such savings over variable terms. The
Company has no written agreement with LSI, receives no consideration from LSI
and merely provides its customers with LSI's brochure with an explanation of
LSI's services.
Secondly, the Company and Apache Future, Inc. ("AFI") whose primary focus
has been to provide remote field installations for equipment in the trucking
industry, have agreed to work together to provide installation services to the
Company's customers, if required. Like its relationship with LSI, the Company
has no written agreement with AFI, receives no consideration from AFI and simply
provides information concerning AFI's services to the Company's prospective and
current customers in order to assist these customers, based upon management's
9
<PAGE>
belief that this installation service will be beneficial to certain small fleet
operations with limited manpower in their repair facilities.
With these two new alliances, the Company and its distributor network are
able to provide a complete product package, including the Purifiner(TM),
installation and financing to its customers. Management believes the ability to
provide a turn-key program should provide the Company with a competitive edge.
However, no assurance can be given that these alliances will result in increased
revenues to the Company.
The Company relies on management's ability to determine the existence and
extent of available markets for its product. Company management and consultants
have considerable marketing and sales backgrounds and devote a significant
portion of their time to marketing-related activities. The Company markets its
products at various national trade shows, such as the International Truck Show
in Las Vegas, Nevada, Mid-America Truck Show in Louisville, Kentucky, the
Maintenance Council Show in Orlando, Florida, the International Workboat Show in
New Orleans, Louisiana, ConAgra Show in Las Vegas, Nevada, the Recreational
Vehicle Industry Association Trade Show in Louisville, Kentucky and others.
Eventually, management would like to sell its products directly to OEMs. A
number of international and domestic engine, automobile, truck, bus and other
OEMs are currently evaluating the Company's products, including Volvo-Sweden
(trucks), Navistar International Corporation ("Navistar")(trucks), Freightliner
Corporation (trucks), Perkins Engine Company (engines), Hyster (forklifts) and
Blue Bird Corporation (buses). There can be no assurance that these or other
OEMs will accept the Company's products for original placement on their
production. To date, the Company's customers have requested that the
PurifinersTM be installed at a Volvo USA factory (North Carolina) on a very
limited number of vehicles. Certain other manufacturers have agreed to install
the PurifinerTM at their production facilities, if requested by their customers,
including Freightliner Corporation, Navistar, Ford Motor Company and Volvo (US).
The PurifinerTM is installed on a Navistar and Mobil Oil Company show
truck, which is on display at all the major truck shows in the United States.
DISTRIBUTION
The Company currently distributes its products through several channels
under the trademark PurifinerTM. To date, purchasers of the Company's products
have included Coca-Cola Enterprises, Inc., Sysco Foods, Vulcan Chemicals, U.S.
Air Force and others.
While the Company currently does not have written distribution agreements
with its domestic and Canadian distributors, the Company does require that a
10
<PAGE>
domestic and Canadian distributor purchase an initial minimum dollar amount of
Product, and that each distributor be trained by the Company, either at the
Company or at the distributor's location. Typically training takes 1 to 1-1/2
days and the expenses (travel, food and lodging) are paid by the distributor.
Additionally, all distributors (domestic and foreign) must pay in a timely
fashion. The Company has entered into written distribution agreements with
substantially all of its international distributors which typically memorialize
the minimum dollar amount or units to be purchased and the shipping terms.
The Company has approximately 135 warehouse distributors, of which
approximately 80 are currently active, located in 35 states and Canada,
primarily in the heavy duty trucking industry. The remaining are located
primarily in South America, England (See TF Purifiner Ltd.)and the Far East.
These distributors purchase product directly from the Company and sell to their
existing or new customers. The Company currently also has contracts or
arrangements with 11 manufacturer's representatives, primarily in the heavy duty
trucking industry whose responsibilities include the establishment and servicing
of warehouse distributors and introducing selected fleets in a manufacturer's
representative's defined territories to the Company's Products and to the
Company and its distributors in exchange for negotiated commission rates,
depending on the level of services provided. The manufacturer's representative
contracts are typically for one year and can be cancelled by either party on 30
to 120 days notice. The Company has recently established representatives for
certain other market segments, such as marine and recreational vehicle
industries, in defined territories.
During 1995, six customers accounted for approximately 36% of the
Company's net sales, of which KLC Corporation, the Company's Brazilian
distributor, accounted for approximately 14% of the Company's net sales. There
are no assurances that each or all of these customers will continue to do
business with the Company and the loss of any one of these customers and,
particularly, the loss of KLC Corporation could have a material adverse affect
on the Company's revenues.
TF PURIFINER LTD. Pursuant to a joint venture agreement (the "Centrax
Agreement") dated December 18, 1995 (but effective January 1, 1996), the Company
became a stockholder in TF Purifiner Ltd.("Ltd."), an English company limited by
shares and formed under England's Company's Act 1985. The other stockholders and
parties to the agreement include Centrax, Ltd., The Barr family (the "Barr
Family") who includes Messrs. Richard H.H. Barr, C. Robert Barr, the Chief
Executive Officer of Centrax, and Richard A. Barr and the current director and
general manager of Ltd., and Albert N. Davies, of Devon, England (who is not an
affiliate of Centrax or the Barr Family). Centrax has sales of approximately
11
<PAGE>
US$70 million for 1995 from its worldwide activities in power generation and
specialist aero-engine components, and is located in Devon, England. The
principal stockholders of Centrax include Richard H. H. Barr, C. Robert Barr and
Richard A. Barr (the Barr Family), who are also directors of Centrax.
Ltd.'s primary purpose is to market and establish distribution for the
PurifinerTM throughout Europe, the Middle East, the former Soviet Union, Egypt
and South Africa (the "Territory"). In this regard, the Company has granted to
Ltd. its rights under existing licenses, trademarks, and patents with respect to
existing products and its rights with respect to future products to allow for
the marketing and distribution of the products in the Territory. Ltd. also has
the option to manufacture the products based upon market acceptance and other
factors.
The Company owns approximately 45% of Ltd. and has a 50% voting interest.
Forty-five (45%) percent is owned by Centrax and the Barr Family (or a company
representing the Barr Family) and the remaining approximately 10% is owned by
Mr. Davies. The Company is not obligated to fund any of the operations of Ltd.,
which, pursuant to the Centrax Agreement, shall be provided (i) by borrowings by
Ltd. from a bank; (ii) from Centrax; or (iii) from the Barr Family, and such
borrowings or guarantees by the Barr Family or Centrax shall be made until such
time as Ltd. is self- funding. If the Barr Family does not fund Ltd.'s
operations, the Company has the right to take back Ltd.'s manufacturing,
marketing and distribution rights, as well as any patent and trademark rights
assigned or to be assigned to Ltd. by the Company for this Territory. To date,
Ltd. is negotiating to establish, has established new or taken over the
servicing of existing Company distributors in various countries, including the
United Kingdom, Greece, Italy, France, Turkey, the Czech and Slovak Republics,
Norway, Denmark, Spain and Portugal. There can be no assurance that such
distributors will be successful in introducing the PurifinerTM in their
territories as they will face similar obstacles that the Company and its other
distributors have encountered in introducing an innovative technology in their
territories. Additionally, there can be no assurance that Ltd.'s other 45% owner
(Centrax), who is responsible for the ultimate funding of Ltd., will continue to
fund Ltd.'s operations, and if it discontinues such funding, it could have a
material adverse effect on the Company's operations in this Territory. Ltd. has
also commenced or completed various PurifinerTM evaluation programs, including a
large United Kingdom ("U.K.") based fleet based upon the recommendation of a
large international engine manufacturer which test has been completed.
Ltd. currently has a patent pending on a product consisting of a full flow
and bypass oil filter, all housed in one PurifinerTM unit, as well as a
side-by-side full-flow and PurifinerTM bypass filter design. These patent
12
<PAGE>
pending products were designed primarily for original equipment placement by
OEMs. The Company has the right to distribute this product and any other
products developed by Ltd., everywhere other than the Territory.
NAVISTAR INTERNATIONAL DEALERS
The Company entered into aftermarket programs with Navistar in the United
States and Canada as part of its agreement to provide Navistar dealers with the
Company's product line. The aftermarket program has provided the Company with
the opportunity to be invited to participate in Navistar trade fairs. The
program is not reduced to writing in a written agreement between the Company and
Navistar. Additionally, the Company's Products are included in Navistar's
catalog programs for the United States and for Canada which are sent to Navistar
dealers. Finally, the Company may be given the opportunity to participate
advertising programs initiated by Navistar but to date, has only done so on a
limited basis in Canada. These aftermarket programs are administered by Navistar
and, to date, has not resulted in a significant number of new Navistar dealers
purchasing Product from the Company. Management believes that the lack of
participation is primarily due to the Company not allocating sufficient time or
money in order to reach Navistar dealers, although it does intend to do so in
the foreseeable future if sufficient resources are available. However, Navistar
is the first major truck manufacturer that has agreed to an aftermarket program
with the Company and has an exclusive aftermarket arrangement through early
1997. Management plans on working with other truck manufacturers, in addition to
Navistar, to establish other aftermarket programs in the future. No assurance
can be made that such programs will be established or if established that they
will be successful. No assurance can be given that these sales efforts will
result in significant sales to the Company.
13
<PAGE>
SALES
DIRECT SALES. The Company directly and/or with the assistance of its
manufacturer's representatives, warehouse distributors or other agents markets
its products directly to national accounts, which will eventually be sold
directly or through the appropriate distribution channel. Typicallythese larger
customers, and some smaller customers, have required an evaluation period,
usually ranging from six to twelve months, to ensure that the Company's products
perform as advertised. Management believes that this evaluation period will
continue to be shortened as the Company's products gain wider acceptance and
support from well known customers, groups or other companies, such as Ford Motor
Company, AOC, Navistar, VarityPerkins and others.
Currently, the Company's products are being tested by various potential
end users, including Ford Motor Company, Mercury Express, Grant Brothers
Trucking, New Orleans Transit Authority, State of Pennsylvania Department of
Transportation, Chicago Transit Authority, Motor Cargo, United States Air Force
and United States Navy, Wal-Mart Corporation, Waste Management, Bell South and
others. There can be no assurance that such tests will be successful and, even
if successful, that they will result in sales for the Company.
In July 1995, the Company's products were issued National Stocking Numbers
by the General Services Administration which the Company believes will enable
the Company to more efficiently sell its products to the U.S. Government and its
agencies.
INTERNATIONAL SALES. The Company directly and/or with the assistance of
commission based manufacturer's representatives has established exclusive and
non-exclusive distributors in various countries, including Australia, Singapore,
Malaysia, Indonesia, Thailand, South Korea, Colombia, Panama, El Salvador,
Venezuela, Chile, Mexico, China, Hong Kong, Brazil and others. The exclusive
distributors are required to purchase minimum quantities of product to maintain
their exclusive status. The majority of these distributors have been established
in 1995 and later, and therefore, their and the other distributors' ultimate
success depends upon, among other things, their abilities to successfully
introduce and sell the product in their territories, including obtaining local
evaluations, establishing distribution and other factors similar to those faced
by the Company in the United States. See "TF Purifiner Ltd." There can be no
assurance that the Company's international distributors will be successful in
distributing the Company's products in their territories.
14
<PAGE>
MANUFACTURING AND PRODUCTION.
The Company subcontracts for the manufacturing of component parts for its
PurifinersTM and manufacturers substantially all of its Elements. The component
parts are assembled, packed and shipped from the Company's facility in Boynton
Beach, Florida to distributors and end users.
The Company currently single sources (i.e. purchases each raw material and
component part from a specific vendor) substantially all of its raw materials
and component parts from various vendors in the United States. Substantially all
the tools and dies used by certain of the Company's vendors are owned by the
Company. The Company believes that there are alternative sources of supply, and
the Company does not anticipate that the loss of any single supplier would have
a material long term adverse effect on its business, operations or financial
condition. Management intends, subsequent to obtaining sufficient financing, to
obtain additional tooling and dies and to upgrade certain of its existing
manufacturing equipment, and may expand its vendor network as its volume of
sales increase, for the purpose of limiting its exposure to its single source
suppliers. There can be no assurances, however, that such financing will be
obtained or if obtained, on terms that are in the best interest of the Company
or its stockholders.
WARRANTIES.
The PurifinerTM is generally warranted to the original user to be free of
defects in material and workmanship for ten years, except for the heating
element which is warranted for five years as well as a six- month performance
warranty. The Company also offers limited 250,000-mile and 100,000-mile
continuous oil purification performance warranties for Class VII and VIII trucks
in the United States and Canada. The Company also offers limited performance
warranties for recreational vehicles, including a twelve-month performance
warranty. The Company maintains $2,000,000 aggregate product liability insurance
coverage with a major U.S. carrier.
COMPETITION.
Although the Company believes it is the largest supplier of bypass oil
purification systems with similar capabilities to the Company's product (see
"Legal Proceedings - Premo Litigation"), the Company effectively competes with
other bypass filtration products such as the T.F. Hudgins, Inc. Spinner unit,
Luberfiner, Inc's bypass filter, and others. Additionally, the Company's
products affect the sales of full flow filters, engine replacement parts and
maintenance, original oil sales and disposal costs, and new engine sales. All of
these products and services are provided by companies that have significantly
greater financial, marketing and operating resources than does the Company. The
15
<PAGE>
Company's direct competitors include Premo Lubrication Technologies, Inc. and
Certified Technologies, Corp.
PATENTS AND TRADEMARKS.
The Company has a license and royalty agreement with the owner of four of
the U.S. patents covering the Company's existing PurifinersTM, which expire in
November 1997, September 1998 and June 2008. This agreement also covers several
foreign issued and pending patents in several other countries, the earliest of
which will expire in June 2004. The term of the agreement is for the life of the
patents and any improvements thereto and requires the payment of a 5% royalty
based on the net sales price, as defined, of the covered products. This
agreement also covers the U.S. trademark for which the Company pays a 1% royalty
based on net Element sales, as defined. The Company is primarily responsible for
maintaining and defending the integrity of these patents and trademarks.
The Company has registered its trademark and/or logo in substantially all
the countries of the industrialized world (other than in the United States,
where the Company's licensor has registered the trademark). The Company believes
its trademark to be of considerable value and of material importance to its
business.
The Company has patents pending in substantially all industrialized
countries of the world for the TFP Filter Plus and a redesigned PurifinerTM
which were filed by the Company in 1994 through 1996, and which have been
approved in the United States and certain other countries as to the TFP Filter
Plus. Additionally, in 1996, the Company filed for U.S. patent protection for
its new oil flow meter which will enable the user to visually determine when to
change the Element. There can be no assurance that such patents pending will be
issued. The Company believes all its patents and rights thereto to be of
considerable value and of material importance to its business.
GOVERNMENTAL APPROVAL.
The Company's products typically do not require any governmental
approvals. As part of the certification process under the California
Environmental Protection Agency's Department of Toxic Substances, in July of
1994, the Company has obtained an executive order issued by the State of
California Air Resources Board stating that the PurifinerTM does not reduce the
effectiveness of applicable vehicle pollution control systems, and may be
installed on all 1993 and older model year vehicles with pressure oil systems.
16
<PAGE>
ENGINEERING AND DEVELOPMENT.
The Company employs one full time employee in the engineering and
development department, who is the inventor and the originator of the Company's
two new patents pending and most recently issued patent licensed to the Company,
who has devoted substantially all of his time to the engineering, development
and enhancement of the Company's products over the last two years, as well as
the evaluation of other products introduced to the Company by other parties.
EMPLOYEES.
At September 15, 1996, the Company had 22 employees, 9 of whom were
engaged in manufacturing, assembly, warehousing and shipping, 6 in marketing and
sales, 1 in engineering and development and 6 in administrative positions. None
of the employees are represented by a labor union. The Company believes its
employee relations are good.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company was formed in 1988 and commenced limited operations in 1991
when it obtained worldwide manufacturing and marketing rights to the
Purifiner(TM) 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.
17
<PAGE>
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
----------------------------------------
Six Months
Year Ended December 31 Ended June 30
---------------------- --------------
1994 1995 1995 1996
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Operating costs and expenses:
Cost of sales (46) (48) (50) (59)
Selling expenses (46) (42) (43) (42)
General and
administrative expenses (47) (36) (32) (39)
Other - - - ( 2)
----- ----- ----- -----
Total operating costs
and expenses (139) (126) (125) (142)
----- ----- ----- -----
Operating Loss (39%) (26%) (25%) (42%)
===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
NET SALES. Net sales increased by 9% from $768,587 in the first six months
of 1995 to $841,297 in the first six 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 $242,000 of sales to Ltd., the Company's newly formed
joint venture in 1996. Approximately $19,400 of intercompany profit on these
sales have been deferred at June 30, 1996.
COST OF SALES. Cost of sales increased by 30% from $380,958 in the first
six months of 1995 to $493,869 in the first six months of 1996. This increase is
primarily attributable in part to the 9% increase in sales between the
comparable periods as well as 29% of the first six month sales of 1996
being made to Ltd. at substantially lower prices than the Company's existing
exclusive international distributor pricing. Finally, the Company's gross margin
decreased from 50.4% to 41.3%, substantially all due to the sales made to Ltd.
in the first six months of 1996 at these lower sales prices. To the extent
additional sales are made by the Company to Ltd., the Company's aggregate gross
margin will be adversely affected.
SELLING EXPENSES. Selling expenses increased by 6% from $331,216 in the
first six months of 1995 to $352,210 in the first six months of 1996. The
primary reason for this increase was due to increases in other selling expenses
18
<PAGE>
such as commissions, brochures and catalogs, consulting, travel and trade show
expenses in the first six months of 1996 versus the comparable period of 1995.
As a percentage of revenues, selling expenses decreased from 43% in 1995 to 42%
in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 33% from $244,692 in the first six months of 1995 to $325,394 in
the first six months of 1996 and as a percent of revenues increased from 32% to
39%. This dollar increase was generally due to the increased level of business
activity, specifically including increases in legal, accounting and auditing
expenses.
OPERATING LOSS. As a result of the foregoing, the Company's operating loss
increased from $188,279 in the first six months of 1995 to $349,616 in the first
six months of 1996.
INTEREST EXPENSE. Interest expense increased by 92% from $9,052 for the
first six months of 1995 to $17,399 for the first six months of 1996. This
change resulted from an increase in average short and long term borrowings
outstanding in the first six 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.
NET LOSS. As a result of the foregoing, the Company's net loss increased
from $197,331 for the first six months of 1995 to $367,015 for the first six
months of 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased by 42% from $ 1,038,960 in 1994 to
$1,480,037 in 1995. This increase was attributable to the addition of new
distributors in 1995 and increased sales to existing distributors and new
customers. Of this amount, approximately $207,000 resulted from sales to one
foreign distributor in 1995. Export sales increased from 48% of total revenues
in 1994 to 55% of total revenues in 1995. This increase resulted from increased
sales of TFP products to new and existing foreign distributors.
COST OF SALES. Cost of sales increased by 48% from $480,834 in 1994 to
$712,714 in 1995. This increase is primarily attributable to the 42% increase in
sales between the comparable periods. Additionally, the Company's gross margin
decreased to 51.8% in 1995 from 53.7% in 1994, the decrease being primarily
attributable to the increase in export sales (having a lower gross margin than
domestic sales) from $503,000 in 1994 to $821,000 in 1995.
19
<PAGE>
SELLING EXPENSES. Selling expenses increased by 29% from $477,470 in 1994
to $616,569 in 1995. This increase was attributable in part to an increase in
trade show related expenses from approximately $27,000 in 1994 to approximately
$42,000 in 1995. The increased selling expenses were also attributable to the
increased commissions and sales department salaries from approximately $221,000
in 1994 to $292,000 in 1995 and a general increase in sales related activities.
As a percentage of sales, selling expenses decreased from 46% in 1994 to 42% in
1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 8% from $491,094 in 1994 to $531,646 in 1995. Salary and consulting
expenses increased from approximately $209,000 in 1994 to approximately $252,000
in 1995 as a result of additional employees and consultants. As a percentage of
sales, general and administrative expenses decreased from 47% in 1994 to 36% in
1995.
OPERATING LOSS. The Company's operating loss decreased from $410,438 in
1994 to $380,892 in 1995.
INTEREST EXPENSE. Interest expense amounted to $28,915 in 1995 as compared
with interest expense of $9,952 in 1994. This change resulted from the increase
in average short and long term borrowings outstanding in fiscal 1995 versus
fiscal 1994.
NET LOSS. As a result of the foregoing, the Company's net loss decreased
from $424,197 in 1994 to $409,807 in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
NET SALES. Net sales increased by 78% from $583,052 in 1993 to $1,038,960
in 1994. This increase was primarily due to the establishment of new
distributors.
COST OF SALES. Cost of sales increased by 34% from $357,609 in 1993 to
$480,834 in 1994. This increase is primarily attributable to the 78% increase in
sales between comparable periods offset by lower costs related to increased
volumes and the commencement of manufacturing operations by the Company versus
purchasing completed goods from a third party for substantially all of 1993. The
Company's gross margin increased from 39.8% in 1993 to 53.7% in 1994 due
primarily to the lower costs associated with commencement of manufacturing
operations and increased volume.
SELLING EXPENSES. Selling expenses increased by 78% from $268,934 in 1993
to $477,470 in 1994. As a percentage of sales, selling expenses was 46% in both
1993 and 1994. In 1994, the Company increased its sales personnel and related
20
<PAGE>
expenditures, such as trade shows and incurred increased other sales related
expenses, such as commissions and royalties.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 32% from $371,447 in 1993 to $491,094 in 1994. In 1993 and 1994,
general and administrative expenses consisted primarily of officer s salary,
professional fees and various other general and administrative expenses. The
increase in 1994 was primarily due to the general level of increased business
activity. As a percentage of sales, general and administrative expenses
decreased from 64% in 1993 to 47% in 1994.
OPERATING LOSS. The Company's operating loss decreased from $414,938 in
1993 to $410,438 in 1994.
INTEREST EXPENSE. Interest expense increased from $0 in 1993 to $9,952 in
1994 due to increased borrowings, primarily from the principal stockholder,
Richard C. Ford.
NET LOSS. As a result of the foregoing, the Company's net loss increased
from $410,284 in 1993 to $424,197 in 1994.
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 stockholder 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 June 30, 1996, the Company had a working capital deficiency of
$1,046,042 and its current ratio (current assets to current liabilities) was
.29, as compared with a working capital deficiency of $894,117 and a current
ratio of .25 at December 31, 1995. At June 30, 1996, the Company had $50,748 of
cash. Outstanding short-term debt from lenders and shareholders was $731,967 at
June 30, 1996 and included a shareholder loan of $502,026 due to the estate of
Willard Taylor. See Part II - Item 2 "Litigation - Stockholder Litigation." The
balance of long term debt was $610,181 at June 30, 1996 and included a
stockholder loan of $502,026 due to Richard C. Ford and $98,688 due to a related
party. Subsequent to June 30, 1996, the Company exchanged these long term loans
and related unpaid accrued interest of $601,566 by issuing 120,313 shares of its
Common Stock ($5.00 per Share) to Mr. Ford and the related party.
21
<PAGE>
Subsequent to June 30, 1996, the Company completed the sale to private
investors of 81,200 shares of Common Stock for gross proceeds of $406,000
pursuant to of the Securities Act of 1933, as amended.
At June 30, 1996, the Company owed approximately $535,000 to various trade
and other unrelated creditors. Of this amount approximately $318,000 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 of the above offering
proceeds 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
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 o(pound) operations. Accordingly, the Company has
embarked and is implementing plans to raise additional capital, including its
22
<PAGE>
most recent $406,000 offering. 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 an advertising
program, and additional trade shows. Additionally, the Company intends to hire
additional operating/finance personnel, as well as additional manufacturing
supervisory and plant personnel 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 other 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.
23
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY.
