U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
(Mark one)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
For the transition period from to
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Commission file number 0-29192
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T/F Purifiner, Inc.
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(Name of small business issuer in its charter)
Delaware 14-1708544
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3020 High Ridge Road, Suite 100
Boynton Beach, Florida 33426
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) - 547-9499
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of class)
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ x ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,327,230 .
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Common stock, par value $.001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on February 28, 1997. Based on the
closing bid price of the Common Stock on the National Association of Security
Dealers, Inc., OTC Bulletin Board as reported on February 28, 1997 ($9.25), the
aggregate market value of the 1,536,072 shares of the Common Stock held by the
persons other than officers, directors and persons known to the Registrant to be
the beneficial owner (as that term is defined under the rules of the Securities
and Exchange Commission) of more than five percent of the Common Stock on that
date was approximately $14,208,666. By the foregoing statements, the Registrant
does not intend to imply that any of these officers, directors or beneficial
owners are affiliates of the Registrant or that the aggregate market value, as
computed pursuant to rules of the Securities and Exchange Commission, is in any
way indicative of the amount which could be obtained for such shares of Common
Stock.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: February 28, 1997: 5,143,455.
This report contains a total of 59 pages.
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PART I
All discussions herein give effect to a 57:1 forward stock split effected on
July 1, 1996 and a 2.5:1 forward stock split for all stockholders of record as
of January 1, 1997, except as otherwise specifically set forth. Unless the
context otherwise implies, the term "Company" refers to T/F Purifiner, Inc. and
T/F Systems, Inc., as described more fully below.
ITEM 1. DESCRIPTION OF BUSINESS
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Other than historical and factual statements, the matters and items discussed in
this Annual Report on Form 10K-SB are forward-looking statements that involve
risks and uncertainties. Actual results of the Company may differ materially
from the results discussed in the forward-looking statements. Certain factors
that could contribute to such differences are discussed with the forward-looking
statements throughout this report.
Introduction
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The Company owns the rights to manufacture, market and distribute
worldwide the Purifiner(R), a bypass oil purification system for use with
substantially all internal combustion engines, generators and other types of
equipment that use lubricating oil. The Purifiner cleans oil by continually
removing solid and liquid contaminants from the oil through a sophisticated and
unique filtration and evaporation process. The Purifiner has been used
successfully to substantially extend oil-drain intervals and to extend the time
between engine overhauls to up to three times longer than traditional intervals.
The Company also manufactures (with one exception) and sells disposable
replacement filter elements ("Elements") for the Purifiner.
By keeping the oil continually clean, the Purifiner effectively extends
engine life and dramatically reduces new oil purchases as well as maintenance
time and the costs and environmental concerns involved in the storage and
disposal of waste oil. In addition, according to customer statements, extensive
testing done by Southwest Research Institute (an independent third party testing
laboratory) on an improved heavy duty engine oil that supports improved fuel
efficiency from the use of this new oil, and the growing industry recognition
that operating an engine with cleaner oil will reduce engine energy losses due
to friction, wear, and oil viscosity fluctuations, the Company believes that end
users will experience improved fuel economy.
Background and Formation of T/F Purifiner, Inc.
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The patents issued on the oil purification system that, after further
development, has evolved into the current Purifiner units, were issued in the
early 1980's. The owners of such patents attempted to market and sell the
original system under various other tradenames, but were not successful. The
factors to which that could be attributed, include (a) the failure of potential
customers to understand the importance or possibility of continually clean oil
and belief that extended drain interval could be practical; (b) lack of consumer
awareness of the importance of the environmental benefits inherent in the
Purifiner; (c) the absence of acceptance and endorsement by engine and vehicle
<PAGE>
manufacturers; (d) general disbelief that the product would perform as claimed
and could provide benefits in a cost-effective manner; (e) inadequate
capitalization, and (f) limited management experience.
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 Purifiner in several states
from Refineco Manufacturing Company, Inc. ("Refineco"), then located in Oakland
Park, Florida (Byron Lefebvre, currently an executive officer and a Director of
the Company, was then the President of Refineco). In 1988, Systems obtained an
option to acquire the exclusive manufacturing and marketing rights to the
Purifiner in the event Refineco, and subsequently, Purifiner Distribution
Corporation of Chicago, Illinois, were unable to meet their commitments to
supply Purifiners to Systems. As a result of a default - a failure of the
manufacturer to meet this supply commitment -- Systems obtained the
manufacturing and marketing rights to the Purifiner in 1990.