All of the Company's operations are conducted from its 14,500 square foot
facility located in Boynton Beach, Florida. The facility is leased for a term
ending March 31, 1999 at a current annual rate of approximately $78,600.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock beneficially owned on September 15, 1996 for (i) each stockholder
known by the Company to be the beneficial owner of five (5%) percent or more of
the Company's outstanding Common Stock, (ii) each of the Company's executive
officers and directors, and (iii) all executive officers and directors as a
group. In general, a person is deemed to be a "beneficial owner" of a security
if that person has or shares the power to vote or direct the voting of such
security, or the power to dispose or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities of which the
person has the right to acquire beneficial ownership within sixty (60) days. At
September 15, 1996, there were 1,520,294 shares of Common Stock outstanding. The
address of each of the persons set forth below is 3020 High Ridge Road, Suite
100, Boynton Beach, Florida 33426, except as otherwise noted.
No. of Shares Percent of
Name and Address or of Common Stock Beneficial
Identity of Group Beneficially Owned Ownership
- ----------------- ------------------ ---------
Richard C. Ford(1)(2) 678,383 43.1%
Richard J. Ford(2)(3) 462,350 30.3%
Traci M. Ford(3) 152,300 10.0%
Jennifer D. Ford/Roe(3) 152,300 10.0%
Stephen J. Hauser(4) 20 *
Byron Lefebvre(5) 44,070 2.9%
All Executive Officers
and Directors as
a group (4 persons) 1,184,823 74.4%
J.W. Taylor(6)(7) 114,000 7.5%
- ------------------------
* Less than 1%
(1) Mr. Ford is the Company's President, Treasurer, Chief Executive Officer
and a Director. Includes 11,400 shares owned by Catherine Ford, Mr. Ford's
wife, of which Mr. Ford disclaims beneficial ownership. Also includes 500
shares of Common Stock beneficially owned by Mrs. Ford's son and for whom
Mrs. Ford is the custodian. Also includes options to purchase (i) 10,000
24
<PAGE>
shares of Common Stock at $5.50 per Share through August 2, 2001; 40,000
shares of Common Stock at $5.00 per Share through August 2, 2006; and
(iii) options issued to Mrs. Catherine Ford to purchase 3,750 shares of
Common Stock at $5.50 through August 2, 2001 for which Mr. Ford disclaims
beneficial ownership.
(2) Ownership of approximately 440,000 shares owned by Mr. R.C. Ford and his
children is currently being contested by members of the Taylor Family. See
"Part II, Item 2 - Legal Proceedings-Stockholder Litigation."
(3) Mr. Ford is a Vice President, the Secretary and a Director of the Company.
Includes 152,300 shares owned by Traci M. Ford and 152,300 shares owned by
Jennifer D. Ford/Roe over which Richard J. Ford has irrevocable proxy
voting power through 2006. Also includes options to purchase 3,750 shares
of Common Stock at $5.50 per Share through August 2, 2006.
(4) Mr. Hauser is the Company's Chief Financial Officer, Chief Operating
Officer and a Vice President.
(5) Mr. Lefebvre is a Director of the Company. Includes options to purchase
15,000 shares of Common Stock at $5.00 per Share through August 2, 2006.
(6) Includes 28,500 shares owned by each of Margaret A. Taylor, Barbara A.
Taylor and John F. Taylor, of which James W. Taylor has voting power.
(7) The address is c/o N.A. Taylor and Company, 10 W. 9th Avenue,
Gloversville, N.Y. 12078.
25
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, positions with the Company and
ages of the executive officers and directors of the Company. Directors will be
elected at the Company's annual meeting of stockholders and serve for one year
or until their successors are elected and qualify. Officers are elected by the
Board and their terms of office are, except to the extent governed by employment
contract, at the discretion of the Board.
Name Age Position
---- --- --------
Richard C. Ford 52 President, Treasurer, Chief
Executive Officer and Director
Byron Lefebvre 58 Director
Stephen J. Hauser 43 Chief Financial Officer, Chief
Operating Officer and Vice President
Richard J. Ford 25 Vice President, Secretary, Director
RICHARD C. FORD has been President, Chief Executive Officer, Treasurer and a
Director of the Company since its inception in 1988. Mr. Ford is also a Director
of TF Purifiner Ltd. He served as Secretary of the Company from its inception
until August 1996.
BYRON LEFEBVRE has been a Director of the Company since February 1994 and has
been an employee of the Company since 1994 and since late 1993 was a consultant
to the Company. From 1985 to 1990, he was President of Refineco Manufacturing
Company, Inc., the Company which manufactured and marketed the Purifiner(TM)
prior to the Company. He is the inventor of the Purifiner(TM) TF-8 spin-on unit
as well as the inventor of the new TFP Filter Plus and redesigned Purifiner(TM)
(patent pending). During the period from 1990 to May 20, 1996, Mr. Lefebvre
controlled D.B. Filters, Inc., an inactive company since October 1993, which had
limited rights to manufacture the Elements used in the PurifinerTM in North
America and owned certain royalty rights related to the TFP Filter Plus. On May
28, 1993, Mr. Lefebvre filed for personal bankruptcy with the United States
Bankruptcy Court for the Southern District of Florida. The case was discharged
on September 27, 1993. Mr. Lefebvre served in the United States Air Force. Mr.
Lefebvre oversees the engineering, development and evaluation of all of the
Company's new products and product enhancements.
STEPHEN J. HAUSER has been the Company's Chief Financial Officer, Chief
Operating Officer and a Vice President since August 5, 1996. From July 1995 to
August 5, 1996, Mr. Hauser was a business consultant with DanaHill Group, Inc.
in Fort Lauderdale, Florida.
26
<PAGE>
From January 1993 to July 1995, Mr. Hauser was General Manager of the
International Distribution Center of Federal Mogul Corporation in Fort
Lauderdale where he was responsible for planning, staffing, budgeting and
operating management of Federal Mogul's automotive parts export sales and
logistics profit center, serving over 900 customers. From August 1992 to
December 1992, he was a director of Business Integration of Federal Mogul in
Southfield, Michigan where he led the successful integration of TRW's $320
million aftermarket business into Federal Mogul; and from March 1990 to July
1992, Mr. Hauser was the director of Corporate Development in Southfield,
Michigan for Federal Mogul. From March 1987 through March 1990, Mr. Hauser
served as senior manager for Arthur Young & Company/Ernst & Young in Milwaukee,
Wisconsin and in Chicago, Illinois.
RICHARD J. FORD has been with the Company since January 1994, a Vice President
of the Company since October 1995, and the Secretary and a Director of the
Company since August 1996. Mr. Ford has worked in the marketing, communications
and public relations areas, and undertaken various special projects for the
Company. Mr. Ford is also a Director of TF Purifiner Ltd. Mr. Ford received
degrees in English from Florida State University in 1993. Mr. Ford is the son of
Richard C. Ford.
BOARD OF ADVISORS
The Company has recently formed a Board of Advisors. The Company's Board
of Advisors will be a non-policymaking Board whose intent is to advise the
Company's Board of Directors and Management.
The following individuals currently have agreed to be members of the
Company's Board of Advisors:
C.R. BARR is the Chief Executive Officer, a director and stockholder of Centrax.
Mr. Barr is a mechanical engineer and member of the Regional Board of the
Engineering Employers Federation in England and is a frequent speaker at
aerospace industry meetings. See "Description of Business - TF Purifiner, Ltd.
GENERAL DAVID C. JONES, USAF (RET) is the former Chief of Staff, United States
Air Force (June 1974 to June 1978) and the former Chairman of the Joint Chiefs
of Staff from June 1978 to June 1982 during which time General Jones served as
the senior military advisor to the President, the National Security Council and
the Secretary of Defense. General Jones is the Chairman of the Board of the
National Education Corporation. He has served on the Board of Directors of
General Electric, NBC, RCA, USX, Kemper Insurance, USAir Group and Hay Systems.
27
<PAGE>
JOYCE SHIELDS, PH.D. is the Vice President and General Manager of Hay Management
Consultants --Southeast, where she has managed and directed client services in
the areas of human resources planning, performance management, organization
change, and design and implementation of integrated competency-based human
resource systems. Dr. Shields has consulted with organizations such as Armco,
Bell Atlantic, Boeing, British Petroleum, CSX, IBM, Phillip Morris, Shell,
Xerox, the U.S. Army, U.S Air Force and Department of Defense.
ERNST VOLGENAU, PH.D. is the President of SRA International, Inc., a company
which provides computer, communications and management consulting services and
software to business and government organizations.
KANG YAO is currently Advisor of the Swire Group of Hong Kong and is a director
of Hambro Pacific Holdings Ltd., a subsidiary of Hambro Bank of United Kingdom,
and a director of Cathay Pacific Airways Ltd., John Swire and Sons (Hong Kong
and China) Ltds. and Hsin Chong Construction Group, Ltd. Mr. Yao also serves as
a director of BC Development Co. Ltd. in China, which holds a number of
Coca-Cola bottling franchises in China and of Sing Tao Holdings Ltd., which
controls, among other things, a leading English newspaper in Hong Kong and a
leading Chinese newspaper worldwide.
Each of the members of the current advisory board were issued options to
purchase 5,000 shares of Common Stock through August 2, 2006 at $5.00, of which
2,006 Shares vested on August 2, 1996, 1,667 shall vest on August 2, 1997, and
1,666 shall vest on August 2, 1998; provided that vesting shall occur so long as
each is a member of the advisory board or serves with the Company in another
capacity as of the vesting date.
28
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table shows, for the three year period ended December 31,
1995, the cash and other compensation paid by the Company to its President and
Chief Executive Officer and to each of the executive officers of the Company who
had annual compensation in excess of $100,000.
Summary Compensation Table
Name and Other All
Principal Annual Other
Position Year Salary Bonus Compensation(1) Compensation(2)
- -------- ---- ------ ----- --------------- ---------------
Richard C. Ford(3) 1995 $104,000 -0- $1,370 $12,000
President, CEO 1994 $104,000 -0- $1,355 $12,000
Treasurer, 1993 $104,000 -0- $1,385 $4,000
Secretary
- --------------
(1) This amount represents payments made by the Company for health insurance
premiums.
(2) This amount represents payments made to Mr. Ford for performing various
product field testing.
(3) Mr. Ford served as Secretary of the Company until August 1996.
EMPLOYMENT AGREEMENTS
The Company currently does not have employment agreements with any of its
executive officers or other employees but does intend to enter into written
agreements with certain of them in the future.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1995 to each person named in the Summary Compensation Table.
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Shares) Date
- ---- ------------ ------------ ----------- -----------
Richard C. Ford -0- -0- -0- -0-
29
<PAGE>
INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
The Board of Directors and a majority of the Company's stockholders
adopted the Company's 1996 Stock Option Plan (the "Plan") on July 31, 1996 and
the approval was ratified at the Company's 1995 Annual Meeting held on August
28, 1996.
The Plan will work to increase the employees', board of advisors,
consultants' and non-employee directors' proprietary interest in the Company and
to align more closely their interests with the interests of the Company's
stockholders. The Plan will also maintain the Company's ability to attract and
retain the services of experienced and highly qualified employees and
non-employee directors.
Under the Plan, the Company has reserved an aggregate of 650,000 shares of
Common Stock for issuance pursuant to options granted under the Plan ("Plan
Options"). The Board of Directors or a Committee of the Board of Directors (the
"Committee") of the Company will administer the Plan including, without
limitation, the selection of the persons who will be granted Plan Options under
the Plan, the type of Plan Options to be granted, the number of shares subject
to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee.
The per Share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
30
<PAGE>
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.
Officers, directors, key employees and consultants of the Company and its
subsidiaries (if applicable in the future) will be eligible to receive
Non-Qualified Options under the Plan. Only officers, directors and employees of
the Company who are employed by the Company or by any subsidiary thereof are
eligible to receive Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will or
by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a Director is terminated for
any reason, other than death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of termination. If the optionee dies during the term of his
employment, the Plan Option granted to him shall lapse to the extent unexercised
on the earlier of the expiration date of the Plan Option or the date one year
following the date of the optionee's death. If the optionee is permanently and
totally disabled within the meaning of Section 22(c)(3) of the Internal Revenue
Code of 1986, the Plan Option granted to him lapses to the extent unexercised on
the earlier of the expiration date of the option or one year following the date
of such disability.
The Board of Directors or the Committee may amend, suspend or terminate
the Plan at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan or changes the minimum purchase
price therefor (except in either case in the event of adjustments due to changes
in the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan shall
theretofore have been suspended or terminated by the Board of Directors, the
Plan shall terminate on July 31, 2006. Any such termination of the Plan shall
not affect the validity of any Plan Options previously granted thereunder.
As of September 15, 1996, incentive stock options to purchase 159,650
shares of Common Stock were granted and non-qualified options to purchase
490,350 shares of Common Stock were issued.
PLAN OPTIONS GRANTED TO OFFICERS AND DIRECTORS. On August 2, 1996, the
Company granted Richard C. Ford incentive Plan Options to purchase an aggregate
of 20,000 shares of Common Stock at $5.50 per Share through August 2, 2001, of
31
<PAGE>
which 10,000 vest on August 2, 1996, 5,000 vest on August 2, 1997, and 5,000
vest on August 2, 1998. On August 2, 1996, the Company granted Richard C. Ford
non-qualified Options to purchase an aggregate of 80,000 shares of Common Stock
at $5.00 per Share through August 2, 2006, of which 40,000 vest on August 2,
1996, 20,000 vest on August 2, 1997, and 20,000 vest on August 2, 1998.
On August 2, 1996, the Company granted Byron Lefebvre incentive Plan
Options to purchase an aggregate of 30,000 shares of Common Stock at $5.00 per
Share through August 2, 2006, of which 15,000 vest on August 2, 1996, 7,500 vest
on August 2, 1997, and 7,500 vest on August 2, 1998.
On August 2, 1996, the Company granted Stephen J. Hauser incentive Plan
Options to purchase an aggregate of 30,000 shares of Common Stock at $15.00 per
Share through August 5, 2006, of which 7,500 vest on August 5, 1997, 7,500 vest
on August 5, 1998, 7,500 vest on August 5, 1999, and 5,000 vest on August 5,
2000. On August 2, 1996, the Company granted Stephen J. Hauser incentive Plan
Options to purchase an aggregate of 7,500 shares of Common Stock at $5.00 per
Share through August 2, 2006, of which 1,875 vest on August 5, 1997, 1,875 vest
on August 5, 1998, 1,875 vest on August 5, 1999, and 1,875 vest on August 5,
2000.
On August 2, 1996, the Company granted Richard J. Ford incentive Plan
Options to purchase an aggregate of 7,500 shares of Common Stock at $5.50 per
Share through August 2, 2001, of which 3,750 vest on August 2, 1996, 1,875 vest
on August 2, 1997, and 1,875 vest on August 2, 1998.
32
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1995 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1995 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- --------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised in-the-Money
Acquired Options/SARs Options/SARs
on Value at FY-End (#) at FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Richard C. Ford 0 0 0 0
President, Chief Executive
Officer, Treasurer, and
Secretary
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------
Number Performance Estimated Future Payouts Under
of Shares, or Other Non-stock Price-based Plans
Units or Period Until ------------------------------
Other Rights Maturation Threshold Target Maximum
Name (#) or Payout ($ or #) ($ or #) ($ or #)
- --------------------------------------------------------------------------------
Richard C. Ford 0 0 0 0 0
President, Chief
Executive Officer,
Treasurer, and Secretary
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTION WITH TAYLOR FAMILY. During 1995, the Company had sales of
approximately $91,000 to N.A. Taylor and Company, an affiliate of the Taylor
Family. Such affiliate is a current warehouse distributor for the Company. From
February 24, 1994 to October 6, 1995, this company was the exclusive master
distributor of the Company's products for the State of New York and also acted
as the Company's manufacturer's representative for the State of New York, for
which it received certain price concessions from the Company.
RELATIONSHIP OF THE COMPANY TO T/F SYSTEMS, INC. On December 31, 1995, the
Company acquired all of the operating assets and assumed all of the operating
liabilities of T/F Systems, Inc., except as previously described. At such time,
T/F Systems, Inc. was owned approximately 75% by Richard C. Ford and his
immediately family and substantially all the other shares were owned by the
Taylor Family.
33
<PAGE>
LOANS AND ISSUANCES OF SECURITIES TO AFFILIATES. During 1994, the Company and
Systems received stockholder loans of approximately $462,000 from Richard C.
Ford, the Company's principal stockholder, and his children, Richard J., Traci
M. and Jennifer D. Ford. Such loans bore interest at 10% per annum. In 1994,
$266,000 of such loans were converted into 866,400 shares of the Company's
Common Stock.
At December 31, 1995, the Company had a total of $1,004,052 of unsecured
non-interest bearing shareholder loans payable equally to Richard C. Ford,
President, Treasurer, Chief Executive Officer and a director of the Company, and
the estate of Willard Taylor. There are no stated due dates for these
shareholder loans. During 1994, the Company and Richard C. Ford instituted legal
action against the estate of Willard Taylor, the former 50% owner of the
Company. 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 Mr. Richard C. Ford and
his children. Subsequently, the beneficiaries of the estate filed counterclaims
against the Company and its principal shareholder, Richard C. Ford 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 Mr. Ford, individually. In June 1995, the estate
demanded repayment of the shareholder loans due to the estate ($502,026 at June
30, 1996). The ultimate outcome of this litigation and demand for the repayment
of the shareholder loans cannot currently be determined; however, management
believes it has meritorious defenses to the counterclaims and current demand for
repayment and would eventually prevail in its declaratory action and that the
repayment of loans would not result in the current payment of such amounts. See
"Part II, Item 2 - Legal Proceedings-Stockholder Litigation."
Additionally, in 1995, Mr. Richard C. Ford loaned the Company and Systems
$75,500 at 10% per annum. For the six months ended June 30, 1996, Mr. Ford
loaned the Company an additional $9,000. During 1994 and 1995, the Company
incurred approximately $9,000 and $4,000 respectively of interest expense
related to these and other loans. See "Note 4 to the Notes to Financial
Statements."
Mr. Richard C. Ford, during 1995 and during the six months ended June 30,
1996, was repaid an aggregate amount of $129,213 on all outstanding loans. At
June 30, 1996, the amount of outstanding obligations from the Company to Mr.
Ford was $502,026. On August 1, 1996, Mr. Ford received 100,405 shares of Common
Stock in exchange for his shareholder loans in the amount of $502,026.
During 1995, Mr. Richard C. Ford agreed to become personally obligated on
behalf of the Company for the repayment of certain loans made to the Company of
34
<PAGE>
which approximately $224,000 of principal and accrued interest was outstanding
as of June 30, 1996.
D.B. FILTERS, INC. On May 20, 1996, the Company acquired all of the common stock
of D.B. Filters, Inc. ("DB Filters") for $1,275 in cash and 36,309 shares of its
Common Stock with an estimated fair value of approximately $137,000. The fair
market value of the shares of Common Stock was based upon $3.77 per Share, which
was the price per Share being offered by the Company to investors pursuant to a
private offering, which was being undertaken by the Company at the same time as
the acquisition of D.B. Filters. DB Filters was owned by two employees of the
Company, one of which was Byron Lefebvre, a Director of the Company. D.B
Filter's only assets were the future royalty rights related to the Company's new
Element patent and certain restricted, as defined, North American Element
manufacturing rights. DB Filters had no other material assets or liabilities at
December 3, 1994 and 1995 and no material operations in 1994 and 1995.
The Company believes that the transactions referred to above were on terms
no less favorable to the Company than terms which could have been obtained from
unrelated third parties.
ITEM 8. DESCRIPTION OF SECURITIES
The Company is currently authorized to issue up to 20,000,000 shares of
Common Stock, $.001 par value, of which 1,520,294 shares were outstanding as of
September 15, 1996. The Company is also authorized to issue up to 500,000 shares
of Preferred Stock, par value $.001 per Share, no shares of which have
previously been issued.
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, $.001 par value per Share. Subject to the dividend rights of the holders
of any outstanding shares of Preferred Stock, holders of shares of Common Stock
are entitled to share, on a ratable basis, such dividends as may be declared by
the Board of Directors out of funds legally available therefor. Upon
liquidation, dissolution or winding up of the Company, after payment to
creditors and holders of any outstanding shares of Preferred Stock, the assets
of the Company will be divided pro rata on a per Share basis among the holders
of the Common Stock.
Each share of Common Stock entitles the holders thereof, to one vote.
Holders of Common Stock do not have cumulative voting rights which means that
the holders of more than 50% of shares voting for the election of Directors can
elect all of the Directors if they choose to do so, and in such event, the
holders of the remaining shares will not be able to elect any Directors. The
Company's management or their affiliates own or have the right to vote 1,184,823
35
<PAGE>
shares or approximately 77.9% of the outstanding Common Stock of the Company at
September 15, 1996. The By-Laws of the Company require that only a majority of
the issued and outstanding shares of Common Stock of the Company need be
represented to constitute a quorum and to transact business at a stockholders'
meeting. The Common Stock has no preemptive, subscription or conversion rights
and is not redeemable by the Company.
PREFERRED STOCK
The Company is authorized to issue 500,000 shares of Preferred Stock, par
value $.001 per Share, issuable in such series and bearing such voting,
dividend, conversion, liquidation and other rights and preferences as the Board
of Directors may determine. As of the date hereof, no shares have been issued or
are outstanding. The Preferred Stock is so-called "Blank Check" Preferred Stock,
which means that the Board of Directors of the Company, in its sole discretion,
will be able to issue the shares of Preferred Stock in one or more series of
classes having such terms, designations and preferences as determined by the
Board of Directors and without authorization or confirmation by the stockholders
of the Company.
OPTIONS AND WARRANTS
There are currently no outstanding warrants to purchase shares of Common
Stock of the Company. However, warrants to purchase shares of Common Stock may
be expected to be provided to key employees, members of management, directors,
board of advisors, and consultants to the Company in the future.
As of September 15, 1996, the Company granted incentive Plan Options to
purchase an aggregate of 159,650 shares of Common Stock and non-qualified Plan
Options to purchase an aggregate of 490,350 shares of Common Stock. Of the
incentive Plan Options granted, options to purchase an aggregate of (i) 35,000
shares at $5.50 per Share through August 2, 2001 were granted, 17,500 of which
vested on August 2, 1996, 8,750 of which vest on August 2, 1997, and 8,750 of
which vest on August 2, 1998; (ii) options to purchase 81,750 at $5.00 per Share
through August 2, 2006 were granted, 40,375 of which vest on August 2, 1996,
20,438 of which vest on August 2, 1997, 20,437 of which vest on August 2, 1998,
250 of which vest on August 2, 1999 and 250 of which vest on August 2, 2000;
(iii) options to purchase an aggregate of 12,500 Shares at $5.00 per Share
through August 2, 2006, of which 3,125 vest on August 5, 1997, 3,125 vest on
August 5, 1998, 3,125 vest on August 5, 1999 and 3,125 vest on August 5, 2000;
(iv) options to purchase an aggregate of 30,000 Shares at $15.00 per Share
through August 2, 2006, 7,500 of which vest on August 5, 1997, 7,500 of which
vest on August 5, 1998, 7,500 of which vest on August 5, 1999 and 7,500 of which
vest on August 5, 2000; and (v) options to purchase an aggregate of 400 Shares
36
<PAGE>
at $5.00 per Share through September 9, 2006, 100 of which vest on September 9,
1997, 100 of which vest on September 9, 1998, 100 of which vest on September 9,
1999, and 100 of which vest on September 9, 2000.