In February 1988, T/F Purifiner, Inc. was incorporated in Delaware under
the name "Econology Systems, Inc." On October 16, 1990, the 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 Purifiner 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 Purifiner were contested in
court as to other third parties who were also manufacturing and marketing a
device similar to the Purifiner and using the Purifiner 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 period of this litigation, T/F Purifiner continued to
market the Purifiner, but success was limited 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 of the Purifiner. On
December 31, 1995, in exchange for any claims T/F Purifiner had in the delay
damage award, T/F Purifiner purchased all operating assets and assumed all
operating liabilities of Systems, except for (a) any benefits and/or liabilities
related to a delay damage judgment awarded in December 1994 against the parties
discussed above, and (b) liabilities related to certain stockholder advances
made to Systems by Ford and Taylor. Accordingly, T/F Purifiner currently owns
all manufacturing rights previously owned by Systems.
Prior to Mr. Taylor's death in May 1993, Mr. Taylor and Mr. Ford had
each contributed equal amounts of working capital to the Company and each
owned 50% of the issued and outstanding capital stock. Following Mr.
Taylor's death, despite Mr. Ford's subsequent investments in the Company, the
business activities and growth of the Company have been hampered by
insufficient capital.
Strategy
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As the Purifiner had limited acceptance in the marketplace, the Company's
strategy has been to obtain product credibility by disproving the long-held
<PAGE>
conviction that oil must be changed regularly in accordance with manufacturers'
recommended guidelines. Gradually, the credibility of the Purifiner and the
concept of extended oil replacement intervals is becoming more readily accepted.
The Company believes that this acceptance is due to the third-party testing of
the product, awards and other recognition the Purifiner has received and
increasing awareness of consumers as well as vehicle and engine manufacturers
and oil companies of the cost benefits, the Company's warranties, as well as
environmental benefits of conserving oil and reducing the disposal of waste oil.
The Company has expanded its distribution network and direct-marketing
activities, primarily in the heavy-duty truck and industrial marketplaces, both
in the U.S. and internationally. To date the Company has approximately 75 U.S.
and Canadian distributors, and approximately 17 international distributors. The
Company also formed a foreign joint venture effective January 1, 1996, to market
the Purifiner through Europe, the Middle East, the former Soviet Union, Egypt,
and South Africa. (See "Distribution").
The Company plans on continuing to expand its distribution channels
worldwide, as well as the number of market segments on which it focuses. The
Company continues to (a) employ additional direct sales personnel to establish
more distributors, (b) market its products to certain major accounts in
conjunction with its distributors, (c) to consider additional joint ventures to
manufacture and/or market its products in various parts of the world and (d)
work to encourage original equipment manufacturers ("OEM's") to install the
Purifiner on their product at their factories (See "Marketing").
There can be no assurance that the Company will be able to successfully
implement its various strategies.
Products
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The Purifiner Oil Purification System dramatically extends the life of
lubricating oil in gas and diesel engines as well as hydraulic fluid used in
industrial machinery. The core product, the Purifiner, is easily attached to any
engine. In essence, it works like a dialysis machine that filters blood to rid
it of impurities, so it keeps the oil in engines continually clean. Whenever the
engine or machinery is operating, the Purifiner is extracting from the oil solid
particles down to one micron (1/49 millionth of an inch), as well as liquid
contaminants (water, fuel and antifreeze). As the Purifiner dramatically extends
the useful life of the oil, it also protects engines from the harmful wear
caused by contaminants in oil. As dirty, damaging oil does not come in contact
with the engine, the result is less down time for maintenance and longer engine
life. Further, not only are oil purchases drastically reduced, but as used
hydraulic fluids are recovered and no waste oil is generated, the need for and
cost of disposal decline dramatically. Thus, the Purifiner reduces maintenance
costs by decreasing oil consumption, engine wear, increased fuel economy, and
the necessity for overhauls and certain other types of general maintenance. All
these savings are achieved from utilizing the Purifiner which has a typical
payback period of less than one year. Accordingly, the Purifiner achieves great
savings and, therefore, increased profits for its end users.
<PAGE>
The Purifiner is manufactured in six different sizes ranging from 8 to 240
quarts; the size varies according to the oil sump capacity of the engine or
equipment on which it is placed. The Purifiner also can be used in multiples for
larger oil sumps. Qualified personnel can usually install the Purifiner on
engines and other equipment in 1 1/2 to 2 hours.
The Company also has developed and sells a Hydraulic Batch System ("HBS")
which is mounted on a hand cart for mobility. The HBS was developed to clean
55-gallon drums of used hydraulic oils, which substantially reduces 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 Purifiners, a preheater, a pump and other miscellaneous parts.
All Purifiners are compatible with virtually all standard and synthetic
oils on the market and they work with engines using gasoline, diesel, propane or
natural gas. Except for the HBS, the Purifiner cannot be used on engines without
a pressurized lubricating system, and neither can be used on an outboard boat
motor, which mixes oil with the fuel.
The Purifiner consists of a canister that can be mounted on the firewall,
fender well, frame of a vehicle or on other convenient locations, depending on
the particular application. The canister inlet is connected either to the
engine's oil-pressure sending unit or, for hydraulic applications, a pressure
line. The outlet is connected to the sump. The canister houses the Element and
an evaporation chamber 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 Purifiner. The oil passes slowly 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. A conventional paper oil filter will typically
remove particles down to 25-40 microns. 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 in
the Element also absorbs water, traps sulfur and neutralizes the acids which are
left in the oil by conventional paper filters. The slow rate at which the oil
passes through the Element helps ensure maximum contaminant retention.
After filtration the oil flows slowly over the diffuser plate located in
the dry-heated evaporation chamber where it is heated to a temperature of
approximately 200 degrees Fahrenheit (slightly higher on the HBS model) to
enable the removal of the liquid contaminants including water, fuel and coolant.
The stainless steel heating element is sealed in aluminum and, for safety is,
completely isolated from direct contact with the oil. The liquid contaminants
are evaporated and then vented out of the Purifiner 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.
<PAGE>
The Company also manufactures and distributes its replacement Elements for
the Purifiner. The Company generally recommends that the Element be replaced at
the engine manufacturer's recommended/approved periodic oil change interval
(with one exception for one model currently used primarily for gasoline
applications only, the Company generally recommends that the Element be replaced
every ten thousand miles or 250 hours when used for gasoline powered automobiles
and vans). The Company recently introduced a U.S. patent approved oil-flow meter
which enables the user to easily visually confirm that the oil is flowing
through the Purifiner at the proper rate. 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 change intervals mentioned above may vary. 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) costs
$15.00 or more for automobiles, $100 or more for heavy duty trucks and $200 or
more per engine for diesel powered marine engines. These costs vary depending
on, among other things, the type of engine and application, 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 $42.00 and the cost of an oil analysis purchased through
the Company currently costs approximately $8.50 per sample.
The Company has recently received patents from the United States Patent
Office and certain other countries for a new Element (the "TFP Filter Plus"), in
which pelletized chemicals are 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. This 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, which also replenishes
the consumed additives in older engines, has decreased. The TFP Filter Plus
compensates for this factor.
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 Purifiner has an oil sample valve to
expedite the taking of the oil sample. There are some local independent oil
testing laboratories and a number of larger users of the Purifiner have access
to other testing facilities. The Company also sells prepaid oil sample kits and
has arrangements with Ana Laboratories, Inc. in New Jersey and United Testing
Group, Inc., in Georgia, 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 $8.50. The cost of an oil sample may exceed
$8.50 in certain foreign countries.
<PAGE>
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
Purifiner more effective and stimulating recurring Element sales. 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 corrected before incurring
significant problems. To date, there have been no significant problems with
existing Purifiners or warranty claims, although there can be no assurances that
such a trend will continue. Due to the sometimes prohibitive cost of oil
analyses 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 poorer quality of oil and fuel used, not all performance
warranties for Purifiner products (whether offered by the Company or by the
Company's distributors) used outside the United States and Canada require oil
analyses at the OEM recommended/approved oil change intervals.
The Purifiner has no moving parts and consequently requires no significant
ongoing maintenance. The Purifiner 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
analyses dictate, and other standard preventive maintenance procedures are
performed, the Company believes that the Purifiner can perform as designed in
excess of ten years (10 years is the material and workmanship warranty period
for the Purifiner). Purifiners 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 or 1500
hours, depending on the particular application of the Purifiner. 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 Purifiner does not void their manufacturer's warranties. Most engine
manufacturers will accept oil analyses as alternatives 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 will the cost, environmental and other benefits obtained from
extended oil drain intervals.
<PAGE>
Marketing
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The Company' s products are expected to be marketed to numerous market
segments, including trucking, marine, agricultural, 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 lubrication. Currently, the primary focus is on the truck and bus
segments.