As of August 31, 1996, non-qualified options to purchase an aggregate of
490,350 shares were issued as follows: (i) options to purchase an aggregate of
25,000 Shares at $5.00 per Share through August 2, 2006 were granted to members
of the Company's Board of Advisors of which an aggregate of 8,335 of which
vested as of August 2, 1996, 8,335 of which shall vest on August 2, 1997 and
8,330 shall vest as of August 2, 1998; (ii) options to purchase an aggregate of
317,850 Shares were granted to consultants of the Company at $5.00 per Share
through August 2, 1997; 108,500 of which vest on August 2, 1996, 9,350 of which
vest on November 2, 1996, and 200,000 of which vest on January 1, 1997 (iii)
options to purchase an aggregate of 67,500 Shares were issued to consultants
of the Company at $15.00 per Share through August 2, 1997; 67,500 of which vest
on August 2, 1996, and (iv) options to purchase an aggregate of 80,000 Shares
were issued to Richard C. Ford, the Company's Chief Executive Officer,
President, Chairman and a Director at $5.00 per Share, 40,000 of which vested
as of August 2, 1996, 20,000 of which shall vest on August 2, 1997, and 20,000
of which shall vest on August 2, 1998.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
DELAWARE GENERAL CORPORATION LAW. The Delaware General Corporation Law
contains a statute designed to provide Delaware corporations with protection
against hostile takeovers. The takeover statute, which is codified in Section
203 of the Delaware General Corporation Law ("Section 203"), among other things,
prohibits the Company from engaging in certain business combinations (including
a merger) with a person who is the beneficial owner of 15% or more of the
Company's outstanding voting stock (an "Interested Stockholder") during the
three-year period following the date such person became an Interested
Stockholder. This restriction does not apply if (1) before such person became an
Interested Stockholder, the Board of Directors approved the transaction in which
the Interested Stockholder becomes an Interested Stockholder or approved the
business combination; or (2) upon consummation of the transaction which resulted
in the stockholder's becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the voting stock of the Company outstanding at
the time the transaction commenced, excluding for purposes of determining the
number of shares outstanding, those shares owned by (i) persons who are
directors and officers and (ii) employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or (3)
on or subsequent to such date, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
37
<PAGE>
outstanding voting stock which is not owned by the Interested Stockholder. The
Company may exempt itself from the requirements of the statute by adopting an
amendment to its Certificate of Incorporation. At the present time, the Board of
Directors does not intend to propose any such amendment.
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE CERTIFICATE OF INCORPORATION.
While the Board of Directors of the Company is not aware of any effort that
might be made to obtain control of the Company at the present time, the Board of
Directors, as discussed below, believes that it is appropriate to include
certain provisions as part of the Company's Certificate of Incorporation to
protect the interests of the Company and its stockholders from hostile takeovers
which the Board of Directors might conclude are not in the best interests of the
Company or the Company's stockholders. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult.
The following discussion is a general summary of certain provisions of the
Company's Amended and Restate Certificate of Incorporation ("Certificate of
Incorporation") of the Company which may be deemed to have such an
"anti-takeover" effect. The description of these provisions is necessarily
general and reference should be made in each case to the Certificate of
Incorporation of the Company.
BOARD OF DIRECTORS. Certain provisions of the Company's Certificate of
Incorporation will impede changes in control of the Board of Directors of the
Company. The Certificate of Incorporation provides that if the number of
Directors exceeds six persons, the Board will be divided into three classes, as
nearly equal in number as possible, which shall be elected for staggered
three-year terms.
A classified Board of Directors could make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Since the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the stockholders to
change a majority, whereas a majority of a non-classified board could be changed
in one year. In the absence of the provisions of the Certificate of
Incorporation classifying the Board, all of the directors would be elected each
year. Management of the Company believes that the staggered election of
38
<PAGE>
directors tends to promote continuity of management because only one-third of
the Board of Directors is subject to election each year. Staggered terms
guarantee that in the ordinary course approximately two-thirds of the directors,
or more, at any one time have had at least one year's experience as directors of
the Company, and moderate the pace of change in the Board by extending the
minimum time required to elect a majority of directors.
The Certificate of Incorporation further provides that any vacancy
occurring in the Board of Directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a two-thirds vote of the directors then in office.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Company's Certificate of Incorporation requires the approval
of the holders of (i) at least 66% of the Company's outstanding shares of voting
stock, and (ii) at least a majority of the Company's outstanding shares of
voting stock, not including shares held by a "Related Person," to approve
certain "Business Combinations" as defined therein, and related transactions.
Under Delaware law, absent this provision, Business Combinations, including
mergers, consolidations and sales of substantially all of the assets of the
Company must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of the Common Stock. For a
discussion of an exception to the majority approval requirement under Delaware
law, see "Certain Restrictions on Acquisition of the Company-- Delaware General
Corporation Law." The increased voting requirements in the Company's Certificate
of Incorporation apply in connection with business combinations involving a
"Related Person," except in cases where the proposed transaction has been
approved in advance by two-thirds of those members of the Company's Board of
Directors who (i) are unaffiliated with the Related Person and (ii) who were
either (a) directors prior to the time when the Related Person became a Related
Person or (b) a member of the Board of Directors on the effective date of the
Certificate of Incorporation (the "Continuing Directors"). The term "Related
Person" is defined to include any individual, corporation, partnership or other
entity which owns beneficially or controls, directly or indirectly, 10% or more
of the outstanding shares of Common Stock of the Company. A "Business
Combination" is defined to include (i) any merger, reorganization, or
consolidation of the Company with or into any Related Person; (ii) any sale,
lease exchange, mortgage, transfer, or other disposition of all or a substantial
part of the assets of the Company or of a subsidiary to any Related Person (the
term "substantial part" is defined to include more than 25% of the Company's
total assets); (iii) any merger or consolidation of a Related Person with or
into the Company or a subsidiary of the Company; (iv) any sale, lease, exchange,
transfer or other disposition of all or any substantial part of the assets of a
Related Person to the Company or a subsidiary of the Company; (v) the issuance
39
<PAGE>
of any securities of the Company or a subsidiary of the Company to a Related
Person; (vi) the acquisition by the Company or a subsidiary of the Company of
any securities of the Related Person; and (vii) any agreement, contract or other
arrangement providing for any of the above transactions.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES. The Certificate of
Incorporation provides that for a period of five years from the effective date
of the initial registered public offering of the Company's common stock, no
person may acquire, directly or indirectly, the beneficial ownership of more
than 10% of any class of equity security of the Company, unless such offer or
acquisition shall have been approved in advance by a two-thirds vote of the
Company's Continuing Directors. This provision does not apply to any employee
stock benefit plan of the Company. In addition, during such five-year period, no
shares beneficially owned in violation of the foregoing percentage limitation,
as determined by the Company's Board of Directors, shall be entitled to vote in
connection with any matter submitted to stockholders for a vote. Additionally,
the Certificate of Incorporation provides for further restrictions on voting
rights of shares owned in excess of 10% of any class of equity security of the
Company beyond five years after the initial registered public offering.
Specifically, the Certificate of Incorporation provides that if, at any time
after five years from the initial registered public offering, any person
acquires the beneficial ownership of more than 10% of any class of equity
security of the Company, then, with respect to each share voted in excess of
10%, the record holders of voting stock of the Company beneficially owned by
such person shall be entitled to cast only one-hundredth of one vote with
respect to each share voted in excess of 10% of the voting power of the
outstanding shares of voting stock of the Company which such record holders
would otherwise be entitled to cast without giving effect to the provision, and
the aggregate voting power of such record holders shall be allocated
proportionately among such record holders. An exception from the restriction is
provided if the acquisition of more than 10% of the securities received the
prior approval by a two-thirds vote of the Company's Continuing Directors. Under
the Company's Certificate of Incorporation, the restriction on voting shares
beneficially owned in violation of the foregoing limitations is imposed
automatically. In order to prevent the imposition of such restrictions, the
Board of Directors must take affirmative action approving in advance a
particular offer to acquire such shares. Unless the Board took such affirmative
action, the provision would operate to restrict the voting by beneficial owners
of more than 10% of the Common Stock in a proxy contest.
BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN
OFFER BY ANOTHER PARTY. The Certificate of Incorporation of the Company directs
the Board of Directors, in evaluating a Business Combination or a tender or
exchange offer, to consider, in addition to the adequacy of the amount to be
40
<PAGE>
paid in connection with any such transaction, certain specified factors and any
other factors the Board deems relevant, including (i) the social and economic
effects of the transaction on the Company and its subsidiaries, employees,
customers, creditors and other elements of the communities in which the Company
and its subsidiaries operate or are located; (ii) the business and financial
condition and earnings prospects of the acquiring party or parties; and (iii)
the competence, experience and integrity of the acquiring party or parties and
its or their management.
One effect of this provision might be to encourage consultation by an
offeror with the Board of Directors prior to or after commencing a tender offer
in an attempt to prevent a contest from developing. This provision thus may
strengthen the Board of Directors' position in dealing with any potential
offeror which might attempt to effect a takeover of the Company. The provision
will not make a Business Combination regarded by the Board of Directors as being
in the interests of the Company more difficult to accomplish, but it will permit
the Board of Directors to determine that a Business Combination or tender or
exchange offer is not in the interests of the Company (and thus to oppose it) on
the basis of various factors deemed relevant.
AUTHORIZATION OF PREFERRED STOCK. The Company's Certificate of
Incorporation authorizes the issuance of up to 500,000 shares of preferred
stock, which conceivably would represent an additional class of stock required
to approve any proposed acquisition. The Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law, and the Board of Directors is authorized to fix the
designations, powers, preferences and relative participating, optional and other
special rights of such shares, including voting rights (which could be multiple
or as a separate class) and conversion rights. Issuance of the preferred stock
could adversely affect the relative voting rights of holders of the Common
Stock. In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any preferred stock and
does not intend to issue any preferred stock except on terms which the Board of
Directors deems to be in the best interests of the Company and its stockholders.
This preferred stock, none of which has been issued by the Company, together
with authorized but unissued shares of Common Stock (the Certificate of
Incorporation authorizes the issuance of up to 20,000,000 shares of Common
Stock), also could represent additional capital required to be purchased by an
acquiror.
41
<PAGE>
AMENDMENT OF BYLAWS. The Company's Certificate of Incorporation provides
that the Company's Bylaws may be amended either by a two-thirds vote of the
Company's Board of Directors or by the affirmative vote of the holders of not
less than 66% of the outstanding shares of the Company's capital stock entitled
to vote generally in the election of directors (considered for this purpose as a
single class). Absent this provision, Delaware law provides that a corporation's
bylaws may be amended by the holders of a majority of a corporation's
outstanding capital stock. The Company's Bylaws contain numerous provisions
concerning the Company's governance, such as fixing the number of directors and
determining the number of directors constituting a quorum. By reducing the
ability of a potential corporate raider to make changes in the Company's Bylaws
and to reduce the authority of the Board of Directors or impede its ability to
manage the Company, this provision could have the effect of discouraging a
tender offer or other takeover attempt where the ability to make fundamental
changes through bylaw amendments is an important element of the takeover
strategy of the acquiror.
AMENDMENT OF CERTIFICATE OF INCORPORATION. The Company's Certificate of
Incorporation provides that specified provisions contained in the Certificate of
Incorporation may not be repealed, altered, amended or rescinded except upon the
affirmative vote of not less than 66% of the outstanding shares of the Company's
capital stock entitled to vote generally in the election of directors
(considered for this purpose as a single class). This requirement exceeds the
majority vote of the outstanding stock that would otherwise be required by
Delaware law for the repeal or amendment of a certificate provision. The
specific provisions are those (i) governing the calling of special meetings, the
absence of cumulative voting rights and the requirement that stockholder action
be taken only at annual or special meetings, (ii) requiring written notice to
the Company of nominations for the election of directors and new business
proposals, (iii) governing the number of the Company's Board of Directors, the
filling of vacancies on the Board of Directors and classification of the Board
of Directors, (iv) providing the mechanism for removing directors, (v) limiting
the acquisition of 10% or more of the capital stock of the Company (except, with
the prior approval of the Continuing Directors of the Company), (vi) governing
the requirement for the approval of certain Business Combinations involving a
"Related Person," (vii) regarding the consideration of certain nonmonetary
factors in the event of an offer by another party, (viii) providing for the
indemnification of directors, officers, employees and agents of the Company,
(ix) pertaining to the elimination of the liability of the directors to the
Company and its stockholders for monetary damages, with certain exceptions, for
breach of fiduciary duty, and (x) governing the required stockholder vote for
amending the Certificate of Incorporation or Bylaws of the Company. This
provision is intended to prevent the holders of less than 66% of the outstanding
42
<PAGE>
stock of the Company from circumventing any of the foregoing provisions by
amending the Certificate of Incorporation to delete or modify one of such
provisions. This provision further provides that such repeal, alteration,
amendment or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Company entitled to
vote generally in the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of the Continuing
Directors, as defined above.
THE PURPOSE OF AND ANTI-TAKEOVER EFFECT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION. The Board of Directors of the Company and believes that the
provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. The Board of Directors of the Company
believes these provisions are in the best interests of the Company and its
stockholders. In the judgment of the Board of Directors of the Company, the
Board is in the best position to consider all relevant factors and to negotiate
for what is in the best interests of the stockholders and the Company's other
constituents. Accordingly, the Boards of Directors of the Company believe that
it is in the best interests of the Company and its stockholders to encourage
potential acquirors to negotiate directly with the Company's Board of Directors
and that these provisions will encourage such negotiations and discourage
non-negotiated takeover attempts.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining stockholders.
Despite the belief of the Company as to the benefits to stockholders of
these provisions of the Company's Certificate of Incorporation, these provisions
may also have the effect of discouraging a future takeover attempt which would
not be approved by the Company's Board, but pursuant to which the stockholders
may receive a substantial premium for their shares over then current market
prices. As a result, stockholders who might desire to participate in such a
transaction may not have any opportunity to do so. Such provisions will also
render the removal of the Company's Board of Directors and management more
difficult and may tend to stabilize the Company's stock price, thus limiting
gains which might otherwise be reflected in price increases due to a potential
merger or acquisition. The Board of Directors, however, has concluded that the
43
<PAGE>
potential benefits of these provisions outweigh the possible disadvantages.
Pursuant to applicable regulations, at any annual or special meeting of its
stockholders, the Company may adopt additional Certificate of Incorporation
provisions regarding the acquisition of its equity securities that would be
permitted to a Delaware corporation.
44
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
As of September 15, 1996, there were approximately 251 stockholders of
record of the Company's Common Stock. The Company's Common Stock is not
currently listed for trading.
The transfer agent for the Company's Common Stock is Florida Atlantic
Stock Transfer, Inc., 5701 N. Pine Island Road, Tamarac, Florida 33321.
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain future earnings, if any, to finance the expansion of
its business and does not anticipate that any cash dividends will be paid in the
foreseeable future. The future dividend policy will depend on the Company's
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.
ITEM 2. LEGAL PROCEEDINGS.
LEGAL PROCEEDINGS
Premo Litigation.
On December 8, 1994, the Company, as exclusive licensee of two patents,
(one which was granted in 1980 and one granted in 1990, both of which are used
in connection with all of the Company's Products, except its new Element and oil
flow meter Products and patents filed for Products by TF Purifiner, Ltd.) and
Robert C. Malt, the patent owner, filed an action against Premo Lubrication
Technologies, Inc. ("Premo") and Charles Borzarelli (collectively the
"Defendants") in the United States District Court for the Southern District of
Florida. The Company and Mr. Malt have alleged that the Defendants have
infringed on one of its patents issued on October 14, 1980, and have
manufactured and sold such devices (the other patent is no longer at issue). The
Plaintiffs are seeking adjudication that (i) Defendants have willfully infringed
this patent (and requesting damages for lost profits or, at a minimum, royalties
together with an amount equal to three times these damages plus interest), (ii)
Defendants be permanently enjoined from the making, using or selling the
infringing oil reclamation devices and (iii) infringing devices in Defendants'
possession be forfeited.
The Defendants subsequently filed counterclaims, as amended, against
Plaintiffs alleging that (i) the subject patents are unenforceable and,
furthermore, (ii) that under certain legal doctrines the Plaintiffs are barred
from asserting its claims. Additionally, the Defendants allege that the Company
45
<PAGE>
engaged in antitrust violations and various kinds of unfair trade practices and
that the Company and certain of its employees have libeled the Defendant's
business and unlawfully interfered with its business relationships. The case is
scheduled for trial in November 1996 and management believes that it has
meritorious defenses to all of the counterclaims and that the Company will
eventually prevail in the litigation. However, there can be no assurance that
the Company will prevail in the litigation, and if not, the outcome could have a
material adverse effect on the Company's operations.
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.
The ultimate outcome of this litigation and demand for the repayment of
the stockholder loans cannot currently be determined. However, management
believes it has meritorious defenses to the counterclaims and current demand for
repayment, and will eventually prevail in its declaratory action and that the
repayment of loans would not result in the current payment of such amounts.
However, in the event an unfavorable outcome against the companies is rendered
in this litigation, the possible remedies may include the redistribution and
46
<PAGE>
rescission of certain stock transactions with the Ford family, and possible
reconstitution of the Board of Directors. Based upon the initial pleadings by
defendants, it does not appear that a sizable judgment against the companies for
money damages is presently being sought by the Taylor representatives. Any
judgment for money damages, based upon the pleadings filed thus far, would
conceivably be against Richard C. Ford, individually.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not Applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On June 15, 1995, the Company undertook a 100 for one (100:1) forward
stock split of its Common Stock (the "1995 Forward Split") and on July 1, 1996,
the Company effected a fifty-seven for one (57:1) forward stock split of its
Common Stock (the "1996 Forward Split"). All figures set forth below give effect
to the 1995 Forward Split and the 1996 Forward Split.
On February 10, 1994, the Company issued 5700 shares of Common Stock to
Richard C. Ford in exchange for convertible notes in the amount of $1,750. The
issuance of the share was exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act") pursuant to Section 4(2) of the
Act.
On June 2, 1994, the Company issued 535,800 shares of Common Stock to
Richard C. Ford in exchange for convertible notes in the amount of $164,500. The
issuance of such shares was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
On August 12, 1994, the Registrant issued 62,700 shares, 62,700 shares and
62,700 shares of Common Stock to Richard J. Ford (the Vice President of the
Company), Jennifer D. Ford and Traci M. Ford, respectively in exchange for
convertible notes in the amount of $19,250, $19,250 and $19,250, respectively.
The issuance of such Shares was exempt from the registration requirements of the
Act pursuant to Section 4(2) of the Act. Richard J. Ford, Jennifer D. Ford and
Traci M. Ford are the children of Richard C. Ford, the Company's President and
Chief Executive Officer.
On December 7, 1994, the Company issued 45,600 shares, 45,600 shares and
45,600 shares of Common Stock to Richard J. Ford (the Vice President of the
Company), Jennifer D. Ford and Traci M. Ford respectively in exchange for
convertible notes in the amount of $14,000, $14,000 and $14,000, respectively.
The issuance of such Shares was exempt from the registration requirements of the
Act pursuant to Section 4(2) of the Act.
On June 5, 1995, the Company issued 11,400 shares and 11,400 shares of
Common Stock to an employee of the Company and to Catherine Ford, respectively,
47
<PAGE>
in exchange for promissory notes and cash of $3,501, and $3,501, respectively.
The issuance of such Shares was exempt from the registration requirements of the
Act pursuant to Section 4(2) of the Act. Mrs. Ford is the wife of Richard C.
Ford, the Company's President and Chief Executive Officer.
Between approximately March 20, 1996 and May 16, 1996, the Company issued
an aggregate of 157,377 shares of Common Stock to investors in the offering of
the Company's Common Stock in reliance on Rule 506 of Regulation D of the Act
whereby the Company sold its securities to twelve accredited investors. In
addition, each of the investors was provided with information and had access to
relevant additional information concerning the Company. Accordingly, the
issuance of the shares was exempt from the registration requirements of the Act
pursuant to the exemption set forth under Section 4(2) and Rule 506 of the Act.
The Company received proceeds of $594,000 from this private offering.
On May 20, 1996, the Company issued 7,239 shares and 29,070 shares to
Robert Meyer (an employee of the Company) and Byron Lefebvre (a director and
employee of the Company), respectively, in exchange for all of the outstanding
shares of D.B. Filters, Inc. D.B. Filters, Inc.'s only material assets are
certain future royalty rights and limited North American filter Element
manufacturing rights. These securities were issued pursuant to Section 4(2) of
the Securities Act.
On June 15, 1995 and July 1, 1996, pursuant to recapitalizations effected
by amendments to the Articles of Incorporation, the Company issued an aggregate
of 1,310,886 shares of Common Stock to it its existing stockholders in exchange
for all issued and outstanding Common Stock. The issuance of such shares
pursuant to the recapitalization was exempt from the registration requirements
of the Act pursuant to Section 3(A)(9) of the Act.
Between July 15 and August 19, 1996, the Company sold, in compliance with
the conditions of Rule 504 under Regulation D of the Act, an aggregate of 81,200
shares and received proceeds of $406,000, pursuant to the Company's sale of
Common Stock at $5.00 per Share.
On July 31, 1996, the Company issued 5,000 shares of Common Stock to
Atlas, Pearlman, Trop & Borkson, P.A., special securities counsel, in
consideration for certain professional services performed by them on behalf of
the Company, pursuant to Section 4(2) of the Securities Act.
On August 1, 1996, the Company issued 100,405 shares of Common Stock to
Richard C. Ford, the Chief Executive Officer, President, Chairman and a director
of the Company, in exchange for retirement of debt in the amount $502,026 due to
Mr. Ford by the Company.
48
<PAGE>
The securities were issued pursuant to Section 4(2) of the Securities Act. On
July 31, 1996, the Company issued 19,908 shares of Common Stock to Larry
Freedman, an employee of the Company, in exchange for retirement of debt in the
amount of $99,540 due to Mr. Freedman by the Company. The securities were issued
pursuant to Section 4(2) of the Securities Act.
Between August 2, 1996 and September 9, 1996, the Company issued an
aggregate of 159,650 incentive Plan Options to employees of the Company at
exercise prices ranging from $5.00 per Share to $15.00 per Share and for
exercise periods ranging from five years from the date of issuance to ten years
from the date of issuance.
Between August 2, 1996 and August 5, 1996, the Company issued an aggregate
of 490,350 non-qualified Plan Options to members of its Advisory Board, its
President, and pursuant to certain consulting agreements at exercise prices
ranging from $5.00 per Share to $15.00 per Share and for exercise periods
ranging from one year to ten years.
On August 3, 1996, the Company issued an aggregate of 895 shares of Common
Stock to employees, distributors, customers, manufacturer's representatives and
their families in recognition and appreciation of prior contributions made to
the Company during the Company's formative stage. No sale was involved in
connection with this transaction.
On August 3, 1996, the Company issued 2,000 shares of Common Stock to
American Oceans Campaign, a not-for-profit corporation, as a contribution . This
contribution was made in recognition of the support provided by this
organization to the Company's products in community segments concerned with the
promotion of the environment. American Oceans Campaign seeks to promote products
and services in the public and private sectors which it believes contribute to
the betterment of the environment. While the Company is under no obligation to
make such donation, it supports the effects of the American Oceans Campaign,
whose policy goals coincide with the perceived benefits to be derived from the
application of the Company's products. No sale was involved in the issuance of
the shares to American Oceans Campaign.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article X of the Company's Amended and Restated Certificate of
Incorporation provide for indemnification of officers and directors. The
specific provision of the Amended and Restated Certificate of Amendment related
to such indemnification is as follows:
A. PERSONS. The Corporation shall indemnify, to the extent provided in
paragraphs B, D or F:
49
<PAGE>
(1) any person who is or was a director, officer, employee, or
agent of the Corporation; and
(2) any person who serves or served at the Corporation's request
as a director, officer, employee, agent, partner or trustee of
another corporation, partnership, joint venture, trust or
other enterprise.
B. EXTENT -- DERIVATIVE SUITS. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfied the standard in paragraph C,
for expenses (including attorneys' fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit.
C. STANDARD -- DERIVATIVE SUITS. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject
of the suit or action, and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the
Corporation, including, but not limited to, the taking of any
and all actions in connection with the Corporation's response
to any tender offer or any offer or proposal of another party
to engage in a Business Combination and approved by the Board
of Directors. However, he shall not be indemnified in respect
of any claim, issue or matter as to which he has been adjudged
liable to the Corporation unless (and only to the extent that)
the court in which the suit was brought shall determine, upon
application, that despite the adjudication but in view of all
the circumstances, he is fairly and reasonably entitled to
indemnity for such expenses a the court shall deem proper.
D. EXTENT -- NONDERIVATIVE SUITS. In case of a threatened, pending or
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a Nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfied the standard in paragraph E, for
50
<PAGE>
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. STANDARD -- NONDERIVATIVE SUITS. In case of a nonderivative suit, a
person named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject
of the nonderivative suit and in a manner he reasonably
believed to be in, or not opposed to, the best interests of
the Corporation, including, but not limited to, the taking of
any and all actions in connection with the Corporation's
response to any tender offer or any offer or proposal of
another party to engage in a Business Combination not approved
by the Board of Directors and, with respect to any criminal
actions or proceeding, he had no reasonable cause to believe
his conduct was unlawful. The termination of a nonderivative
suit by judgment, order, settlement, conviction, or upon a
plea of no lo contendere or its equivalent shall not, in
itself, create a presumption that the person failed to satisfy
the standard of this subparagraph E(2).
F. DETERMINATION THAT STANDARD HAS BEEN MET. A determination that the
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in subpara- graph C(2) (second sentence), the determination may
be made by:
(1) the Board of Directors by a majority vote of a quorum
consisting of directors of the Corporation who were not
parties to the action, suit or proceeding; or
(2) independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a
quorum) in a written opinion; or
(3) the stockholders of the Corporation.
G. PRORATION. Anyone making a determination under paragraph F may
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
51
<PAGE>
H. ADVANCE PAYMENT. The Corporation shall pay in advance any expenses
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if:
(1) the Board of Directors authorizes the specific payment; and
(2) the person receiving the payment undertakes in writing to
repay the same if it is ultimately determined that he is not
entitled to indemnification by the Corporation under
paragraphs A through G.
I. NONEXCLUSIVE. The indemnification and advance payment of expenses
provided by paragraphs A through H shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. CONTINUATION. The indemnification provided by this Article X shall
be deemed to be a contract between the Corporation and the persons entitled to
indemnification thereunder, and any repeal or modification of this Article X
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts. The indemnification and advance payment provided by paragraphs A
through H shall continue as to a person who has ceased to hold a position named
in paragraph A and shall inure to his heirs, executors and administrators.
K. INSURANCE. The Corporation may purchase and maintain insurance on
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through H.
L. INTENTION AND SAVINGS CLAUSE. It is the intention of this Article X
to provide for indemnification to the fullest extent permitted by the General
Corporation Law of the State of Delaware, and this Article X shall be
interpreted accordingly. If this Article X or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settle with respect to
any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article X that shall not
have been invalidated and to the full extent permitted by applicable law. If
52
<PAGE>
the General Corporation Law of the State of Delaware is amended, or other
Delaware law is enacted, to permit further or additional indemnification of the
persons defined in this Article X A, then the indemnification of such persons
shall be to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended, or such other Delaware law.
Article XI of the Company's Amended and Restated Article of Incorporation
sets forth the limitations on directors" liability as follows:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except: (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions that are not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived any improper personal benefit.
If the General Corporation Law of the State of Delaware or other Delaware
law is amended or enacted after the date of filing of this Certificate to
further eliminate or limit the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited
to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as amended, or such other Delaware law. Any repeal or
modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
The above indemnification provisions notwithstanding, the Company is aware
that insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as express in the act and is therefore unenforceable.
53
<PAGE>
PART F/S
The financial statements and supplementary data are included herein.
FINANCIAL STATEMENTS AND EXHIBITS
The following audited Financial Statements for the Company, include the
audited balance sheet at December 31, 1995 and the related audited statements of
operations, changes in capital deficiency and cash flows for each of the years
in the two year period ended December 31, 1995, and the unaudited balance sheet
at June 30, 1996. The following audited Financial Statements for the Company
also include the related unaudited statements of operations, changes in capital
deficiency, and cash flows for each of the six months ended June 30, 1996 and
June 30, 1995.
54
<PAGE>
T/F Purifiner, Inc.
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors................................................F-2
Audited Financial Statements
Balance Sheet as of December 31, 1995.........................................F-3
Statements of Operations for the years ended December 31, 1994 and 1995.......F-4
Statements of Changes in Capital Deficiency for the years ended
December 31, 1994 and 1995..............................................F-5
Statements of Cash Flows for the years ended December 31, 1994 and 1995.......F-6
Notes to Financial Statements................................................F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
T/F Purifiner, Inc.
We have audited the accompanying balance sheet of T/F Purifiner, Inc. as at
December 31, 1995, and the related statements of operations, changes in capital
deficiency and cash flows for each of the years in the two-year period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of T/F Purifiner, Inc. as at December
31, 1995 and the results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring operating losses, a
working capital deficiency, negative cash flows from operating activities and a
stockholders' capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this undertainty.
/s/Richard A. Eisner & Company, LLP
New York, New York
May 24, 1996
With respect to Note 5
July 1, 1996
F-2
<PAGE>
T/F Purifiner, Inc.
Balance Sheet
December 31, 1995
Assets
Current assets:
Cash $ 31,732
Trade accounts receivable, net of allowance for doubtful
accounts of $3,100 84,122
Inventories 169,627
Prepaid expenses and other current assets 7,949
-----------
Total current assets 293,430
Property and equipment, net 94,616
Patents and trademarks, net of $6,377 of accumulated
amortization 112,516
Other assets 19,100
-----------
$ 519,662
===========
Liabilities and capital deficiency Current liabilities:
Accounts payable - trade $ 163,657
Accrued expenses 165,358
Customer deposits and other 149,487
Note payable - related party 101,804
Accrued interest and other payables - related parties 61,663
Current portion of note payable and capital lease obligation 8,339
Shareholder loans 537,239
-----------
Total current liabilities 1,187,547
Note payable and capital lease obligation 13,994
Other note payable and accrued interest 211,835
Deferred rent 22,293
Liability to equity investee 33,105
Shareholder loans 502,026
-----------
Total liabilities 1,970,800
Commitments and contingencies
Capital deficiency:
Common Stock, $.001 par value, 20,000,000 shares authorized,
1,117,200 shares issued and outstanding 1,117
Additional paid-in-capital 962,375
Accumulated deficit (2,407,630)
Subscription receivables (7,000)
-----------
(1,451,138)
-----------
$ 519,662
===========
See accompanying notes to financial statements
F-3
<PAGE>
T/F Purifiner, Inc.
Statements of Operations
Years ended December 31, 1994 and 1995
1994 1995
---- ----
Net sales $ 1,038,960 $ 1,480,037
Cost of sales 480,834 712,714
----------- -----------
Gross profit 558,126 767,323
Operating expenses:
Selling 477,470 616,569
General and administrative 491,094 531,646
----------- -----------
968,564 1,148,215
----------- -----------
Operating loss (410,438) (380,892)
Other expenses:
Interest expense (9,952) (28,915)
Other (3,807) --
----------- -----------
Net loss $ (424,197) $ (409,807)
=========== ===========
Loss per common share $ (.68) $ (.37)
=========== ===========
Weighted average common shares outstanding 628,311 1,107,510
=========== ===========
See accompanying notes to financial statements.
F-4
<PAGE>
T/F Purifiner, Inc.
Statements of Changes
in Capital Deficiency
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------ Paid-In- Accumulated Subscription Capital
Shares Amount Capital Deficit Receivables Deficiency
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 228,000 $ 228 $ 559,256 $(1,573,626) $ -- $(1,014,142)
Transaction by TFS - pooled company -- -- 133,000 -- -- 133,000
Conversion of shareholder
and related party loans 866,400 866 265,134 -- -- 266,000
Net loss -- -- -- (424,197) -- (424,197)
-----------------------------------------------------------------------------
Balance at December 31, 1994 1,094,400 1,094 957,390 (1,997,823) -- (1,039,339)
Issuance of common stock,
net of issuance costs 22,800 23 4,985 -- (7,000) (1,992)
Net loss -- -- -- (409,807) -- (409,807)
-----------------------------------------------------------------------------
Balance at December 31, 1995 1,117,200 $ 1,117 $ 962,375 $(2,407,630) $ (7,000) $(1,451,138)
=============================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
T/F Purifiner, Inc.
Statements of Cash Flows
Years ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Operating activities
Net loss $(424,197) $(409,807)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 1,122 5,255
Depreciation and amortization of property and equipment 19,695 25,823
Loss on disposal of equipment 2,831 --
Changes in operating assets and liabilities:
Trade accounts receivable, net (17,785) (26,490)
Inventories 113,962 (12,729)
Prepaid expenses and other current assets (13,688) 8,839
Other assets (700) (15,300)
Accounts payable - trade (66,513) 27,648
Accrued expenses 43,787 76,051
Customer deposits and other 39,750 86,572
Accrued interest and other payables - related parties 9,186 52,477
Deferred rent 18,334 3,959
--------- ---------
Net cash used in operating activities (274,216) (177,702)
Investing activities
Patents and trademarks (26,694) (92,199)
Purchases of property and equipment (66,057) (16,302)
--------- ---------
Net cash used in investing activities (92,751) (108,501)
Financing activities
Payment of issuance costs -- (1,992)
Proceeds from notes payable 9,867 495,000
Payment on notes payable and capital lease obligation (3,054) (199,676)
Proceeds from shareholder loans 462,614 75,500
Payment on shareholder loans (118,400) (85,000)
Borrowing from investee -- 51,340
Repayment to investee -- (18,235)
--------- ---------
Net cash provided by financing activities 351,027 316,937
--------- ---------
(Decrease) increase in cash (15,940) 30,734
Cash balance at beginning of year 16,938 998
--------- ---------
Cash balance at end of year $ 998 $ 31,732
========= =========
Cash paid for interest $ 766 $ 13,052
========= =========
</TABLE>
During 1994 and 1995, the Company entered into capital lease obligations in the
amounts of approximately $20,000 and $2,000, respectively. See Notes 4 and 5 for
description of issuance's of Common Stock.
See accompanying notes to financial statements.
F-6
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements
December 31, 1994 and 1995
1. The Company and Summary of Significant Accounting Policies
The Company
T/F Purifiner Inc. ("TFP" or the "Company"), a Delaware corporation, is engaged
in the manufacturing, distribution and sale of electric mobile oil purification
systems under the trademark "Purifiner" (See Note 11).
The Company holds the exclusive worldwide manufacturing and marketing rights for
the Purifiner products pursuant to various patents (see Note 8). Additionally,
TFP is the owner of pending patents for an improved filtration system and filter
element.
The Company has incurred recurring losses from operations since inception, which
has resulted in 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.
The Company expects that the net proceeds from the proposed issuances will be
sufficient for the Company to operate for at least the next twelve months.
However, there is no assurance that the Company can complete these 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Sales are recognized upon shipment. Cash received by the Company prior to
shipment is recorded as a customer deposit. Sales are made to certain customers
F-7
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
1. The Company and Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
under terms allowing certain limited rights of return and other limited product
and performance warranties for which no provision has been made in the
accompanying financial statements. Management believes, based on past experience
and future expectations, that such limited return rights and warranties will not
have a material adverse effect on the Company's financial statements.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the useful lives of the
improvement or the term of the related lease. The estimated useful lives of
property and equipment is 5 years.
Patents and Trademarks
Patents and trademarks are stated at cost, including legal costs incurred to
defend patent rights, and are amortized using the straight-line method over 10
to 15 years.
Engineering and Development
In 1994 and 1995, engineering and development expenses were approximately
$55,000 and $61,000, respectively, and are expensed as incurred.
Impact of Recently Issued Accounting Standards
The Company has adopted the provisions of Financial Accounting Standards Board
Statement ("FASB") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" in the first quarter of 1996. FASB
121 requires impairment losses to be recorded on long-lived assets (i.e.:
property and equipment and patent and trademarks) used in operations when
impairment indicators are present and undiscounted cash flows estimated to be
generated by those assets are less than the asset's carrying amount. Based on
current circumstances, the adoption of FASB 121 will not have a material effect
on the Company's financial statements.
F-8
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
1. The Company and Summary of Significant Accounting Policies (continued)
Impact of Recently Issued Accounting Standards (continued)
In October 1995, FASB No. 123 was issued which introduces a preferable
fair-value based method of accounting for stock-based compensation to employees
and for stock-based arrangements with non-employees. At a minimum, the new
Statement expands required disclosures of stock-based compensation arrangements
with employees and encourages, but does not require, application of the
fair-value recognition provisions in the Statement for stock-based compensation
to employees. The Company anticipates no material effect on its financial
position or results of operations from this new standard which will become
effective in 1996 and will continue to follow the existing accounting standards
for these types of plans.
Credit Risk
The Company minimizes the concentration of credit risk associated with cash by
maintaining its cash with a high quality federally insured financial
institution.
The Company performs ongoing evaluations of its significant trade accounts
receivable customers and generally does not require collateral. An allowance for
doubtful accounts is maintained against trade accounts receivable at levels
which management believes are sufficient to cover potential credit losses. (See
Note 10.)
Loss per Share
Loss per share is calculated by dividing net loss by the weighted average number
of common shares outstanding during each period.
Income Taxes
The Company has elected to be treated as an "S" corporation under the provisions
of the Internal Revenue Code ("IRC"). Accordingly, its taxable income or loss is
includable in the current taxable income of its shareholders, and no federal or
F-9
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
1. The Company and Summary of Significant Accounting Policies (continued)
Income Taxes (continued)
state income tax provision or benefit has been recorded in the accompanying
financial statements. The differences between financial statement loss and
taxable loss related primarily to the treatment of the gain recognized for tax
purposes upon the acquisition of TF Systems, Inc. and the timing of the
deductibility of certain related party accrued expenses. At December 31, 1995,
the Company's tax basis in its inventories and manufacturing rights acquired
from TF Systems, Inc. were approximately $215,000 in excess of their financial
statement basis.
If the Company had been subject to corporate income taxes for 1994 and 1995, it
would not have recorded any income tax expense or benefit in its statements of
operations. On April 1, 1996, the Company ceased to qualify under Subchapter S
of the IRC and, accordingly, is subject to corporate income taxes commencing
April 1, 1996.
2. Inventories
At December 31, 1995, inventories consist of the following:
Raw materials $99,611
Finished goods 57,819
Supplies 12,197
----------
$169,627
==========
3. Property and Equipment
At December 31, 1995, property and equipment consists of the following:
Machinery and equipment $130,415
Furniture and fixtures 23,007
Leasehold improvements 30,030
----------
183,452
Less accumulated depreciation and
amortization (88,836)
----------
$ 94,616
==========
F-10
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
3. Property and Equipment (continued)
At December 31, 1995, machinery and equipment includes approximately $22,000 of
equipment held under a capital lease with related accumulated amortization of
approximately $6,200.
4. Shareholder Loans
At December 31, 1995, the Company had a total of $1,004,052 of unsecured
noninterest bearing shareholder loans payable equally to its principal
shareholder and the estate of a former shareholder. There are no stated due
dates for these shareholder loans. During 1994, the Company and its principal
shareholder instituted legal action against the estate of a former 50% owner of
the Company. 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 shareholder loans due to the estate ($502,026 at
December 31, 1995). The ultimate outcome of this litigation and demand for the
repayment of the shareholder loans cannot currently be determined, however,
management believes it has meritous defenses to the counterclaims and current
demand for repayment and would eventually prevail in its declaratory action and
that the repayment of loans would not result in the current payment of such
amounts. However, in the event an unfavorable outcome against the Company is
rendered, the possible remedy will include the redistribution and rescission of
certain stock transactions with the Ford family. Such loans have been classified
as current in the accompanying balance sheet. The principal shareholder has
agreed not to demand repayment of his loans in the amount of $502,026 prior to
April 1, 1997 and, accordingly, such loans have been classified as long-term in
the accompanying balance sheet.
At December 31, 1995, the Company had a total of $35,213 of unsecured loans due
to its principal shareholder bearing interest at 10% per annum. These loans were
repaid in April 1996. During 1994 and 1995, the Company incurred approximately
$9,000 and $4,000, respectively, of interest expense related to these loans.
F-11
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
4. Shareholder Loans (continued)
During 1994, $266,000 of outstanding convertible notes payable were converted by
the principal shareholder and his children into 866,400 shares of T/F Purifiner,
Inc. Common Stock based upon the estimated fair value of such Common Stock.
At December 31, 1995, the Company had outstanding notes payable to a shareholder
of $101,804, which bear interest at 10% per annum ($9,711 in 1995) and are
collateralized by substantially all the assets of the Company. The notes are a
primary obligation of the principal shareholder and are due on demand.
5. Common Stock
In June 1995, pursuant to agreements entered into on December 15, 1994, TFP
issued an aggregate of 22,800 shares of its Common Stock to two employees, one
of which is related to the principal shareholder, for their estimated fair value
at December 15, 1994 of $7,000. The Company agreed to provide additional
compensation, including the effect of tax consequences, to such parties in order
for them to repay the subscription receivables, prior to their December 31, 1996
due date. On June 6, 1995, the Board of Directors of the Company approved an
increase in authorized shares from 2,000 to 100,000, approved a change in the
par value of Common Stock from no par value to $.01 par value, and approved a
100 to 1 stock split.
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.
All share and per share data presented in the accompanying financial statements
have been restated to reflect the above actions.
6. Leases
In August 1993, TFP entered into a five-year noncancelable operating lease
agreement, as amended, for the Company's manufacturing, warehouse and office
facilities. The lease commenced on April 1, 1994, with payments commencing on
July 1, 1994 and increasing lease payments over the second through fourth years
of its term. The Company has accounted for these lease payments related to this
facility using the straight-line method over the term of this lease and recorded
a deferred rent payable. At December 31, 1995, the schedule of future minimum
lease payments under this lease is as follows:
F-12
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
6. Leases (continued)
1996 $78,000
1997 85,000
1998 87,000
1999 22,000
---------
$272,000
=========
Total rent expense was approximately $53,000 and $75,000 for 1994 and 1995,
respectively.
In December 1994 and February 1995, the Company also entered into a four year
lease obligation for certain office equipment which has been accounted for as a
capital lease. At December 31, 1995, future minimum commitments under this
noncancelable capital lease are as follows:
1996 $7,114
1997 7,114
1998 7,114
1999 1,779
---------
Total minimum lease payments 23,121
Less amount representing interest at 12% (4,781)
Present value of minimum lease payments ---------
($5,520 due in 1996) $ 18,340
=========
7. Notes Payable
At December 31, 1995, the Company has an outstanding note payable,
collateralized by certain equipment, in the amount of $3,993. This note bears
interest at 6.75% per annum and is due in monthly installments of principal and
interest of $265 through 1997.
At December 31, 1995, the Company has an outstanding note payable,
collateralized by a partial interest in any future dividends from its joint
venture established in 1996 (see Note 13), in the amount of $200,000 plus
$11,835 of accrued interest. The note bears interest at 10% per annum and both
principal and interest are due on January 15, 1997. This note is also a primary
obligation of the principal shareholder.
F-13
<PAGE>
TF Purifiner, Inc.
Notes to Financial Statements (continued)
8. Royalties
In connection with the Company being granted worldwide manufacturing and
marketing rights for certain of the Purifiner products in 1990, a royalty
agreement was entered into, the term of which mirrors the life of the related
patents or any improvements thereto. Pursuant to the royalty agreement, the
owner of the patents will receive 5% of the units net sale price, as defined, of
all covered Purifiner products, as defined. Additionally, 1% of the net sales
price of replacement oil filter elements will be paid as a royalty for the use
of the Purifiner U.S.
trademark.
In May 1994, the Company and the patent owner entered into a settlement
agreement relating to the appropriate method of calculating and disbursing both
future and retrospective royalties. As a result of this agreement, the patent
owner is entitled to a minimum annual royalty of $24,000, payable in monthly
installments of $2,000. The monthly royalty may exceed, but never be less than
$2,000, unless the current calendar year monthly average is more than $2,000.
Royalty expense for 1994 and 1995 was approximately $44,000 and $49,000,
respectively.
9. 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 meritious 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, the Company is seeking to
resolve this case through arbitration and, although the ultimate outcome of this
matter cannot be determined at this time, the Company believes it has meritious
defenses and will eventually prevail in this matter.
10. Major Customers and Export Sales
The Company currently operates in a single business segment and its products are
electric mobile oil purification systems, substantially all of which are sold to
distributors and end users for use on transportation vehicles. This could
unfavorably affect the Company's overall exposure to credit risk in as much as
these customers could be affected by similar economic or other conditions.
During 1995, six customers accounted for approximately 36% of the Company's net
sales, one of which accounted for approximately 14% of this amount. In 1995,
export sales aggregated approximately $821,000 in geographic regions as follows:
F-14
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
10. Major Customers and Export Sales (continued)
South American ($343,000), European ($241,000), Asia/Pacific ($207,000) and
others ($30,000). During 1994, six customers accounted for approximately 36% of
the Company's net sales, none of which was in excess of 10%. In 1994, export
sales amounted to approximately $503,000 in geographic regions as follows: South
American ($276,000), European ($27,000), Asia/Pacific ($178,000) and others
($22,000). The loss of business from one or a combination of the Company's
significant customers could adversely effect its operations. During 1994 and
1995, the Company had net sales of approximately $91,000 and $8,400 to an
affiliate of a minority shareholder.
11. Acquisition of T/F Systems, Inc.
On December 31, 1995, TFP purchased all the operating assets and assumed all the
operating liabilities for T/F Systems, Inc. ("TFS"), except for TFS's
shareholder loans of $537,484, and TFS's assets and liabilities related to an
ongoing litigation matter. TFP assigned all its rights and interests to such
litigation matter in return for TFS's net operating assets. During 1994,
$133,000 of outstanding convertible notes payable due to the principal
shareholder and his children were converted into TFS equity and, accordingly,
such amount is included in the accompanying 1994 statement of changes in capital
deficiency as a TFS equity transaction. This transaction has been accounted for
in a manner similar to a pooling-of-interests and, accordingly, all financial
statements have been retroactively restated to include the acquired assets,
liabilities and operations of TFS, except as stated above. Both TFP and TFS were
under common control and have the same shareholders.
Prior to this acquisition, TFS owned the exclusive manufacturing rights for the
Purifiner products and TFP held the marketing rights which were granted to TFP
by TFS. TFS's only revenues were sales of product to TFP which have been
eliminated in accounting for this acquisition. The net losses of TFP and TFS's
acquired operations for 1994 were $351,691 and $72,506, respectively, for an
aggregate net loss of $424,197.
12. Financial Instruments
At December 31, 1995, the carrying amounts and estimated fair values of the
Company's financial instruments which consist of debt, excluding capital leases
and $502,026 of shareholder loans, approximated $844,000 due to the short-term
maturity and interest rates of these instruments. Due to the nature of the
noninterest bearing current shareholder loans of $502,026, the Company is unable
to determine its fair value (See Note 4).
F-15
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
13. Subsequent Events
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 will account 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, Ltd advanced the Company
approximately $51,000 to be used to fund certain patent and trademark filings
for the venture's exclusive territory. At December 31, 1995, $33,105 remained
unexpended. During 1995, the Company had sales of approximately $85,000 to one
of Ltd's shareholders, prior to forming this venture, at negotiated prices, and
$14,011 of such amount was included in trade accounts receivable at December 31,
1995.