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, a program broadcast throughout the world, which
resulted in the addition of several new distributors and, more important, added
to the credibility of the Company's products. The Company was also featured on
CNN's EARTH MATTERS program in early 1996. In addition, numerous magazines,
including BUSINESS WEEK, DEFENSE NEWS, EQUIPMENT TODAY, MOTOR TREND, CAR AND
DRIVER and others have featured stories on the Company's products. 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 Purifiner 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 Purifiner and increase its distribution and sales. However, no
assurance can be given that such associations will be successful in promoting
the Company's products.
In April 1996, the Company made arrangements to help facilitate retrofit
sales of the product at the end user level. Leasing Services, Incorporated
("LSI") , with principal offices 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. Lease financing will enable the user to immediately benefit from
reduced maintenance expenses and to pay for the Purifiner 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
which explains LSI's services.
<PAGE>
With this arrangement, the Company and its distributor network are able to
provide to its customers a complete product package, that includes the
Purifiner, installation assistance and financing. Management believes the
ability to provide a turnkey program should provide the Company with a
competitive edge. However, no assurance can be given that this approach 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 has marketed
its products at various national trade shows, including 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, the 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, among them are
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 equipment. To date, the Company's customers have requested
that the Purifiners be installed at a Volvo USA factory (North Carolina) on a
very limited number of vehicles. Certain other manufacturers, including
Freightliner Corporation, Navistar and Ford Motor Company, have agreed to
install the Purifiner at their production facilities if their customers request
such installation.
The Purifiner is installed on a Navistar and Mobil Oil Company show truck,
which is on display at some of the major truck shows in the United States.
Distribution
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The Company currently distributes its products through several channels
under the Purifiner trademark. To date, purchasers of the Company's products
have included Coca-Cola Enterprises, Inc., Ford Motor Company, Sysco Foods,
Vulcan Chemicals, the U.S. Air Force and others.
While the Company currently does not have written distribution agreements
with all its domestic and Canadian distributors, the Company does require its
domestic and Canadian distributors to make an initial purchase of a minimum
dollar amount of the Company's Products. All distributors (domestic and foreign)
must pay in a timely fashion. With substantially all its international
distributors, the Company has entered into written distribution agreements which
typically memorialize the minimum dollar amount or units to be purchased and the
shipping terms.
<PAGE>
The Company has approximately 75 active warehouse distributors located in
the United States and Canada, primarily in the heavy-duty trucking industry. The
remaining are located primarily in South America, England (See "Distribution")
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 8 manufacturer's representatives, primarily in
the heavy-duty trucking industry, whose responsibilities include the
establishment and servicing of warehouse distributors and introducing Company's
Products to selected fleets in the representative's defined territories. The
Company pays its manufacturer's representatives negotiated commission rates,
depending on the level of services provided. The manufacturer's representative
contracts are typically for one year and can be canceled by either party on 30
to 120 days notice. The Company recently established representatives in defined
territories for certain other market segments, including marine, industrial and
recreational vehicle industries.
During 1996, nine customers accounted for approximately 56% of the
Company's net sales, of which TF Purifiner Ltd., the Company's joint venture,
accounted for approximately 19% 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 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., Albert N. Davies, of Devon, England (who is not an
affiliate of Centrax or the Barr Family) . Centrax, located in Devon, England,
had sales of approximately $70 million for 1996 from its worldwide activities in
power generation and specialist aero-engine components. The principal
stockholders of Centrax include Richard H. H. Barr, C. Robert Barr (See
"Management - Board of Advisors") 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
Purifiner 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
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Ltd. from a bank; (ii) from Centrax; or (iii) from the Barr Family, 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, and/or has established distributors 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 Purifiner in their
territories as they will face obstacles similar to those the Company and its
other distributors have encountered in introducing an innovative technology in
their territories. Further, there can be no assurance that Ltd's other 45% owner
(Centrax), which is responsible for the ultimate funding of Ltd., will continue
to fund Ltd.'s operations; discontinuing such funding could have a material
adverse effect on the Company's operations in this Territory. Ltd. has also
commenced or completed various Purifiner evaluation programs, including those on
a large United Kingdom ("U.K.") based fleet. This U.K. test was recommended by a
large international engine manufacturer and has been successfully completed.
Ltd. currently is negotiating for the rights to patents pending filed by
Centrax on a product consisting of a full flow and bypass oil filter, all housed
in one Purifiner unit, as well as a side-by-side full-flow and Purifiner bypass
filter design. These patent pending products were designed primarily for
original equipment placement by OEMs. The Company is negotiating with Centrax
for the right to distribute these products everywhere other than the Territory.