Subsequent to December 31, 1995, the Company sold 157,377 shares of its Common
Stock for $594,000. The subscription agreements provide that if the Company has
not registered any amount of any 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 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. If
the shareholders exercise their put options the put option purchase price will
be funded from dividends received from Ltd or from excess available cash of the
Company as determined by its Board of Directors. Accordingly, such Common Stock
will be treated as Redeemable Common Stock until the expiration of the put
options. The redemption price will be accreted at the rate of 10% and charged to
additional paid in capital.
On May 20, 1996, the Company acquired all the common stock of DB Filters, Inc.,
an inactive company ("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 also a Director. DB
Filter's only assets were the future royalties related to the Company's patent
pending filter technology and certain restricted, as defined, North American
filter manufacturing rights ("Rights"). The Company will account for this
acquisition using the purchase method of accounting. DB Filters had no material
assets or liabilities at December 31, 1994 and 1995 and no material operations
in 1994 and 1995.
F-16
<PAGE>
T/F Purifiner, Inc.
Contents
Unaudited Condensed Interim
Financial Statements
Page
----
Condensed Balance Sheet as of June 30, 1996............................ F-18
Condensed Statements of Operations for the six
months ended June 30, 1995 and 1996................................. F-19
Condensed Statement of Changes in Redeemable
Common Stock and Capital Deficiency
for the six months ended June 30, 1996.............................. F-20
Condensed Statements of Cash Flows for the six
months ended June 30, 1995 and 1996................................. F-21
Notes to Condensed Financial Statements................................ F-22
F-17
<PAGE>
T/F Purifiner, Inc.
Condensed Balance Sheet
June 30, 1996
(Unaudited)
Assets
Current assets:
Cash $ 50,748
Trade accounts receivable, net 121,282
Inventories 216,721
Prepaid expenses and other current assets 32,865
-----------
Total current assets 421,616
Property and equipment, net 112,376
Patents and trademarks, net 226,187
Costs in excess of net assets acquired, net 137,294
Other assets 102,205
-----------
$ 999,678
Liabilities and capital deficiency Current liabilities:
Accounts payable - trade 133,036
Accrued expenses 357,602
Customer deposits and other 224,960
Accrued interest and other payables-related parties 20,093
Current portion of notes payable and capital lease obligation 229,941
Shareholder loans 502,026
Total current liabilities 1,467,658
Notes payable and capital lease obligation 9,467
Deferred rent 21,303
Note payable - related party 98,688
Shareholder loans 502,026
Redeemable common stock 609,497
Contingencies
Capital deficiency:
Common Stock, $.001 par value 1,153
Preferred Stock, $.001 par value --
Additional paid-in-capital 1,064,531
Accumulated deficit (2,774,645)
-----------
(1,708,961)
-----------
$ 999,678
===========
See accompanying notes to financial statements.
F-18
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Operations
Six Months Ended June 30, 1995 and 1996
(Unaudited)
1995 1996
---- ----
Net sales $ 768,587 $ 841,297
Cost of sales 380,958 493,869
----------- -----------
Gross profit 387,629 347,428
Operating expenses:
Selling 331,216 352,210
General and administrative 244,692 325,394
Deferred profit -- 19,440
----------- -----------
575,908 697,044
Operating loss (188,279) (349,616)
Interest expense 9,052 17,399
----------- -----------
Net loss $ (197,331) $ (367,015)
=========== ===========
Loss per common share $ (.18) $ (.33)
=========== ===========
Weighted average common shares outstanding 1,097,649 1,125,625
=========== ===========
See accompanying notes to financial statements.
F-19
<PAGE>
<TABLE>
<CAPTION>
T/F Purifiner, Inc.
Condensed Statements of Changes
in Redeemable Common Stock and Capital Deficiency
(Unaudited)
Redeemable
Common Stock Common Stock Additional Total
------------- --------------- Paid-In- Accumulated Subscription Capital
Shares Amount Shares Amount Capital Deficit Receivables Deficiency
----------------------------------------------------------------------------------------
<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)
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 - - (19,311) - - (19,311)
Issuance of Common Stock
to acquire D.B. Filters - - 36,309 36 136,964 - - 137,000
Accrued interest on redeemable
common stock - 15,497 - - (15,497) - - (15,497)
Collection of subscription
receivables - - - - - - 7,000 7,000
Net loss - - - - - (367,015) - (367,015)
-----------------------------------------------------------------------------------------
Balance at June 30, 1996 157,377 $609,497 1,153,509 $1,153 $1,064,53 $(2,774,645) $---- $(1,708,961)
=========================================================================================
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
T/F Purifiner, Inc.
Condensed Statements of Cash Flows
Six months ended June 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Operating activities
Net loss $(197,331) $(367,015)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 1,636 6,117
Depreciation and amortization of property and equipment 13,242 15,120
Changes in operating assets and liabilities:
Trade accounts receivable, net (79,975) (37,160)
Inventories 34,966 (47,094)
Prepaid expenses and other current assets (7,676) (24,916)
Other assets (10,179) (19,153)
Accounts payable - trade (47,858) (30,621)
Accrued expenses 7,908 192,244
Customer deposits and other 74,947 85,475
Accrued interest and other payables - related parties 2,455 (41,570)
Deferred rent 2,969 (990)
--------- ---------
Net cash used in operating activities (204,896) (269,563)
Investing activities
Patents and trademarks (57,447) (118,807)
Purchases of property and equipment (9,466) (32,880)
Acquisition of DB Filters -- (1,275)
--------- ---------
Net cash used in investing activities (66,913) (152,962)
Financing activities
Increase in deferred issuance costs -- (63,952)
Proceeds from redeemable common stock, net -- 574,689
Collection of subscription receivables -- 7,000
Proceeds from notes payable 435,000 25,000
Payment on notes payable and capital lease obligation (110,556) (32,878)
Proceeds from shareholder loans 57,500 9,000
Payment on shareholder loans (67,500) (44,213)
Repayment to investee -- (33,105)
--------- ---------
Net cash provided by financing activities 314,444 441,541
--------- ---------
Increase in cash 42,635 19,016
Cash at beginning of period 998 31,732
--------- ---------
Cash at end of period $ 43,633 $ 50,748
========= =========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
T/F Purifiner, Inc.
Notes to Condensed Financial Statements
(Unaudited)
1. Basis of Presentation and Company
The unaudited condensed financial statements as of June 30, 1996 and for the six
month periods ended June 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 statements have been prepared on
the basis of presentation as more fully described in the Company's annual
financial statements. The results of operations for the six month period ended
June 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 June 30, 1996, the Company completed the private placement sale of
81,200 shares of its Common Stock for gross proceeds of $406,000 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 June 30, 1996, deferred issuance costs of approximately $68,000, 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.
F-22
<PAGE>
T/F Purifiner, Inc.
Notes to Condensed Financial Statements
(Unaudited)
2. Inventories
At June 30, 1996, inventories consist of the following:
Raw materials $139,703
Finished goods 64,186
Supplies 12,832
----------
$216,721
3. Shareholder Loans
At June 30, 1996, the Company had a total of $1,004,052 of unsecured noninterest
bearing shareholder loans payable equally to its principal shareholder and the
estate of a former shareholder. There are no stated due dates for these
shareholder loans. During 1994, the Company and its principal shareholder
instituted legal action against the estate of a former 50% owner of the Company.
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
shareholder loans due to the estate ($502,026 at June 30, 1996). The ultimate
outcome of this litigation and demand for the repayment of the shareholder loans
cannot currently be determined, however, management believes it has meritous
defenses to the counterclaims and current demand for repayment and would
eventually prevail in its declaratory action and that the repayment of loans
would not result in the current payment of such amounts. However, in the event
an unfavorable outcome against the Company is rendered, the possible remedy will
include the redistribution and rescission of certain stock transactions with the
Ford family. Such loans due to the Estate have been classified as current in the
accompanying balance sheet. On August 1, 1996, the principal shareholder
received 100,405 shares of Common Stock in exchange for his shareholder loans in
the aggregate amount of $502,026 ($5 per share) and, accordingly, such loans
have been classified as long-term in the accompanying balance sheet.
On June 30, 1996, the Company had outstanding notes payable to a shareholder of
$98,688, which bear interest at 10% per annum and are collateralized by
substantially all assets of the Company. The notes are a primary obligation of
F-23
<PAGE>
T/F Purifiner, Inc.
Notes to Condensed Financial Statements
(Unaudited)
the principal shareholder and are due on demand. On July 31, 1996, this
shareholder received 19,908 shares of Common Stock in exchange for his
shareholder loans and unpaid interest in the aggregate amount of $99,540 ($5 per
share) and, accordingly, such loans have been classified as long-term in the
accompanying balance sheet.
4. 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 meritious 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 is resolving this case through arbitration and, although the
ultimate outcome of this matter cannot be determined at this time, the Company
believes it has meritious defenses and will eventually prevail in this matter.
5. 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, Ltd advanced the Company
approximately $51,000 to be used to fund certain patent and trademark filings
for the venture's exclusive territory. At June 30, 1996, all of these funds had
been expended. For the six months ended June 30, 1996, the Company had sales of
approximately $242,000 to Ltd, at negotiated prices. At June 30, 1996,
approximately $19,400 has been recorded as unrealized intercompany profit
related to the inventory sold to Ltd which is included in Ltd's inventory at
June 30, 1996.
At June 30, 1996, summarized financial information of Ltd is as follows:
F-24
<PAGE>
T/F Purifiner, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Total assets $390,000
Total liabilities 569,000
Total revenues 127,000
Gross profit 46,000
Net loss (137,000)
6. Redeemable Common Stock
During the six months ended June 30, 1996, the Company sold 157,377 shares of
its Common Stock for gross proceeds of $594,000. The subscription agreements
provide that if the Company has 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 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. If the shareholders exercise their put options the
put option purchase price will be funded from dividends received from Ltd or
from excess available cash of the Company as determined by its Board of
Directors. Accordingly, such Common Stock is being treated as Redeemable Common
Stock until the expiration of the put options. The redemption price will be
accrued at the rate of 10% and charged to additional paid in capital.
7. 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.
8. 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
F-25
<PAGE>
T/F Purifiner, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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 June 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's Board of Directors approved the issuance of
5,000 shares of the Company's Common Stock to one of its law firms in payment
for professional services rendered.
On August 3, 1996, the Board of Directors approved the issuance of 2,895 shares
of the Company's 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 will be charged to expense based
upon the estimated fair market value of such Common Stock as determined by the
Board of Directors.
9. 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 nonqualified 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 15, 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. Of these options, 282,210 shares are currently
exercisable and 367,790 shares will become exercisable from 1997 to 2000. At
September 15, 1996, 650,000 shares of Common Stock have been reserved for
issuance under the 1996 Option Plan.
F-26
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibits Description of Document
- -------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of T/F
Purifiner, Inc. dated July 24, 1996 (1).
3.2 Bylaws of T/F Purifiner, Inc.(1)
3.3 Memorandum and Articles of Association of TF Purifiner Ltd(1).
10.1 Stock Option Plan(2).
10.2 Agreement between T/F Systems, Inc. and T/F Purifiner, Inc.
dated March 1, 1991 (with exhibits)(1).
10.3 Asset Purchase Agreement between T/F Systems, Inc and T/F
Purifiner, Inc. dated December 31, 1995(1).
10.4 Stock Exchange Agreement between D.B. Filters, Inc., Byron
Lefebvre and Robert Meyer, and T/F Purifiner, Inc. (with
exhibits)(1).
10.5 Joint Venture Agreement between T/F Purifiner, Inc., T/F
Systems, Inc., Centrax Limited, The Barr Family and A.N.
Davies (1).
10.6 Lease Agreement between Papeyco Trading International, Inc.
and T/F Purifiner, Inc. dated August 23, 1993 (1).
10.7 Master Distributor Agreement dated April 6, 1995 between KLC
Corporation and the Company (2).
10.8 Exclusive Distributor Agreement/Colombia Effective Date March
1, 1996, between Al Pacific Cali and the Company (2).
10.9 Exclusive Agreement for Distributorship in Singapore dated
February 6, 1996 between Kian Seng Hardware Trading Pte. Ltd.
and the Company (2).
10.10 Exclusive Agreement for Distributorship in Malaysia dated
February 6, 1996 between Kian Seng Hardware Trading Pte. Ltd.
and the Company (2).
55
<PAGE>
10.11 Exclusive Agreement for Distributorship in Thailand dated
November 17, 1995 between N. Haven Group International Co.
Ltd. and the Company (2).
10.12 Exclusive Agreement for Distributorship in Indonesia dated
February 5, 1996 between PT Hista Bayhu and the Company (2).
10.13 Master Distributor Agreement dated January 11, 1995 between
Trimex Korea and the Company (2).
10.14 Promissory Note dated December 21, 1995 between the Company,
Richard C. Ford, individually, TF Systems, Inc. as maker and
Bassett Boat Company of Florida in the principal amount of
$200,000 (2).
27.1 Financial Data Schedule (Electronic filing only) (1).
99.1 Final Judgment in T/F SYSTEMS, INC. V. SOUTHEAST CAPITAL
FINANCING, INC., Case No. CL 90-12772AE in the Circuit Court
of the 15th Judicial Circuit in and for Palm Beach County,
Florida(1).
- --------------
(1) Previously filed.
(2) Filed herewith.
56
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
T/F PURIFINER, INC.
Date: October 1, 1996 By:/s/ Richard C. Ford
--------------------------
Richard C. Ford
President and
Chief Executive Officer
T/F PURIFINER, INC.
1996 STOCK OPTION PLAN
----------------------
1. GRANT OF OPTIONS; GENERALLY. In accordance with the provisions
hereinafter set forth in this stock option plan, the name of which is the T/F
PURIFINER, INC. 1996 STOCK OPTION PLAN (the "Plan"), the Board of Directors (the
"Board") or, the Compensation Committee (the "Stock Option Committee") of T/F
Purifiner, Inc. (the "Corporation") is hereby authorized to issue from time to
time on the Corporation's behalf to any one or more Eligible Persons, as
hereinafter defined, options to acquire shares of the Corporation's $.001 par
value common stock (the "Stock").
2. TYPE OF OPTIONS. The Board or the Stock Option Committee is authorized
to issue options which meet the requirements of Section ss.422 of the Internal
Revenue Code of 1986, as amended (the "Code"), which options are hereinafter
referred to collectively as ISOs, or singularly as an ISO. The Board or the
Stock Option Committee is also, in its discretion, authorized to issue options
which are not ISOs, which options are hereinafter referred to collectively as
NSOs, or singularly as an NSO. The Board or the Stock Option Committee is also
authorized to issue "Reload Options" in accordance with Paragraph 8 herein,
which options are hereinafter referred to collectively as Reload Options, or
singularly as a Reload Option. Except where the context indicates to the
contrary, the term "Option" or "Options" means ISOs, NSOs and Reload Options.
3. AMOUNT OF STOCK. The aggregate number of shares of Stock which may be
purchased pursuant to the exercise of Options shall be 650,000 shares. Of this
amount, the Board or the Stock Option Committee shall have the power and
authority to designate whether any Options so issued shall be ISOs or NSOs,
subject to the restrictions on ISOs contained elsewhere herein. If an Option
ceases to be exercisable, in whole or in part, the shares of Stock underlying
such Option shall continue to be available under this Plan. Further, if shares
of Stock are delivered to the Corporation as payment for shares of Stock
purchased by the exercise of an Option granted under this Plan, such shares of
Stock shall also be available under this Plan. If there is any change in the
number of shares of Stock on account of the declaration of stock dividends,
recapitalization resulting in stock split-ups, or combinations or exchanges of
shares of Stock, or otherwise, the number of shares of Stock available for
purchase upon the exercise of Options, the shares of Stock subject to any Option
and the exercise price of any outstanding Option shall be appropriately adjusted
by the Board or the Stock Option Committee. The Board or the Stock Option
Committee shall give notice of any adjustments to each Eligible Person granted
an Option under this Plan, and such adjustments shall be effective and binding
on all Eligible Persons. If because of one or more recapitalizations,
reorganizations or other corporate events, the holders of outstanding Stock
receive something other than shares of Stock then, upon exercise of an Option,
the Eligible Person will receive what the holder would have owned if the holder
had exercised the Option immediately before the first such corporate event and
not disposed of anything the holder received as a result of the corporate event.
<PAGE>
4. ELIGIBLE PERSONS.
(a) With respect to ISOs, an Eligible Person means any individual
who is employed by the Corporation or by any subsidiary of the Corporation.
(b) With respect to NSOs, an Eligible Person means (i) any
individual who has been employed by the Corporation or by any subsidiary of the
Corporation, (ii) any director of the Corporation or any subsidiary of the
Corporation, (iii) any member of the Corporation's advisory board member or of
any of the Corporation's subsidiar(ies), or (iv) any consultant of the
Corporation or by any subsidiary of the Corporation.
5. GRANT OF OPTIONS. The Board or the Stock Option Committee has the
right to issue the Options established by this Plan to Eligible Persons. The
Board or the Stock Option Committee shall follow the procedures prescribed for
it elsewhere in this Plan. A grant of Options shall be set forth in a writing
signed on behalf of the Corporation or by a majority of the members of the Stock
Option Committee. The writing shall identify whether the Option being granted is
an ISO or an NSO and shall set forth the terms which govern the Option. The
terms shall be determined by the Board or the Stock Option Committee, and may
include, among other terms, the number of shares of Stock that may be acquired
pursuant to the exercise of the Options, when the Options may be exercised, the
period for which the Option is granted and including the expiration date, the
effect on the Options if the Eligible Person terminates employment and whether
the Eligible Person may deliver shares of Stock to pay for the shares of Stock
to be purchased by the exercise of the Option. However, no term shall be set
forth in the writing which is inconsistent with any of the terms of this Plan.
The terms of an Option granted to an Eligible Person may differ from the terms
of an Option granted to another Eligible Person, and may differ from the terms
of an earlier Option granted to the same Eligible Person.
6. OPTION PRICE. The option price per share shall be determined by the
Board or the Stock Option Committee at the time any Option is granted, and shall
be not less than (i) in the case of an ISO, the fair market value, (ii) in the
case of an ISO granted to a ten percent or greater stockholder, 110% of the fair
market value, or (iii) in the case of an NSO, not less than 75% of the fair
market value (but in no event less than the par value) of one share of Stock on
the date the Option is granted, as determined by the Board or the Stock Option
Committee. Fair market value as used herein shall be:
(a) If shares of Stock shall be traded on an exchange or
over-the-counter market, the closing price or the closing bid price of such
Stock on such exchange or over-the-counter market on which such shares shall be
traded on that date, or if such exchange or over-the-counter market is closed or
if no shares shall have traded on such date, on the last preceding date on which
such shares shall have traded.
(b) If shares of Stock shall not be traded on an exchange or
over-the-counter market, the value as determined by the Board of Directors or
the Stock Option Committee of the Corporation.
2
<PAGE>
7. PURCHASE OF SHARES. An Option shall be exercised by the tender to the
Corporation of the full purchase price of the Stock with respect to which the
Option is exercised and written notice of the exercise. The purchase price of
the Stock shall be in United States dollars, payable in cash or by check, or in
property or Corporation stock, if so permitted by the Board or the Stock Option
Committee in accordance with the discretion granted in Paragraph 5 hereof,
having a value equal to such purchase price. The Corporation shall not be
required to issue or deliver any certificates for shares of Stock purchased upon
the exercise of an Option prior to (i) if requested by the Corporation, the
filing with the Corporation by the Eligible Person of a representation in
writing that it is the Eligible Person's then present intention to acquire the
Stock being purchased for investment and not for resale, and/or (ii) the
completion of any registration or other qualification of such shares under any
government regulatory body, which the Corporation shall determine to be
necessary or advisable.
8. GRANT OF RELOAD OPTIONS. In granting an Option under this Plan, the
Board or the Stock Option Committee may include a Reload Option provision
therein, subject to the provisions set forth in Paragraphs 20 and 21 herein. A
Reload Option provision provides that if the Eligible Person pays the exercise
price of shares of Stock to be purchased by the exercise of an ISO, NSO or
another Reload Option (the "Original Option") by delivering to the Corporation
shares of Stock already owned by the Eligible Person (the "Tendered Shares"),
the Eligible Person shall receive a Reload Option which shall be a new Option to
purchase shares of Stock equal in number to the tendered shares. The terms of
any Reload Option shall be determined by the Board or the Stock Option Committee
consistent with the provisions of this Plan.
9. STOCK OPTION COMMITTEE. The Stock Option Committee may be appointed
from time to time by the Corporation's Board of Directors. The Board may from
time to time remove members from or add members to the Stock Option Committee.
The Stock Option Committee shall be constituted so as to permit the Plan to
comply in all respects with the provisions set forth in Paragraph 20 herein. The
members of the Stock Option Committee may elect one of its members as its
chairman. The Stock Option Committee shall hold its meetings at such times and
places as its chairman shall determine. A majority of the Stock Option
Committee's members present in person shall constitute a quorum for the
transaction of business. All determinations of the Stock Option Committee will
be made by the majority vote of the members constituting the quorum. The members
may participate in a meeting of the Stock Option Committee by conference
telephone or similar communications equipment by means of which all members
participating in the meeting can hear each other. Participation in a meeting in
that manner will constitute presence in person at the meeting. Any decision or
determination reduced to writing and signed by all members of the Stock Option
Committee will be effective as if it had been made by a majority vote of all
members of the Stock Option Committee at a meeting which is duly called and
held.
10. ADMINISTRATION OF PLAN. In addition to granting Options and to
exercising the authority granted to it elsewhere in this Plan, the Board or the
Stock Option Committee is granted the full right and authority to interpret and
3
<PAGE>
construe the provisions of this Plan, promulgate, amend and rescind rules and
procedures relating to the implementation of the Plan and to make all other
determinations necessary or advisable for the administration of the Plan,
consistent, however, with the intent of the Corporation that Options granted or
awarded pursuant to the Plan comply with the provisions of Paragraph 20 and 21
herein. All determinations made by the Board or the Stock Option Committee shall
be final, binding and conclusive on all persons including the Eligible Person,
the Corporation and its stockholders, employees, officers and directors and
consultants. No member of the Board or the Stock Option Committee will be liable
for any act or omission in connection with the administration of this Plan
unless it is attributable to that member's willful misconduct.
11. PROVISIONS APPLICABLE TO ISOS. The following provisions shall apply to
all ISOs granted by the Board or the Stock Option Committee and are incorporated
by reference into any writing granting an ISO:
(a) An ISO may only be granted within ten (10) years from July 31,
1996, the date that this Plan was originally adopted by the Corporation's Board
of Directors.
(b) An ISO may not be exercised after the expiration of ten (10)
years from the date the ISO is granted.
(c) The option price may not be less than the fair market value of
the Stock at the time the ISO is granted.
(d) An ISO is not transferrable by the Eligible Person to whom it is
granted except by will, or the laws of descent and distribution, and is
exercisable during his or her lifetime only by the Eligible Person.
(e) If the Eligible Person receiving the ISO owns at the time of the
grant stock possessing more than ten (10%) percent of the total combined voting
power of all classes of stock of the employer corporation or of its parent or
subsidiary corporation (as those terms are defined in the Code), then the option
price shall be at least 110% of the fair market value of the Stock, and the ISO
shall not be exercisable after the expiration of five (5) years from the date
the ISO is granted.
(f) The aggregate fair market value (determined at the time the ISO
is granted) of the Stock with respect to which the ISO is first exercisable by
the Eligible Person during any calendar year (under this Plan and any other
incentive stock option plan of the Corporation) shall not exceed $100,000.
(g) Even if the shares of Stock which are issued upon exercise of an
ISO are sold within one year following the exercise of such ISO so that the sale
constitutes a disqualifying disposition for ISO treatment under the Code, no
provision of this Plan shall be construed as prohibiting such a sale.
4
<PAGE>
(h) This Plan was adopted by the Corporation on July 31, 1996, by
virtue of its approval by the Corporation's Board of Directors. Approval by a
majority of the stockholders of the Corporation occurred on July 31, 1996 and
was ratified at the Company's 1995 Annual Meeting on August 28, 1996.
12. DETERMINATION OF FAIR MARKET VALUE. In granting ISOs under this Plan,
the Board or the Stock Option Committee shall make a good faith determination as
to the fair market value of the Stock at the time of granting the ISO.
13. RESTRICTIONS ON ISSUANCE OF STOCK. The Corporation shall not be
obligated to sell or issue any shares of Stock pursuant to the exercise of an
Option unless the Stock with respect to which the Option is being exercised is
at that time effectively registered or exempt from registration under the
Securities Act of 1933, as amended, and any other applicable laws, rules and
regulations. The Corporation may condition the exercise of an Option granted in
accordance herewith upon receipt from the Eligible Person, or any other
purchaser thereof, of a written representation that at the time of such exercise
it is his or her then present intention to acquire the shares of Stock for
investment and not with a view to, or for sale in connection with, any
distribution thereof; except that, in the case of a legal representative of an
Eligible Person, "distribution" shall be defined to exclude distribution by will
or under the laws of descent and distribution. Prior to issuing any shares of
Stock pursuant to the exercise of an Option, the Corporation shall take such
steps as it deems necessary to satisfy any withholding tax obligations imposed
upon it by any level of government.
14. EXERCISE IN THE EVENT OF DEATH OF TERMINATION OR EMPLOYMENT.
(a) If an optionee shall die (i) while an employee of the
Corporation or a Subsidiary or (ii) within three months after termination of his
employment with the Corporation or a Subsidiary because of his disability, or
retirement or otherwise, his Options may be exercised, to the extent that the
optionee shall have been entitled to do so on the date of his death or such
termination of employment, by the person or persons to whom the optionee's right
under the Option pass by will or applicable law, or if no such person has such
right, by his executors or administrators, at any time, or from time to time. In
the event of termination of employment because of his death while an employee or
because of disability, his Options may be exercised not later than the
expiration date specified in Paragraph 5 or one year after the optionee's death,
whichever date is earlier, or in the event of termination of employment because
of retirement or otherwise, not later than the expiration date specified in
Paragraph 5 hereof or one year after the optionee's death, whichever date is
earlier.
(b) If an optionee's employment by the Corporation or a Subsidiary
shall terminate because of his disability and such optionee has not died within
the following three months, he may exercise his Options, to the extent that he
shall have been entitled to do so at the date of the termination of his
employment, at any time, or from time to time, but not later than the expiration
date specified in Paragraph 5 hereof or one year after termination of
employment, whichever date is earlier.
5
<PAGE>
(c) If an optionee's employment shall terminate by reason of his
retirement in accordance with the terms of the Corporation's tax-qualified
retirement plans or with the consent of the Board or the Stock Option Committee
or involuntarily other than by termination for cause, and such optionee has not
died within the following three months, he may exercise his Option to the extent
he shall have been entitled to do so at the date of the termination of his
employment, at any time and from to time, but not later than the expiration date
specified in Paragraph 5 hereof or thirty (30) days after termination of
employment, whichever date is earlier. For purposes of this Paragraph 14,
termination for cause shall mean termination of employment by reason of the
optionee's commission of a felony, fraud or willful misconduct which has
resulted, or is likely to result, in substantial and material damage to the
Corporation or a Subsidiary, all as the Board or the Stock Option Committee in
its sole discretion may determine.
(d) If an optionee's employment shall terminate for any reason other
than death, disability, retirement or otherwise, all right to exercise his
Option shall terminate at the date of such termination of employment.
15. CORPORATE EVENTS. In the event of the proposed dissolution or
liquidation of the Corporation, a proposed sale of all or substantially all of
the assets of the Corporation, a merger or tender for the Corporation's shares
of Common Stock the Board of Directors shall declare that each Option granted
under this Plan shall terminate as of a date to be fixed by the Board of
Directors; provided that not less than thirty (30) days written notice of the
date so fixed shall be given to each Eligible Person holding an Option, and each
such Eligible Person shall have the right, during the period of thirty (30) days
preceding such termination, to exercise his Option as to all or any part of the
shares of Stock covered thereby, including shares of Stock as to which such
Option would not otherwise be exercisable. Nothing set forth herein shall extend
the term set for purchasing the shares of Stock set forth in the Option.
16. NO GUARANTEE OF EMPLOYMENT. Nothing in this Plan or in any writing
granting an Option will confer upon any Eligible Person the right to continue in
the employ of the Eligible Person's employer, or will interfere with or restrict
in any way the right of the Eligible Person's employer to discharge such
Eligible Person at any time for any reason whatsoever, with or without cause.
17. NONTRANSFERABILITY. No Option granted under the Plan shal be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, an Option shall be exercisable only by him.
18. NO RIGHTS AS STOCKHOLDER. No optionee shall have any rights as a
stockholder with respect to any shares subject to his Option prior to the date
of issuance to him of a certificate or certificates for such shares.
19. AMENDMENT AND DISCONTINUANCE OF PLAN. The Corporation's Board of
Directors may amend, suspend or discontinue this Plan at any time. However, no
such action may prejudice the rights of any Eligible Person who has prior
6
<PAGE>
thereto been granted Options under this Plan. Further, no amendment to this Plan
which has the effect of (a) increasing the aggregate number of shares of Stock
subject to this Plan (except for adjustments pursuant to Paragraph 3 herein), or
(b) changing the definition of Eligible Person under this Plan, may be effective
unless and until approval of the stockholders of the Corporation is obtained in
the same manner as approval of this Plan is required. The Corporation's Board of
Directors is authorized to seek the approval of the Corporation's stockholders
for any other changes it proposes to make to this Plan which require such
approval, however, the Board of Directors may modify the Plan, as necessary, to
effectuate the intent of the Plan as a result of any changes in the tax,
accounting or securities laws treatment of Eligible Persons and the Plan,
subject to the provisions set forth in this Paragraph 19, and Paragraphs 20 and
21.
20. COMPLIANCE WITH RULE 16B-3. This Plan is intended to comply in all
respects with Rule 16b-3 ("Rule 16b-3") promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with respect to participants who are subject to Section 16 of
the Exchange Act, and any provision(s) herein that is/are contrary to Rule 16b-3
shall be deemed null and void to the extent appropriate by either the Stock
Option Committee or the Corporation's Board of Directors.
21. COMPLIANCE WITH CODE. The aspects of this Plan on ISOs is intended to
comply in every respect with Section 422 of the Code and the regulations
promulgated thereunder. In the event any future statute or regulation shall
modify the existing statute, the aspects of this Plan on ISOs shall be deemed to
incorporate by reference such modification. Any stock option agreement relating
to any Option granted pursuant to this Plan outstanding and unexercised at the
time any modifying statute or regulation becomes effective shall also be deemed
to incorporate by reference such modification and no notice of such modification
need be given to optionee.
If any provision of the aspects of this Plan on ISOs is determined
to disqualify the shares purchasable pursuant to the Options granted under this
Plan from the special tax treatment provided by Code Section 422, such provision
shall be deemed null and void and to incorporate by reference the modification
required to qualify the shares for said tax treatment.
22. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Corporation to sell
and deliver Stock under such options, shall be subject to all applicable federal
and state laws, rules, and regulations and to such approvals by any government
or regulatory agency as may be required. The Corporation shall not be required
to issue or deliver any certificates for shares of Stock prior to (a) the
listing of such shares on any stock exchange or over-the-counter market on which
the Stock may then be listed and (b) the completion of any registration or
qualification of such shares under any federal or state law, or any ruling or
regulation of any government body which the Corporation shall, in its sole
discretion, determine to be necessary or advisable. Moreover, no Option may be
exercised if its exercise or the receipt of Stock pursuant thereto would be
contrary to applicable laws.
7
<PAGE>
23. DISPOSITION OF SHARES. In the event any share of Stock acquired by an
exercise of an Option granted under the Plan shall be transferable other than by
will or by the laws of descent and distribution within two years of the date
such Option was granted or within one year after the transfer of such Stock
pursuant to such exercise, the optionee shall give prompt written notice thereof
to the Corporation or the Stock Option Committee.
24. NAME. The Plan shall be known as the "T/F Purifiner 1996 Stock Option
Plan."
25. NOTICES. Any notice hereunder shall be in writing and sent by
certified mail, return receipt requested or by facsimile transmission (with
electronic or written confirmation of receipt) and when addressed to the
Corporation shall be sent to it at its office, 3020 High Ridge Road, Suite 100,
Boynton Beach, Florida 33426 and when addressed to the Committee shall be sent
to it 3020 High Ridge Road, Suite 100, Boynton Beach, Florida 33426, subject to
the right of either party to designate at any time hereafter in writing some
other address, facsimile number or person to whose attention such notice shall
be sent.
26. HEADINGS. The headings preceding the text of Sections and subpara-
graphs hereof are inserted solely for convenience of reference, and shall not
constitute a part of this Plan nor shall they affect its meaning, construction
or effect.
27. EFFECTIVE DATE. This Plan, the T/F Purifiner, Inc. 1996 Stock Option
Plan, was adopted by the Board of Directors of the Corporation on July 31, 1996.
The effective date of the Plan shall be the same date.
Dated as of July 31, 1996.
T/F PURIFINER, INC.
By: Richard C. Ford
Its: President
8
<PAGE>
[NSO GRANT FORM]
T/F PURIFINER, INC.
3020 High Ridge Road, Suite 100
Boynton Beach, Florida 33426
Date: __________
___________
___________
___________
Dear __________:
The Board of Directors of T/F Purifiner, Inc.(the "Corporation") is
pleased to award you an Option pursuant to the provisions of the 1996 Stock
Option Plan (the "Plan"). This letter will describe the Option granted to you.
Attached to this letter is a copy of the Plan. The terms of the Plan also set
forth provisions governing the Option granted to you. Therefore, in addition to
reading this letter you should also read the Plan. Your signature on this letter
is an acknowledgement to us that you have read and under-stand the Plan and that
you agree to abide by its terms. All terms not defined in this letter shall have
the same meaning as in the Plan.
1. TYPE OF OPTION. You are granted an NSO. Please see in particular
Section 11 of the Plan.
2. RIGHTS AND PRIVILEGES. Subject to the conditions hereinafter set
forth, we grant you the right to purchase __________ shares of Stock at
$__________ per share, the current fair market value of a share of Stock. The
right to purchase the shares of Stock accrues in __________ installments over
the time periods described below:
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
3. TIME OF EXERCISE. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.
4. METHOD OF EXERCISE. The Options shall be exercised by written notice
to the Chairman of the Board of Directors at the Corporation's principal place
of business. The notice shall set forth the number of shares of Stock to be
acquired and shall contain a check payable to
1
<PAGE>
the Corporation in full payment for the Stock or that number of already owned
shares of Stock equal in value to the total Exercise Price of the Option. We
shall make delivery of the shares of Stock subject to the conditions described
in Section 13 of the Plan.
5. TERMINATION OF OPTION. To the extent not exercised, the Option shall
terminate upon the first to occur of the following dates:
(a) __________, 199_, being __________ years from the date of grant
pursuant to the provisions of Section 2 of this Agreement; or
(b) The expiration of three months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or
(c) The expiration of 12 months following the date your employment
terminates with the Corporation and any of its subsidiaries included in the
Plan, if such employment termination occurs by reason of your death or by reason
of your permanent disability (as defined above).
6. SECURITIES LAWS.
The Option and the shares of Stock underlying the Option have not
been registered under the Securities Act of 1933, as amended (the "Act"). The
Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired upon the exercise of
the Option shall be "restricted securities" as that term is defined in Rule 144
promulgated under the Act. The certificate representing the shares shall bear an
appropriate legend restricting their transfer. Such shares cannot be sold,
transferred, assigned or otherwise hypothecated without registration under the
Act or unless a valid exemption from registration is then available under
applicable federal and state securities laws and the Corporation has been
furnished with an opinion of counsel satisfactory in form and substance to the
Corporation that such registration is not required.
7. BINDING EFFECT. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.
2
<PAGE>
8. DATE OF GRANT. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.
Very truly yours,
By:_______________________________
President
AGREED AND ACCEPTED:
____________________
3
<PAGE>
Date: ________________
T/F PURIFINER, INC.
3020 High Ridge Road, Suite 100
Boynton Beach, Florida 33426
________________
________________
________________
Dear _______________:
The Board of Directors of T/F Purifiner, Inc.(the "Corporation") is
pleased to award you an Option pursuant to the provisions of the 1996 Stock
Option Plan (the "Plan"). This letter will describe the Option granted to you.
Attached to this letter is a copy of the Plan. The terms of the Plan also set
forth provisions governing the Option granted to you. Therefore, in addition to
reading this letter you should also read the Plan. Your signature on this letter
is an acknowledgement to us that you have read and under-stand the Plan and that
you agree to abide by its terms. All terms not defined in this letter shall have
the same meaning as in the Plan.
1. TYPE OF OPTION. You are granted an ISO. Please see in particular
Section 11 of the Plan.
2. RIGHTS AND PRIVILEGES. Subject to the conditions hereinafter set
forth, we grant you the right to purchase __________ shares of Stock at
$__________ per share, the current fair market value of a share of Stock. The
right to purchase the shares of Stock accrues in __________ installments over
the time periods described below:
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
<PAGE>
3. TIME OF EXERCISE. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.
4. METHOD OF EXERCISE. The Options shall be exercised by written notice
to the Chairman of the Board of Directors at the Corporation's principal place
of business. The notice shall set forth the number of shares of Stock to be
acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.
5. TERMINATION OF OPTION. To the extent not exercised, the Option shall
terminate upon the first to occur of the following dates:
(a) _____________, 199___, being __________ years from the date of
grant pursuant to the provisions of Section 2 of this Agreement; or
(b) The expiration of thirty (30) days following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or
(c) The expiration of 12 months following the date your employment
terminates with the Corporation and any of its subsidiaries included in the
Plan, if such employment termination occurs by reason of your death or by reason
of your permanent disability (as defined above).
6. SECURITIES LAWS.
The Option and the shares of Stock underlying the Option have not
been registered under the Securities Act of 1933, as amended (the "Act"). The
Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired upon the exercise of
the Option shall be "restricted securities" as that term is defined in Rule 144
promulgated under the Act. The certificate representing the shares shall bear an
appropriate legend restricting their transfer. Such shares cannot be sold,
transferred, assigned or otherwise hypothecated without registration under the
Act or unless a valid exemption from registration is then available under
applicable federal and state securities laws and the Corporation has been
furnished with an opinion of counsel satisfactory in form and substance to the
Corporation that such registration is not required.
2
<PAGE>
7. BINDING EFFECT. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.
8. DATE OF GRANT. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.
Very truly yours,
By:_______________________________
President
AGREED AND ACCEPTED:
____________________
3
<PAGE>
[NSO GRANT FORM
WITH RELOAD OPTIONS]
T/F PURIFINER, INC.
3020 High Ridge Road, Suite 100
Boynton Beach, Florida 33426
Date: __________
___________
___________
___________
Dear __________:
The Board of Directors of T/F Purifiner, Inc. (the "Corporation") is
pleased to award you an Option pursuant to the provisions of the 1996 Stock
Option Plan (the "Plan"). This letter will describe the Option granted to you.
Attached to this letter is a copy of the Plan. The terms of the Plan also set
forth provisions governing the Option granted to you. Therefore, in addition to
reading this letter you should also read the Plan. Your signature on this letter
is an acknowledgement to us that you have read and understand the Plan and that
you agree to abide by its terms. All terms not defined in this letter shall have
the same meaning as in the Plan.
1. TYPE OF OPTION. You are granted an NSO. Please see in particular
Section 11 of the Plan.
2. RIGHTS AND PRIVILEGES.
(a) Subject to the conditions hereinafter set forth, we grant you
the right to purchase __________ shares of Stock at $__________ per share, the
current fair market value of a share of Stock. The right to purchase the shares
of Stock accrues in __________ installments over the time periods described
below:
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
(b) In addition to the Option granted hereby (the "Underlying
Option"), the Corporation will grant you a reload option (the "Reload Option")
as hereinafter provided. A Reload Option is hereby granted to you if you acquire
shares of Stock pursuant to the exercise of the Underlying Option and pay for
1
<PAGE>
such shares of Stock with shares of Common Stock already owned by you (the
"Tendered Shares"). The Reload Option grants you the right to purchase shares of
Stock equal in number to the number of Tendered Shares. The date on which the
Tendered Shares are tendered to the Corporation in full or partial payment of
the purchase price for the shares of Stock acquired pursuant to the exercise of
the Underlying Option is the Reload Grant Date. The exercise price of the Reload
Option is the fair market value of the Tendered Shares on the Reload Grant Date.
The fair market value of the Tendered Shares shall be the low bid price per
share of the Corporation's Common Stock on the Reload Grant Date. The Reload
Option shall vest equally over a period of __________ (___) years, commencing on
the first anniversary of the Reload Grant Date, and on each anniversary of the
Reload Grant Date thereafter; however, no Reload Option shall vest in any
calendar year if it would allow you to purchase for the first time in that
calendar year shares of Stock with a fair market value in excess of $100,000,
taking into account ISOs previously granted to you. The Reload Option shall
expire on the earlier of (i) __________ (___) years from the Reload Grant Date,
or (ii) in accordance with Paragraph 5(b), or (iii) in accordance with Paragraph
5(c) as set forth herein. If vesting of the Reload Option is deferred, then the
Reload Option shall vest in the next calendar year, subject, however, to the
deferral of vesting previously provided. Except as provided herein the Reload
Option is subject to all of the other terms and provisions of this Agreement
governing Options.
3. TIME OF EXERCISE. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.
4. METHOD OF EXERCISE. The Options shall be exercised by written notice
to the Chairman of the Board of Directors at the Corporation's principal place
of business. The notice shall set forth the number of shares of Stock to be
acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.
5. TERMINATION OF OPTION. To the extent not exercised, the Option shall
terminate upon the first to occur of the following dates:
(a) __________, 199_, being __________ years from the date of grant
pursuant to the provisions of Section 2 of this Agreement; or
(b) The expiration of three months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or
2
<PAGE>
(c) The expiration of 12 months following the date your employment
terminates with the Corporation and any of its subsidiaries included in the
Plan, if such employment termination occurs by reason of your death or by reason
of your permanent disability (as defined above).
6. SECURITIES LAWS.
The Option and the shares of Stock underlying the Option have not
been registered under the Securities Act of 1933, as amended (the "Act"). The
Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired upon the exercise of
the Option shall be "restricted securities" as that term is defined in Rule 144
promulgated under the Act. The certificate representing the shares shall bear an
appropriate legend restricting their transfer. Such shares cannot be sold,
transferred, assigned or otherwise hypothecated without registration under the
Act or unless a valid exemption from registration is then available under
applicable federal and state securities laws and the Corporation has been
furnished with an opinion of counsel satisfactory in form and substance to the
Corporation that such registration is not required.
7. BINDING EFFECT. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.
8. DATE OF GRANT. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.
Very truly yours,
By:_______________________________
President
AGREED AND ACCEPTED:
____________________
________
3
- -------------------------------------------------------------------------------
MASTER
DISTRIBUTOR AGREEMENT
- -------------------------------------------------------------------------------
This Agreement, made this 6th day of April 1995, between TF Purifiner, Inc.
("TF"), as exclusive worldwide distributor for TF Systems, Inc. (the
"Manufacturer"), both Delaware Corporations, having their principal offices at
3020 High Ridge Road, Suite 100, Boynton Beach, Florida 33426, and KLC
Corporation, having its principal office at 1669 N.W. 79th Avenue, Miami,
Florida 33126.
I. WHEREAS:
A. The Manufacturer and TF are in the business of designing, develop-
ing, manufacturing and marketing bypass oil refiners and filters
under the trademark "PURIFINER(TM)" hereinafter referred to as the
"Product";
B. TF is the exclusive licensee of Patents No. 4,189,351, 4,227,969,
4,289,583, 4,943,352 and pending patent applications;
C. TF has the right to grant to the Distributor the right to purchase
and sell the Product in the Territory (as defined herein);
D. The Distributor warrants that it is now solvent and capable of
acting as a distributor within the Territory; and
E. The Distributor is desirous of purchasing and selling the Product
in the Territory, and TF is desirous of granting the Distributor,
the right to do so upon the following terms and conditions; in
consideration of the mutual promises and understandings set forth
below, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
II. APPOINTMENT
A. TF appoints the Distributor as the master exclusive distributor of
the Product within the Territory and will sell the Product to the
Distributor, and the Distributor agrees to purchase such Product
from TF and distribute the Product within the Territory under the
terms of this Agreement.
B. TF shall not appoint another distributor of the Product in the
Territory. However, TF is not accountable for sales of the Product
or similar items by unauthorized accounts within or outside of the
<PAGE>
Territory, or as a part of a vehicle, boat, engine or other
installation equipped with the Product as OEM and imported into
the Territory.
C. The Territory shall be defined as Brazil.
The Distributor shall not solicit sales or sell the Product
outside the Territory without first getting written permission
from TF.
D. Original Equipment Manufacturer Accounts:
TF reserves the right to sell the product directly to any
manufacturer of engines, vehicles, and other machinery as original
equipment (hereinafter referred to as "OEM"), outside of Brazil.
All sales made to OEM's in Brazil must be negotiated in
conjunction and under the guidelines of TF.
III. TERM OF AGREEMENT
This Agreement is for three years and seven months, commencing May 1,
1995, providing that the Distributor abides by all provisions of this
Agreement, including meeting minimum monthly purchases specified in
Article IV. The Agreement shall be automatically renewed, provided
minimum quantities between the two parties are established, for an
additional four year period with minimum monthly purchase quantities to
be in no event less than quantities established for last year of 300
units per month or more than a 20% increase per year. The Distributor
has the right to appoint sub-distributors or franchisees within the
Territory. The Distributor agrees and accepts that any contract made or
entered into with sub-distributors or franchisees shall not exceed the
term of this Agreement and will be subject to the terms of this
Agreement. In the event that each month's minimum purchases is not met,
the Distributor will be granted a non-exclusive option to sell the
Product and will purchase the Product from TF at the current
International Price Schedule until another exclusive distributor is
appointed, at which time the prior distributor would purchase Product
from the new distributor at the new distributors selling price.
IV. MINIMUM ANNUAL PURCHASES
The parties agree that the Distributor shall purchase from TF not less
than the following:
2
<PAGE>
Number of
Purchase Order Date Units & Cases of Filters
------------------- ------------------------
February 24, 1995 [ ] Purifiner Units
June 1, 1995 and the first of 200 Purifiner Units and 200
each month thereafter through cases of Purifiner Filters
December 1, 1995
January l, 1996 and the first [ ] Purifiner Units and 233
of each month thereafter cases of Purifiner Filters
through December l, 1996
January 1, 1997 and the first [ ] Purifiner Units and 267
of each month thereafter through cases of Purifiner Filters
December 1, 1997
January 1, 1998 and the first [ ] Purifiner Units and [ ] of each month
thereafter through cases of Purifiner Filters December 1, 1998
The Distributor will notify TF at least 30 days prior to the monthly
purchase order date of its actual purchase requirements for the upcoming
month, specifying the actual sizes and voltage requirements. The
Distributor also agrees to provide TF with purchase forecasts by month
for the upcoming calendar year at least 90 days prior to year end. Any
additional orders in excess of the minimum purchase quantities will be
shipped within eight (8) weeks.
V. REPURCHASE OPTION
Upon termination or cancellation of this Agreement, TF shall have the
option to repurchase from the Distributor any or all of the Product then
remaining in Distributor's inventory from TF at TF's original sales
price less freight, duties and other charges plus a restocking charge
not to exceed 15%.