The Company has the right to distribute any new 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, but that
program is not party of any written agreement between the Company and Navistar.
However, 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 in 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,
have 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 to reaching
Navistar dealers; it intends to do so in the foreseeable future if sufficient
resources are available.
Navistar is the first major truck manufacturer that has agreed to an
aftermarket program with the Company. Management plans to work with other truck
manufacturers, in addition to Navistar, to establish additional aftermarket
programs. 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 for the Company.
<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 through
its distribution channel. Typically these larger customers, and some smaller
customers, have required an evaluation period, usually ranging from three to
nine 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 and groups, such as Ford Motor Company, AOC, Navistar, Perkins and
others.
Currently, the Company' s products are being evaluated by numerous
potential end users, including Ford Motor Company, Murphy Farms, CF Motor
Freight, New Orleans Transit Authority, City of Detroit, Chicago Transit
Authority, Pepsi-Cola Company, Motor Cargo, United States Air Force, United
States Postal Services, Waste Management, Bell South and others. There can be no
assurance that such evaluations 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; the Company believes this 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. Exclusive
distributors are required to purchase minimum quantities of product to maintain
their exclusive status. The majority of these distributorships were established
in 1995 and later; therefore, the ultimate success of these and the other
distributors 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.
Manufacturing and Production.
- -----------------------------
The Company subcontracts for the manufacture of component parts for its
Purifiners and manufacturers substantially all of its Elements. The component
parts are assembled, packed and shipped from the Company's facility in Boynton
Beach, Florida.
The Company currently single sources (i.e. purchases each raw material and
component part from a specific vendor) substantially all of its raw materials
<PAGE>
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 as its volume of sales increase, may expand its
vendor network for the purpose of limiting its exposure to its single source
suppliers. However, there can be no assurances that such additional financing
will be obtained or will be obtainable, on terms that are in the best interest
of the Company or its stockholders.
Warranties.
- -----------
The Purifiner carries a six-month performance warranty, and 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.
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 and limited performance warranties for recreational vehicles,
including a twelve-month performance warranty. The Company maintains $2,000,000
aggregate product liability insurance coverage.
Competition.
- ------------
Although the Company believes it is the largest supplier of bypass oil
purification systems (see "Legal Proceedings - Premo Litigation") , the Company
effectively competes with other bypass filtration products such as The Spinner
unit of T.F. Hudgins, Inc., and the bypass filter made by Luberfiner, Inc., and
others. The Company's products affect the sales of full-flow filters,
maintenance services, replacement parts, original oil sales and oil disposal, as
well as sales of new engines.
All of these products and services are provided by companies that have
significantly greater financial, marketing and operating resources than does
the Company. The Company's direct competitors include Premo Lubrication
Technologies, Inc. and Certified Technologies, Corp.
Patents and Trademarks.
- -----------------------
The Company has a license and royalty agreement (See Item 3 - "Legal
Proceedings") with the owner of four of the U.S. patents covering the Company's
existing Purifiners. These patents expire in November 1997, September 1998 and
June 2008. This agreement also covers several foreign issued and pending 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
<PAGE>
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 has patents pending for the TFP Filter Plus and a redesigned
Purifiner in substantially all industrialized countries of the world; these were
filed by the Company in 1994 through 1996, and to date have been issued in the
United States and certain other countries. In 1996, the Company filed for U.S.
patent protection for its new oil flow meter which will enable the user to
visually determine that the oil is flowing through the Purifiner at the proper
rate. The oil flow meter patent was approved in the U.S. in early 1997. There
can be no assurance that such patents pending will be issued.
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 Purifiner 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.
Engineering and Development.
- ----------------------------
The Company has one employee who focuses solely on engineering and
development. He is the inventor and originator of two U.S. patents issued to the
Company in 1996, as well as of the most recently issued patent licensed to the
Company. During the last two years he has devoted substantially all of his time
to the engineering, development and enhancement of the Company's products.
Employees.
- ----------
At February 28, 1997, the Company had 42 employees, 16 of whom were
engaged in manufacturing, assembly, warehousing and shipping, 18 in marketing,
technical and installation assistance and sales, one in engineering and
development and 7 in administrative positions. None of the employees are
represented by a labor union. The Company believes its employee relations are
good.
ITEM 2. DESCRIPTION OF PROPERTY.
-----------------------
Substantially 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
$85,000.