VI. DISCONTINUANCE OF USE OF TRADEMARK AND PATENTS
Upon termination or cancellation of this Agreement, the Distributor
shall (a) discontinue any and all use of the trademarks, trade names and
Patents of TF, including such use in advertising, (b) remove and return
to TF, or in the alternative, remove and destroy, any and all signs
designating Distributor as a distributor for the Product or which
include the trademark or trade name of TF and (c) assign to TF all
rights, title and interest to the use of the local Distributor's name
and local Product names used by Distributor.
3
<PAGE>
VII. TERMINATION
A. If either party breaches materially any of the fundamental terms
of this Agreement, the other party has the right to terminate this
Agreement by written notice unless the party committing such
breach shall have corrected such breach within thirty (30) days
(or such longer time as may be agreed in writing between the
parties) after receipt of the above written notification. The
written notice must specify the breach and be delivered by
certified mail or facsimile.
B. This Agreement shall be terminated immediately by its own force
without notice from either party in the following events: (a) An
assignment of all or a major part of the assets of Distributor for
the benefit of creditors; (b) Insolvency of the Distributor or the
placing in liquidation (voluntarily or compulsorily) or being
subject to the appointment of an official manager or receiver; (c)
The discontinuance of Distributor's purchase of Products in
accordance with the minimum purchase requirement specified in IV;
and (d) Failure in performing any of Distributor's obligations
under this Agreement for a period of more than six (6) months by
reason of directives of any government.
Distributor shall immediately advise TF in writing of the
occurrence of any events specified in this article.
VIII. RELATIONSHIP OF THE PARTIES
A. The relationship of the Distributor to TF shall be that of an in-
dependent contractor. This Agreement does not in any way create
the relationship of joint venture partnership, franchiser and
franchisee or principal and agent between TF and the Distributor,
and it is not contemplated that TF will render significant
assistance or guidance to the Distributor in the management,
promotion or operation of the Distributor's business.
B. Distributor will use its best reasonable efforts to market the
Products in the Territory. The Distributor's activities in
marketing the Products to its customers will include, but not be
limited to: identify and develop new accounts and subdistributors,
diligently promote other new products and/or services offered by
TF, provide all services necessary for the support of customers in
their channel of distribution, effectively communicate all
relevant information on the market, the competition, prices,
customers, etc., that may have an impact on TF's business,
including, but not limited to, normal monthly reporting of
4
<PAGE>
statistical information of sales, units, type of customer,
applications and system ideas.
C. At the expiration of this Agreement, unless renewed~ no further
relationship between Distributor and TF will exist.
D. Distributor agrees that it will:
1. Not act in any way that would give the impression that it
has the power or authority to bind TF in any respect
whatsoever.
2. Not make any representation (oral or written) which varies
from the specifications, operating instructions or
representations given to Distributor or made by TF with
respect to the Products, including warranties.
3. Maintain a place of business in the Territory and employ
sufficient personnel to carry out Distributor's obligations
under this Agreement.
4. Comply with Brazilian and U.S. and other applicable inter-
national, federal, province, state and local laws, rules,
regulations, ordinances and orders, in the solicitation of
orders for the Products, and in its other activities.
5. Ensure that that each installer chosen by the Distributor
will have received adequate and proper training and carry a
"errors and omissions" policy in accordance with the laws of
the Territory which insurance will cover any liability due
to improper installation.
6. Use TF's trademarks (including "Purifiner"), trade names,
logo-type and service marks only in accordance with TF's
guidelines established for the use of such proprietary
materials. Acknowledges TF's exclusive right, title and
interest in any and all trademarks and trade names, which TF
may have now and in the future.
7. Maintain the confidentiality of any of TF's and Manufact-
urer's trade secrets and proprietary information of whatever
nature disclosed to Distributor.
8. Forward to TF a copy of any complaint received by Distribu-
tor about Distributor, TF, Manufacturer, or the Products.
5
<PAGE>
9. Distributor acknowledges that TF has the right at any time
to change the design of discontinue, or limit the
manufacture or provision of any of the Products to change
the price thereof, or to withdraw from the market entirely
upon giving written notice to Distributor within 90 days of
such actions.
10. If the Distributor sells controlling interest of the
distributorship (defined as greater than 50% of the voting
shares), it must first be approved by TF.
11. Assign to TF any improvements to all TF Products as they are
developed by the Distributor or any affiliated entity or
person.
12. The Distributor recognizes the importance of TF's
technologies and will take all necessary steps to protect
TF's proprietary rights in the Territory.
13. Will purchase all necessary sales and training aids, includ-
ing demonstration unit, at TF's cost.
14. Distributor will furnish monthly reports to TF as to the
companies (names) Purifiner units are installed on, and any
oil analysis.
15. Distributor shall indemnify and hold TF harmless from all
liability for damages and/or costs (including attorney fees)
caused by the Distributor's violation of this Agreement or
local, state, federal or international laws or regulations.
16. Distributor will promptly notify TF, in writing, of any and
all infringements, imitations, illegal user or misuse of the
Trademark or Trade Names which come to the attention of the
Distributor. Distributor agrees that he will take no action,
whether legal or otherwise, to attempt to prevent the
infringements, imitations, illegal use or misuse of the
Trademarks, Trade Names or Patents and that such actions
fall within the authority of TF. Distributor will render all
assistance requested of it by TF in connection with the
protection of its Trademarks or Trade Names.
E. TF agrees that it will:
1. Use its best efforts to deliver each order to the freight
forwarder in the least possible time, making partial
6
<PAGE>
deliveries if necessary. TF will not be liable due to any
"force majeure" as stipulated in section XIII.
2. Provide the Distributor with all of TF's existing and to be
developed sales and promotional materials, training manuals,
installation guidelines, etc. at TF's cost.
3. Make available the necessary personnel to provide training
in sales and installation of its Product at TF's Florida
facility. Any out-of-pocket expenses, incurred by TF for
training performed at other locations requested by the
Distributor will be paid for by the Distributor, including
hotel, meals, local transportation, etc.
4. If TF becomes desirous of manufacturing the Product in
Brazil then the Distributor will have the first right for 90
days to negotiate a joint venture with TF.
IX. PRICE AND CREDIT TERMS
A. The Distributor shall purchase the Product from TF at TF's then
current International Distributor Price List attached hereto as
Exhibit A. The Price Schedule may be changed from time to time by
TF upon giving written notice to Distributor within 90 days of
such action. The price contains a commission to Alberto Mitchell,
which shall be paid by TF.
B. The Distributor shall pay for seventy (70%) percent of the monthly
Purchase Price on the monthly Purchase Order Date, commencing June
1, 1995 and the first day of each month thereafter, of the Product
by means of wire transfer to TF at [ ], or cashier's check on a
U.S. bank. The remaining monthly balance of thirty (30%) percent
is payable by wire transfer or cashiers check at the at the end of
each month or time of shipment, if earlier.
C. The Price Schedule does not include applicable taxes, duties,
licenses, excises and tariffs and any other applicable charges all
of which are the responsibility of the Distributor.
D. All shipments will be made F.O.B. TF's Florida shipping dock. In-
surance coverage on all shipments is the responsibility of the
Distributor.
X. ADVERTISING AND PROMOTION
7
<PAGE>
A. Distributor agrees to spend at least 5% of gross revenue, per
annum on advertising and sales assistance.
B. The Distributor shall not manufacture and/or cause to be
manufactured and/or purchase and/or sell during the term of this
Agreement, and for a period of ninety (90) days following
termination or cancellation of this Agreement products which in
the judgment of TF are similar in performance to or competitive
with TF's Products from any source other than TF.
C. TF agrees during the term of the Agreement to permit the Distribu-
tor to use the TF's trademarks and trade names in the
Distributor's sales program for the sole purpose of advertising
and promoting the sale of the Product. Distributor agrees not to
use or cause the use of TF's trademarks or trade names in any
manner which shall directly or indirectly tend to lessen their
value. Further, Distributor shall not use TF's trademark or trade
names in the name of the Distributor's business or in any manner
likely to convey to the public the idea that it is acting or
selling goods on behalf of TF unless approved by TF.
D. Any printed advertising and promotional material created by the
Distributor referring to the Product shall be sent to TF prior to
any use, including the English translation, and TF may disapprove
within ten (10) days by fax, the use of any material which, in
TF's opinion, misrepresents the Product or which might mislead
customers.
E. Distributor agrees to conduct its promotion, advertising, sales,
pricing and business generally at all time in strict compliance
with all applicable international, federal, state and local laws
and regulations.
XI. WARRANTIES AND DISCLAIMERS
Attached to this Agreement is Exhibit B which is a copy of the limited
warranty on the Product provided by the Manufacturer and TF. Distributor
is not authorized on behalf of the Manufacturer or TF to expand or
attempt to expand such warranty or the liabilities for any breach of
that warranty. If defective units are returned to Distributor, the
Distributor will report such to TF and will hold such units until TF
notifies Distributor as to where to ship or dispose of such units at
TF's expense. TF will replace all defective units as part of next
monthly purchase shipment to Distributor.
8
<PAGE>
XII. FORCE MAJEURE
Neither party shall be liable for failure to fulfill any obligation
under this Agreement due to fire, tempest, flood, act of God, war, civil
revolution or disturbance, riot, blockade, governmental restraint,
industrial strike or lock-out, or any other similar causes whatsoever
beyond the party's control.
XIII. MANUFACTURER AND TF HELD HARMLESS
Distributor shall indemnify and hold the Manufacturer and TF harmless
from all liability for damages and/or costs (including attorney fees)
caused by the Distributor's violation of this Agreement or any
international, federal, state or local laws or regulations.
XIV. ENTIRE AGREEMENT AND NOTICE
A. This Agreement is made in English and is the entire Agreement
between the parties and supersedes all prior agreements if any.
Any waiver, amendment, modification or renewal of this Agreement,
to be effective must be in writing and signed by the parties.
There are no oral or implied agreements and no oral or implied
warranties between the parties.
If any provision of this Agreement shall be held invalid, the
remaining provisions shall continue to be binding upon the
parties.
B. The waiver of any one default of this Agreement shall not waive
subsequent defaults.
C. Any notices required by this Agreement shall be sent to TF and KLC
Trading Corporation at the addresses noted herein.
XV. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement or
the breach thereof, shall be settled according to the Florida Law in the
form of legal arbitration. The arbitration shall take place in Palm Beach
County and the number of arbitrators shall be three. Judgment upon the
arbitration award may be entered in any court having jurisdiction thereof
The prevailing party shall be entitled to recover all attorney fees and
related costs incurred in the arbitration proceeding in addition to any
other relief to which they are entitled.
9
<PAGE>
- ------------------------------ ------------------------------
TF Purifiner, Inc. Date
- ------------------------------ ------------------------------
KLC Trading Corporation Date
Luis Carlos Klein
10
EXCLUSIVE DISTRIBUTOR AGREEMENT/COLUMBIA
BETWEEN
AL PACIFIC CAL
AND THE COMPANY
EFFECTIVE MARCH 1, 1996
February 23, 1996
Mr. Ivan Valverde
Al Pacific Cali
Calle 5o No. 24A152 EXCLUSIVE DISTRIBUTOR
Oficina 512 AGREEMENT/COLUMBIA
Calle-Valle, Columbia EFFECTIVE DATE 3/1/96
Dear Ivan:
This letter will serve as an agreement between TF Purifiner, Inc. and Al Pacific
Cali. Al Pacific Cali will serve as distributor of TF Purifiner Units, Filters
and related accessories for a period of one year in the country of Columbia.
During this period, Al Pacific Cali will purchase NOT LESS THAN $20,000.00 of
product, per quarter, for a total of $80,000.00 for this one year period. Should
the minimum quarterly purchase requirements not be met, on time, by Al Pacific
Cali, this agreement will be terminated.
On February 1, 1997, TF Purifiner, Inc. and Al Pacific Cali will negotiate an
additional three year contract for the country of Columbia and establish minimum
quarterly purchases to be determined by TF Purifiner, Inc.
Sincerely,
/s/ Richard C. Ford
- ---------------------
Richard C. Ford
President
RCF/kk
Accepted and Agreed:
/s/ Richard C. Ford /s/ Ivan Valverde
- ------------------------------------ --------------------------------------
Richard C. Ford for Ivan Valverde for
TF Purifiner, Inc. Al Pacific Cali
2-23-96 2-23-96
- ------------------------------------ --------------------------------------
Date Date
EXCLUSIVE AGREEMENT FOR DISTRIBUTORSHIP
BETWEEN
KIAN SENG HARDWARE TRADING PTE. LTD.
AND THE COMPANY
DATED FEBRUARY 6, 1996
(SINGAPORE)
February 6, 1996
Mr. Fernando A.H. Ng EXCLUSIVE AGREEMENT
Kian Seng Hardware Trading Pte. Ltd. FOR DISTRIBUTORSHIP IN
166/168, Simms Ave, SINGAPORE DATED
Singapore 387487 FEBRUARY 6, 1996
Dear Mr. Ng:
This Agreement is made between Kian Seng Hardware Trading Ptd. Ltd. and TF
Purifiner, Inc. It is agreed that TF Purifiner, Inc. U.S.A. will only appoint
the above company as its exclusive Distributor of the Purifiner Products for
Singapore for a period of one year. Upon return to Singapore, Kian Seng Hardware
Trading Ptd. Ltd. will register the name "TF Purifiner (Singapore) Pte. Ltd.".
Should the above parties decide to terminate this agreement, the name of TF
Purifiner (Singapore) Pte. Ltd. will be assigned to TF Purifiner, Inc. (USA) or
its designee. In January of 1997, Kian Seng Hardware Trading Ptd. Ltd. will
submit a marketing plan for the markets it wishes to cover with minimum
quantities for each of the markets. This marketing plan is to be approved by TF
Purifiner, Inc. (USA) at which time, upon approval, TF Purifiner, Inc. (USA)
will draw up a four year contract for Singapore.
The following are the markets:
1) Marine
2) Industrial - Hydraulic - Fork Lifts - Cranes, etc.
3) Construction Equipment
4) Trucks
5) Buses
6) Automobiles
The above will exclude Military and Original Equipment Manufacturers (OEM's)
such as engine companies, trucking, buses, automobiles, etc. that is made in
Singapore. If OEM are obtained and serviced by distributor than TF Purifiner,
Inc. will pay a reasonable commission to the Distributor. In addition, TF
Purifiner, Inc. cannot control any manufacturer that has TF Purifiner units
installed outside of Singapore and exported to Singapore.
<PAGE>
For the above, the Distributor will purchase (on February 6, 1996) Twelve
Thousand Five Hundred dollars U.S. of TF Purifiner products with partial payment
of $1,270.00 made by credit card to TF Purifiner upon placing of order, with the
balance of $11,230.00 due within two weeks of today's date or no later than
February 20, 1996. This order for $12,500.00 will be for the first three months
of the contract. On May 6, 1996, August 6, 1996 and November 6, 1996, additional
orders of not less than $12,500 will be placed and paid for via wire transfer
for a total of $50,000.00 for the year. This agreement will become null and void
should money for each shipment not be wire transferred into the account of TF
Purifiner, Inc. by the following dates: May 6, 1996, August 6, 1996 and November
6, 1996. Banking information for wire transfer is as follows: [ ]
Should any dispute arise as to contents of contract, it shall be construed by
Florida Law USA. The dispute shall be by arbitration by the American Arbitration
Board of not less than three arbitrators. The decision will be final and all
legal costs will be paid by the loser of said arbitration.
Accepted and Agreed by:
- ------------------------------ ------------------------------
Richard C. Ford, President Mr. Fernando A.H. Ng for
TF Purifiner, Inc. Kian Seng Hardware Trading Ptd.
Ltd.
- ------------------------------ ------------------------------
Date Date
2
EXCLUSIVE AGREEMENT FOR DISTRIBUTORSHIP
BETWEEN
KIAN SENG HARDWARE TRADING PTE. LTD.
AND THE COMPANY
DATED FEBRUARY 6, 1996
(MALAYSIA)
February 6, 1996
Mr. Fernando A.H. Ng EXCLUSIVE AGREEMENT
Kian Seng Hardware Trading Pte. Ltd. FOR DISTRIBUTORSHIP IN
166/168, Simms Ave, MALAYSIA DATED
Singapore 387487 FEBRUARY 6, 1996
Dear Mr. Ng:
This Agreement is made between Kian Seng Hardware Trading Ptd. Ltd. and TF
Purifiner, Inc. It is agreed that TF Purifiner, Inc. U.S.A. will only appoint
the above company as its exclusive Distributor of the Purifiner Products for
Malaysia for a period of one year. Upon return to Malaysia, Kian Seng Hardware
Trading Ptd. Ltd. will register the name "TF Purifiner (Malaysia) Sdn. Bhd.".
Should the above parties decide to terminate this agreement, the name of TF
Purifiner (Malaysia) Sdn. Bhd. will be assigned to TF Purifiner, Inc. (USA) or
its designee. In January of 1997, Kian Seng Hardware Trading Ptd. Ltd. will
submit a marketing plan for the markets it wishes to cover with minimum
quantities for each of the markets. This marketing plan is to be approved by TF
Purifiner, Inc. (USA) at which time, upon approval, TF Purifiner, Inc. (USA)
will draw up a four year contract for Malaysia.
The following are the markets:
1) Marine
2) Industrial - Hydraulic - Fork Lifts - Cranes, etc.
3) Construction Equipment
4) Trucks
5) Buses
6) Automobiles
The above will exclude Military and Original Equipment Manufacturers (OEM's)
such as engine companies, trucking, buses, automobiles, etc. that is made in
Malaysia. If OEM are obtained and serviced by distributor than TF Purifiner,
Inc. will pay a reasonable commission to the Distributor. In addition, TF
Purifiner, Inc. cannot control any manufacturer that has TF Purifiner units
installed outside of Malaysia and exported to Malaysia.
For the above, the Distributor will purchase (on February 6, 1996) twenty-five
thousand dollars U.S. of TF Purifiner products to be paid in full within two
weeks of today's date or no later than February 20, 1996. This order for
$25,000.00 will be for the first three months of the contract. On May 6, 1996,
August 6, 1996 and November 6, 1996, additional orders of not less than $25,000
will be placed and paid for via wire transfer for a total of $100,000.00 for the
year.
<PAGE>
This Agreement will become null and void should money for each shipment not be
wire transferred into the account of TF Purifiner, Inc. by the following dates:
May 6, 1996, August 6, 1996 and November 6. 1996. Banking information for wire
transfer is as follows: [ ]
Should any dispute arise as to contents of contract, it shall be construed by
Florida Law USA. The dispute shall be by arbitration by the American Arbitration
Board of not less than three arbitrators. The decision will be final and all
legal costs will be paid by the loser of said arbitration.
Accepted and Agreed by:
- ------------------------------ ------------------------------
Richard C. Ford, President Mr. Fernando A.H. Ng for
TF Purifiner, Inc. Kian Seng Hardware Trading Ptd.
Ltd.
- ------------------------------ ------------------------------
Date Date
EXCLUSIVE AGREEMENT FOR DISTRIBUTORSHIP
BETWEEN
N. HAVEN GROUP INTERNATIONAL CO. LTD.
AND THE COMPANY
DATED NOVEMBER 17, 1995
(THAILAND)
Friday, November 17, 1995
Mr. Pongsak Pongtaveevirat
Mr. Kovit Kovitlavakul
Mr. Chaiyakorn Pleomcharoenkit EXCLUSIVE AGREEMENT
N. Haven Group International Co. Ltd. FOR DISTRIBUTORSHIP IN
48/3 Sirinthorn Road IN THAILAND DATED
Bangplad NOVEMBER 17, 1995
Bangkok 10700, Thailand
Dear Sirs:
This Agreement is made between N. Haven Group International Co. Ltd. and TF
Purifiner, Inc. It is agreed that TF Purifiner, Inc. U.S.A. will only appoint
the above company as its exclusive Distributor of the Purifiner Products for
Thailand for a period of one year. Upon return to Thailand, N. Haven Group
International Co. Ltd. will register the name "TF Purifiner (Thailand) Company,
Limited". In October of 1996, N. Haven Group International Co. Ltd. will submit
a marketing plan for the markets it wishes to cover with minimum quantities for
each of the markets.
The following are the markets:
1) Marine
2) Industrial - Hydraulic - Fork Lifts - Cranes, etc.
3) Construction Equipment
4) Trucks
5) Buses
6) Automobiles
The above will exclude Military and Original Equipment Manufacturers (OEM's)
such as engine companies, trucking, buses, automobiles, etc. that is made in
Thailand. If OEM are obtained and serviced by distributor than TF Purifiner,
Inc. will pay a reasonable commission to the Distributor. In addition, TF
Purifiner, Inc. cannot control any manufacturer that has TF Purifiner units
installed outside of Thailand and exported to Thailand.
For the above, the Distributor will purchase (on November 17, 1995) twenty-five
thousand dollars U.S. of TF Purifiner products with payment made by check to TF
Purifiner upon placing of order which will be for the first six months of the
contract. On May 17, 1996 and August 17, 1996, an additional purchase of not
<PAGE>
less than $25,000 and $30,000, respectively, will be ordered and paid for via
wire transfer.
This agreement will become null and void should money for each shipment not be
wire transferred into the account of TF Purifiner, Inc. by the following dates:
November 17, 1995, May 17, 1996 and August 17, 1996. Banking information for
wire transfer is as follows: [ ]
If, within three months of the date of this letter, the above company does not
wish to proceed. TF Purifiner will refund the sum of approximately eleven
thousand dollars ($11,000.00 USD). This amount of $11,000.00 is the difference
between $25'000.00 and the amount of the order given on November 17, 1995.
Distributor shall notify TF Purifiner Inc. via facsimile should they wish to
discontinue this agreement. Upon discontinuance of this agreement, the name of
TF Purifiner (Thailand) Company Limited will be assigned to TF Purifiner, Inc.
(USA) or its designee.
Should any dispute arise as to contents of contract, it shall be construed by
Florida Law USA. The dispute shall be by arbitration by the American Arbitration
Board of not less than three arbitrators. The decision will be final and all
legal costs will be paid by the loser of said arbitration.
Accepted and Agreed by:
- ------------------------------ ------------------------------
Richard C. Ford, President Mr. Pongsak Pongtaveevirat for
TF Purifiner, Inc. N. Haven Group International
Co. Ltd.
- ------------------------------ ------------------------------
Date Date
- ------------------------------ ------------------------------
Mr. Kovit Kovitlavakul for Mr. Chaiyakorn Pleomcharoenkit
N. Haven Group International for N. Haven Group International
Co. Ltd. Co. Ltd.
- ------------------------------ ------------------------------
Date Date
EXCLUSIVE AGREEMENT FOR DISTRIBUTORSHIP
BETWEEN
PT. HISTA BAYHU
AND THE COMPANY
DATED FEBRUARY 5, 1996
(INDONESIA)
February 5, 1996
Mr. K.W. Husen EXCLUSIVE AGREEMENT
President FOR DISTRIBUTORSHIP IN
PT. Hista Bayhu IN INDONESIA DATED
JI. Raya Pesanggrahan No. 45 FEBRUARY 5, 1996
Jakarta 11610, Indonesia
Dear Mr. Husen:
This Agreement is made between PT. Hista Bayhu and TF Purifiner, Inc. It is
agreed that TF Purifiner, Inc. U.S.A. will only appoint the above company as its
exclusive Distributor of the Purifiner Products for Indonesia for a period of
one year. Upon return to Indonesia, PT. Hista Bayhu will register the name "TF
Purifiner (Indonesia) Company, Limited". Should the above parties decide to
terminate this agreement, the name of TF Purifiner (Indonesia) Company Limited
will be assigned to TF Purifiner, Inc. (USA) or its designee. In January of
1997, PT. Hista Bayhu will submit a marketing plan for the markets it wishes to
cover with minimum quantities for each of the markets. This marketing plan is to
be approved by TF Purifiner, Inc. (USA) at which time, upon approval, TF
Purifiner, Inc. (USA) will draw up a four year contract for Indonesia.
The following are the markets:
1) Marine
2) Industrial - Hydraulic - Fork Lifts - Cranes, etc.
3) Construction Equipment
4) Trucks
5) Buses
6) Automobiles
The above will exclude Military and Original Equipment Manufacturers (OEM's)
such as engine companies, trucking, buses, automobiles, etc. that is made in
Indonesia. If OEM are obtained and serviced by distributor than TF Purifiner,
Inc. will pay a reasonable commission to the Distributor. In addition, TF
Purifiner, Inc. cannot control any manufacturer that has TF Purifiner units
installed outside of Indonesia and exported to Indonesia.
For the above, the Distributor will purchase (on February 5, 1996) twenty-five
thousand dollars U.S. of TF Purifiner products with partial payment of
<PAGE>
$10,000.00 made by money order to TF Purifiner upon placing of order, with the
balance of $15,000.00 due by March 5, 1996. This order for $25,000.00 will be
for the first three months of the contract. On May 5, 1996, August 5, 1996 and
November 5, 1996, additional orders of not less than $25,000 will be placed and
paid for via wire transfer for a total of $100,000.00 for the year.
This agreement will become null and void should money for each shipment not be
wire transferred into the account of TF Purifiner, Inc. by the following dates:
May 5, 1996, August 5, 1996 and November 5, 1996. Banking information for wire
transfer is as follows: [ ]
Should any dispute arise as to contents of contract, it shall be construed by
Florida Law USA. The dispute shall be by arbitration by the American Arbitration
Board of not less than three arbitrators. The decision will be final and all
legal costs will be paid by the loser of said arbitration.
Accepted and Agreed by:
- ------------------------------ ------------------------------
Richard C. Ford, President Mr. K.W. Husen for
TF Purifiner, Inc. PT. Hista Bayhu
- ------------------------------ ------------------------------
Date Date
MASTER DISTRIBUTOR AGREEMENT
----------------------------
This Agreement, made this 11th day of January 1995, between TF Purifiner, Inc.
("TF"), as exclusive worldwide distributor for TF Systems, Inc. (the
"Manufacturer"), both Delaware Corporations, having their principal offices at
3020 High Ridge Road, Suite 100, Boynton Beach, Florida 33426, Trimex Korea, a
South Korean Corporation, located a 7th Floor, Samwon Bldg. 1329-8 Socho-Dong,
Socho-Ku, Seoul, Korea and Trimex Trading Corporation (the "Distributor"),
located at 18301 Von Karman Avenue, Suite 860 Irvine, California 92715.
I. WHEREAS:
A. The Manufacturer and TF are in the business of designing, dev-
eloping manufacturing and marketing bypass oil refiners and
filters under the trademark "PURIFINER(TM)" hereinafter
referred to as the "Product".
B. TF is the exclusive licensee of Patents No. 4,189,351,
4,227,969, 4,289,583, 4,943,352 and pending patent applica-
tions;
C. TF has the right to grant to the Distributor the right to pur-
chase and sell the Product in the Territory (as defined
herein);
D. The Distributor warrants that it is now solvent and capable of
acting as a distributor within the Territory; and
E. The Distributor is desirous of purchasing and selling the
Product in the Territory, and TF is desirous of granting the
Distributor, the right to do so upon the following terms and
conditions; in consideration of the mutual promises and
understandings set forth below, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
II. APPOINTMENT
A. TF appoints the Distributor as the master exclusive distributor
of the Product within the Territory and will sell the Product
to the Distributor, and the Distributor agrees to purchase such
Product from TF and distribute the Product within the Territory
under the terms of this Agreement. Distributor shall not sell
the Product in any country other than its Territory.
B. TF shall not appoint another distributor of the Product in the
Territory. However, TF is not accountable for sales of the
Product or similar items by unauthorized accounts within or
outside of the Territory, or as a part
<PAGE>
of a vehicle, boat, engine or other installation equipped with
the Product as O.E.M. and imported into the Territory.
C. The Territory shall be defined as South Korea.
The Distributor shall not solicit sales or sell the Product
outside the Territory without first getting written permission
from TF.
D. Original Equipment Manufacturer Accounts:
TF reserves the right to sell the product directly to any
manufacturer of engines, vehicles, and other machinery as
original equipment (hereinafter referred to as "O.E.M"),
outside of South Korea.
E. South Korean OEM Accounts:
It is agreed that Halla, KIA and Hando accounts ("Existing
Accounts"), which have been previously contacted by TF, and all
other South Korean OEM accounts will be jointly handled and
negotiated by TF and Distributor. Sales commissions for all OEM
accounts where ( l ) the OEM decides to manufacture the Product
and pay TF a per unit fee and/or (2) purchase the unit directly
from TF, will result in a sales commission to the Distributor
of between 5% to 10%, depending on effort put forth by the
Distributor, with the exact percentage to be negotiated prior
to the signing of any OEM agreements. For example. if TF
receives an average price of $ 100 per unit from the OEM then
the Distributor will receive $5.00 to $10.00 per unit and TF
will be responsible for any applicable royalty payments to Mr.
Malt.
In the event that the Manufacturer, TF and Distributor decide
to sell the exclusive manufacturing rights for the Product to
the Existing Accounts, TF agrees to pay 25% of the total
payment received from the Existing Accounts to the Distributor
as a commission upon collection of such amount by TF. If the
exclusive manufacturing rights are sold to other OEM accounts
the commission earned by the Distributor will be negotiated
prior to the signing of any such OEM agreements. For example,
if TF sells the exclusive manufacturing rights to KIA for five
years for $5,000,000, then the Distributor will receive 25% or
$1,250,000 from TF as a sales commission.
Any sales commissions to be paid to the Distributor will be
paid within 10 working days after TF receives such sales or
license proceeds from the OEM accounts. Payments of sales
commission should be by wire transfer to Trimex Trading
Corporation's bank account at [ ].
2
<PAGE>
III. TERM OF AGREEMENT
This Agreement is for six years providing that the Distributor abides
by all provisions of this Agreement, including meeting minimum
quarterly purchases specified in Article IV. Either party may terminate
this Agreement at the end of its six year term by advising the other
party three (3) months in advance. If the Agreement is not so
terminated, it shall be automatically renewed for another six year
period with minimum purchase quantities to be not less than 7,200 TF
Purifiner units each year plus sufficient original TF replacement
filters each year. The Distributor has the right to appoint
sub-distributors within the Territory. The Distributor agrees and
accepts that any contract made or entered into with sub- distributors
shall not exceed the term of this Agreement. In the event that each
year's minimum annual purchases is not met, the Distributor will be
granted a non-exclusive option to sell the Product and will purchase
the Product from TF at the current International Price Schedule without
any discount until another exclusive distributor is appointed, at which
time the prior distributor would purchase Product from the new
distributor at the new distributors selling price.
IV. MINIMUM ANNUAL PURCHASES
All minimum annual purchase requirements set forth in this Agreement
shall exclude all TF Purifiner units purchased or manufactured by all
original equipment manufacturers in the Territory.
The parties agree that the Distributor shall purchase from TF not less
than [ ] TF Purifiner units in the first year, [ ] TF Purifiner
units in the second year, and [ ] TF Purifiner units in the third
year, plus sufficient original TF replacement filters to meet market
demands on a quarterly basis. The Distributor will notify TF at least
45 days prior to the quarterly purchase deadline of its actual purchase
requirements for the upcoming quarter, specifying the actual sizes and
voltage requirements. The minimum quarterly purchase requirements will
be between 15% to 50% of the annual minimum requirements and in no
event will the sum of the four quarterly purchase requirements, to be
purchased on February l, May l, August l and November l of each year,
be less than the annual minimum purchase requirement of this Agreement.
The Distributor also agrees to provide TF with purchase forecasts by
quarter for the upcoming calendar year at least 90 days prior to year
end.
V. REPURCHASE OPTION
Upon termination or cancellation of this Agreement, TF shall have the
option to repurchase from the Distributor any or all of the Product
then remaining in Distributor's inventory from TF at TF's original
sales price less freight, duties and other charges plus a restocking
charge of 10%.
3
<PAGE>
VI. DISCONTINUANCE OF USE OF TRADEMARK
Upon termination or cancellation of this Agreement, the Distributor
shall (a) discontinue any and all use of the trademarks and trade names
of TF, including such use in advertising, (b) remove and return to TF,
or in the alternative, remove and destroy, any and all signs
designating Distributor as a distributor for the Product or which
include the trademark or trade name of TF and (c) assign to TF all
rights, title and interest to the use of the local Distributor's name
and local Product names used by Distributor.
VII. TERMINATION
A. If either party breaches materially any of the fundamental
terms of this Agreement, the other party has the right to
terminate this Agreement by written notice unless the party
committing such breach shall have corrected such breach within
thirty (30) days (or such longer time as may be agreed in
writing between the parties) after receipt of the above written
notification. The written notice must specify the breach and be
delivered by certified mail.
B. This Agreement shall be terminated immediately by its own force
without notice from either party in the following events: (a)
An assignment of all or a major part of the assets of
Distributor for the benefit of creditors; (b) Insolvency of the
Distributor or the placing in liquidation (voluntarily or
compulsorily) or being subject to the appointment of an
official manager or receiver; (c) The discontinuance of
Distributor's purchase of Products for sale in the Territory
for a period of at least three (3) months, of minimum purchase
requirement specified in IV; and (d) Failure in performing any
of Distributor's obligations under this Agreement for a period
of more than six (6) months by reason of directives of any
government.
Distributor shall immediately advise TF in writing of the
occurrence of any events specified in this article.
VIII. RELATIONSHIP OF THE PARTIES
A. The relationship of the Distributor to TF shall be that of an
independent contractor. This Agreement does not in any way
create the relationship of joint venture partnership,
franchiser and franchisee or Principal and agent between TF and
the Distributor, and it is not contemplated that TF will render
significant assistance or guidance to the Distributor in the
management, promotion or operation of the Distributor's
business.
4
<PAGE>
B. Distributor will use its best reasonable efforts to market the
Products in the Territory. The Distributor's activities in
marketing the Products to its customers will include, but not
be limited to: build sales volume to Existing Accounts,
identify and develop new accounts and sub-distributors,
diligently promote other new products and/or services offered
by TF, provide all services necessary for the support of
customers in their channel of distribution, effectively
communicate all relevant information on the market, the
competition, customers, etc., that may have an impact on TF's
business, including, but not limited to, normal quarterly
reporting of statistical information of sales, units, type of
customer, applications and system ideas.
C. At the expiration of this Agreement, unless renewed, no further
relationship between Distributor and TF will exist, and no
further commissions whatsoever are due to Distributor for any
sales made by TF to any other entity, whether Distributor dealt
with the entity or not, after expiration or termination of this
Agreement, except such amounts as have accrued and are due and
owing to the Distributor at the date of termination.
D. Distributor agrees that it will:
1. Not act in any way that would give the impression that
it has the power or authority to bind TF in any respect
whatsoever.
2. Not make any representation (oral or written) which
varies from the specifications. operating instructions
or representations given to Distributor or made by TF
with respect to the Products, including warranties.
3. Maintain a place of business in the Territory and employ
sufficient personnel to carry out Distributor's
obligations under this Agreement and will commit to
expend a minimum of $1,000,000 (U.S.) to launch the
distribution of the Products in the Territory.
4. Comply with South Korean and other applicable
international, federal, province, state and local laws,
rules, regulations, ordinances and orders, in the
solicitation of orders for the Products, and in its
other activities.
5. Ensure that that each installer chosen by the
Distributor will have received adequate and proper
training and carry a "errors and omissions" policy in
accordance with the laws of the Territory which
insurance will cover any liability due to improper
installation.
5
<PAGE>
6. Use TF's trademarks (including "Purifiner"), trade
names, logo-type and service marks only in accordance
with TF's guidelines established for the use of such
proprietary materials.
7. Maintain the confidentiality of any of TF's and Manu-
facturer's trade secrets and proprietary information
disclosed to Distributor.
8. Forward to TF a copy of any complaint received by Dis-
tributor about Distributor, TF, Manufacturer, or the
Products.
9. Distributor acknowledges that TF has the right at any
time to change the design of, discontinue, or limit the
manufacture or provision of any of the Products, to
change the price thereof, or to withdraw from the market
entirely upon giving written notice to Distributor
within 90 days of such actions.
10. If the Distributor sells controlling interest of the
distributorship (defined as greater than 50% of the
voting shares), it must first be approved by TF.
11. Assign to TF any improvements to all TF Products as they
are developed by the Distributor or any affiliated
entity or person.
12. The Distributor recognizes the importance of TF's
technologies and will take all necessary steps to
protect TF's proprietary rights in the Territory.
13. Will purchase all necessary sales and training aids, in-
cluding demonstration unit at TF's cost.
E. TF agrees that it will:
1. Use its' best efforts to deliver each order to the
freight forwarder in the least possible time, making
partial deliveries if necessary. TF will not be liable
due To any "force majeure" as stipulated in section
XIII.
2. Provide the Distributor with all of TF's existing and to
be developed sales and promotional materials, training
manuals, installation guidelines, etc. at TF's cost.
3. Make available the necessary personnel to provide train-
ing in sales and installation of its Product at TF's
Florida facility. Any out-of-pocket expenses, except for
one round trip airfare to South
6
<PAGE>
Korea, incurred by TF for training performed at other
locations requested by the Distributor will be paid for
by the Distributor, including hotel, meals, local
transportation, etc.
4. TF understands the importance of fast patent approval
from the South Korean Department of Patent Registry and
TF will do its best to support such prompt approval.
5. TF will authorize Distributor to take specific actions
against known patent infringers in order to give
Distributor the ability to stop any illegal activities
as required.
6. TF will apply for TF existing or new trademark to appro-
priate South Korean Government Agency at Distributor
expense.
IX. PRICE AND CREDIT TERMS
A. The Distributor shall purchase the initial purchase of $100,000
of Product from TF at the Price Schedule attached hereto as
Exhibit A. A 5% discount to the attached Price Schedule will
apply to the next $150,000 of Product purchased and a 10%
discount will be applied for all purchases thereafter. The
Price Schedule may be changed from time to time by TF upon
giving written notice to Distributor within 90 days of such
action.
B. Within ten days of the signing of this Agreement, the Distribu-
tor shall pay for 50% of the initial $100,000 (U.S.) order of
the Product by means of wire transfer for $50,000.00 (U.S.) to
TF at [ ]. The remaining balance for the initial order
($50,000.00 U.S.) is payable by an irrevocable confirmed sight
letter of credit with a corresponding bank of Barnett Bank,
opened at the time of the placement of the initial order;
issued in the name of TF and payable on sight upon the delivery
of the Products to the freight carrier for shipment, and TF may
draw upon Distributor's Letter of Credit for this 50% upon
presentation of: (a) a signed bill of lading, and ~b) a net
invoice of shipment. (Letter of Credit to be made payable to [
]). The initial order will be placed within 30 days of this
Agreement and will include sufficient demonstration units,
Batch Refiner units and a mix of other units and filters, as
reasonably determined by Distributor. All fees related to
Letter of Credit will be paid by Distributor.
For all subsequent orders, and depending on the performance of
this Agreement, every order will be payable with an irrevocable
and confirmed on sight Letter of Credit with a corresponding
bank of Barnett Bank for the total amount of each order to be
7
<PAGE>
obtained at the time of the order. TF will be able to draw upon
such Letter of Credit upon presentation to its bank of the
signed billing of lading evidencing shipment of such order and
a net invoice of shipment. All expenses related to the Letters
of Credit will be borne by the Distributor.
C. The Price Schedule does not include applicable taxes, duties,
licenses, excises and tariffs and any other applicable charges
all of which are the responsibility of the Distributor.
D. All shipments will be made F.O.B. TF's Florida shipping dock.
Insurance coverage on all shipments is the responsibility of
the Distributor.
X. ADVERTISING AND PROMOTION
A. Distributor agrees to spend at least 5% of gross revenue, per
annum on advertising and sales assistance.
B. The Distributor shall not manufacture and/or cause to be
manufactured and/or purchase and/or sell during the term of
this Agreement, and for a period of one (1) year following
termination or cancellation of this Agreement products which in
the judgment of TF are similar in performance to or competitive
with TF's Products from any source other than TF.
C. TF agrees during the term of the Agreement to permit the Dis-
tributor to use the TF's trademarks and trade names in the
Distributor's sales program for the sole purpose of advertising
and promoting the sale of the Product. Distributor agrees not
to use or cause the use of TF's trademarks or trade names in
any manner which shall directly or indirectly tend to lessen
their value. Further, Distributor shall not use TF's trademark
or trade names in the name of the Distributor's business or in
any manner likely to convey to the public the idea that it is
acting or selling goods on behalf of TF unless approved by TF.
D. Any printed advertising and promotional material created by the
Distributor referring to the Product shall be sent to TF prior
to any use, including the English translation, and TF may
disapprove within ten (10) days by fax, the use of any material
which, in TF's opinion, misrepresents the Product or which
might mislead customers.
E. Distributor agrees to conduct its promotion, advertising,
sales, pricing and business generally at all time in strict
compliance with all applicable international, federal, state
and local laws and regulations.
8
<PAGE>
XI. WARRANTIES AND DISCLAIMERS
Attached to this Agreement is Exhibit B which is a copy of the limited
warranty on the Product provided by the Manufacturer and TF.
Distributor is not authorized on behalf of the Manufacturer or TF to
expand or attempt to expand such warranty or the liabilities for any
breach of that warranty. If defective units are returned to
Distributor, the Distributor will report such to TF and will hold such
units until
TF notifies Distributor as to where to ship or dispose of such units at
TF's expense. TF will replace all defective units as part of next
quarterly purchase shipment to Distributor.
XIII. FORCE MAJEURE
Neither party shall be liable for failure to fulfill any obligation
under this Agreement due to fire, tempest, flood, act of God, war,
civil revolution or disturbance, riot, blockade, governmental
restraint, industrial strike or lock-out, or any other similar causes
whatsoever beyond the party's control.
XIII. MANUFACTURER AND TF HELD HARMLESS
Distributor shall indemnify and hold the Manufacturer and TF harmless
from all liability for damages and/or costs (including attorney fees)
caused by the Distributor's violation of this Agreement or any
international, federal, state or local laws or regulations.
XIV. ENTIRE AGREEMENT AND NOTICE
A. This Agreement is made in English and is the entire Agreement
between the parties and supersedes all prior agreements if any.
Any waiver amendment, modification or renewal of this
Agreement. to be effective must be in writing and signed by the
parties. There are no oral or implied agreements and no oral or
implied warranties between the parties.
If any provision of this Agreement shall be held invalid, the
remaining provisions shall continue to be binding upon the
parties.
B. The waiver of any one default of this Agreement shall not waive
subsequent defaults.
C. Any notices required by this Agreement shall be sent to TF and
Trimex Trading Corporation at the addresses noted herein.
9
<PAGE>
XV. ABITRATION
Any controversy or claim arising out of or relating to this Agreement
or the breach thereof, shall be settled according to the Florida Law in
the form of legal arbitration. The arbitration shall take place in Palm
Beach County and the number of arbitrators shall be three. Judgment
upon the arbitration award may be entered in any court having
jurisdiction thereof.
- --------------------------------- ----------------------------------
TF PURIFINER, INC. DATE
RICHARD C. FORD, PRESIDENT
- --------------------------------- ----------------------------------
TRIMEX TRADING CORPORATION DATE
IN KIM, PRESIDENT
- --------------------------------- ----------------------------------
TRIMEX KOREA DATE
BYUNG SOO PARK, PRESIDENT
10
<PAGE>
First Amendment to
Master Distributor Agreement
This first amendment to TF Purifiner, Inc., Trimex Korea and Trimex Trading
Corporation Master Distributor Agreement is as follows:
1. All references to minimum purchase requirements shall be amended as
follows:
a) 1996 minimum purchase requirements shall be [ ] units plus a suffic-
ient number of original replacement Purifiner filters, which shall be
ordered by November 1996.
b) Subsequent quarterly minimum purchase amounts (yearly amounts in brac-
kets) shall be as follows:
1. 1997 ([ ] units/1997) - [ ] units plus sufficient
replacement Filters ("Filters")
2. 1998 ([ ] units/1998) - [ ] units plus Filters
3. 1999 ([ ] units/1999) - [ ] units plus Filters
4. 2000 ([ ] units/2000) - [ ] units plus Filters
5. 2001 ([ ] units/2001) - [ ] units plus Filters
c) All references to purchase price and payment terms will be amended as
follows:
1) Purchase price will be due TF Purifiner upon placement of order by
wire transfer.
2) Purchase price will be as shown in the attached Appendix A for all
orders placed prior to the resolution of the patent issue
discussed below. Adjustments may be made to such prices based upon
increases in the international price sheet based upon same
percentage off international prices as Appendix A. The purchase
price subsequent to patent resolution shall be negotiated by
parties within 30 days subsequent to such resolution.
1
<PAGE>
First Amendment to
Master Distributor Agreement
d) TF Purifiner will continue to use its best efforts to have Robert
Malt assigned his rights to the Korean patent number 88-7256 from PDC
and CNP. TF Purifiner represents to Trimex that to the best of its
knowledge Malt is the rightful owner of such patent and any rights
obtained by CNP from PDC were fraudulently obtained. If such patent
rights are not obtained by Malt by December 31, 1996 then Distributor
may cancel agreement.
- -------------------------------- ----------------------------------
TF Purifiner, Inc. Date
Richard C. Ford, President
- -------------------------------- ----------------------------------
Trimex Trading Corporation Date
In Kim, President
- -------------------------------- ----------------------------------
Trimex Korea Date
Byung Soo Park, President
PROMISSORY NOTE
For value received, the undersigned promise to pay to the order of Bassett
Boat Company of Florida, the sum of Two Hundred Thousand Dollars ($200,000.00)
($100,000 from May 18, 1995 and $100,000.00 from June 13, 1995), together with
interest thereon at the rate of 10.00% per annum on the unpaid balance.
Said principal and interest shall be payable in the manner following:
Payment of principal and interest due in full on or before January 15,
1997.
The undersigned may prepay this note without penalty. In the event any
payment due hereunder is not paid when due, the entire balance shall be
immediately due upon demand of any holder. Upon default, the undersigned shall
pay all reasonable attorney fees and costs necessary for the collection of this
note.
This note is being executed to replace those existing notes dated May 18,
1995 and June 13, 1995. Interest will be accrued from the date of the original
notes.
The borrower hereby provides Bassett Boat Company of Florida, as
collateral, a first priority interest, after amounts due Robert Malt (5%) and
contingent legal fees to Caruso, Burlington and Bart Fisher, in the proceeds of
the final judgment for delay damages awarded to TF Systems, Inc. in its case No.
CL9012772AE, as plaintiff, against Fu Sheng Industrial Co., Ltd et al, as
defendants, on December 22, 1994. Such collateral will exclude the supersedeas
bond proceeds currently held by the Court for the benefit of TF Systems, Inc.
and Robert Malt. Additionally, Bassett Boat Company of Florida is hereby granted
additional collateral in the form of TF Purifiner's rights to receive dividend
payments from TF Purifiner (Europe) Ltd. pursuant to the Joint Venture Agreement
between TF Purifiner, Inc., TF Systems, Inc., Centrax Limited, The Barr Family
and A. N. Davies, dated December 18, 1995. These dividend payments will be
distributed by TF Purifiner, Inc. on a pro rata basis to certain parties,
including Bassett Boat Company of Florida.
This note is also the person obligation of Richard C. Ford.
Signed under seal this 21st day of December 1995:
/s/Richard C. Ford /s/Richard C. Ford /s/Richard C. Ford
- --------------------- --------------------- ---------------------
Richard C. Ford TF Systems, Inc. TF Purifiner, Inc.
Individual Richard C. Ford, Richard C. Ford,
President President