<PAGE>
ITEM 3. 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 substantially all of the Company's current Products) 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 (the other patent is
no longer at issue), and that they have manufactured and sold these patented
devices. 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, further,
(ii) that under certain legal doctrines the Plaintiffs are barred from asserting
their claims. Additionally, the Defendants allege that the Company 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 anticipated
to go to trial in 1997 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 the Company's various issuance's of Common Stock to Ford
and members of his family 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 and the Taylor's
were provided with the same opportunity to invest in the Company. The
representatives of the Estate of Willard Taylor had 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.
<PAGE>
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.). In a separate, related action, the
Estate was also seeking repayment of certain loans made to Richard C. Ford by
Willard Taylor prior to Mr. Taylor's death in the principal amount of $508,250
which, in turn, were also advanced to the Company by Ford. On September 19,
1996, Mr. Ford and the Estate reached an agreement as to the repayment of such
personal loans and unpaid accrued interest and such legal action was dismissed
with prejudice.
In September 1996, the Company entered into an Agreement in Partial
Settlement of T/F Purifiner, Inc. Issues ("Agreement") which released the
Company, with prejudice, from all litigation pending or contemplated by the
Taylor Family, the beneficiaries of the Estate, against the Company related to
any actions taken by the Company before the date of the Agreement. In return,
the Company agreed to repay the Estate's loans of $502,026 as follows: $167,342
due 90 days after any equity financings which raise in excess of $5,000,000 of
gross proceeds; $167,342 on the first and second anniversaries of such equity
financings. If the equity financings are less than $5,000,000 the amount of the
periodic debt repayment will be reduced and the term extended proportionately.
The Estate has agreed not to commence any action for loan repayment as long as
the Company is in compliance with the Agreement and raises gross proceeds of at
least $2,000,000 within one year of the Agreement. To date, the Company has
complied with the Agreement and has raised in excess of $2,000,000. See Item 11
- - "Security Ownership of Certain Beneficial Owners and Management".
Malt Litigation:
On January 13, 1997, Robert C. Malt, as owner of certain patents licensed
to the Company, filed an action against T/F Purifiner, Inc. and T/F Systems,
Inc. (collectively the "Defendants") in the Circuit Court of the 15the Judicial
Circuit of Florida in Palm Beach County. Mr. Malt has alleged that the
Defendants are in breach of their license agreement with Malt. Malt is seeking a
(1) permanent injunction to enjoin the Defendants from manufacturing and
marketing the covered Purifiner products and use of the U.S. trademark and (2)
approximately $21,000 for alleged past-due breaches of the license agreements.
The Company has filed an answer to this case and is proceeding to discovery.
Although the Company believes it has meritorious defenses with respect to the
monetary amounts alleged by the licensor patent owner, it has agreed to pay to
the latter such alleged unpaid royalties, which amount relates primarily to the
timing of the royalty payment and legal fees regarding defending certain patents
pending of the licensor. The Company, upon advise of counsel, does not believe
that the Plaintiffs will be in a position to obtain an injunction against the
Company's selling of the Purifiner products. The Company believes that the
licensor patent owner initiated litigation in order to extract a favorable
settlement.
Searcy, Denny, Scarola et. al and Related Claims:
The Company was informed in late 1996 that Searcy, Denny, Scarola et. al.
("Scarola"), former legal counsel of T/F Systems, Inc. ("Systems") was
<PAGE>
considering filing an action against both T/F Systems, Inc. and T/F Purifiner,
Inc. for past due legal fees and costs amounting to approximately $285,000. Such
liability relates to Scarola's representing Systems in obtaining the
manufacturing and marketing rights to the Purifiner from certain parties in May
1993. (See "Item 1 - Description of Business - Background and Formation of T/F
Purifiner, Inc.")
In late 1996, TF Systems, Inc.'s former law firm claimed that it was due
approximately $285,000 in legal fees related primarily to obtaining the
manufacturing and marketing rights to the Purifiner for TF Systems, Inc. ("TFS")
and the Company. TFS was awaiting the judgment of an appellate court which, if
adjudicated in TFS's favor, would have provided TFS with sufficient funds to pay
such legal fees and other possible legal fee claims aggregating approximately
$100,000. On February 26, 1997, the appellate court ruled against TFS and,
accordingly, the funds discussed above are not currently available to TFS to
satisfy such claims. T/F Purifiner, Inc. did not assume these obligations as
part of its purchase of Systems and management believes such amounts are not the
responsibility of T/F Purifiner, Inc. However, the ultimate outcome of the
claims against the Company cannot be determined at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of February 28, 1997, there were approximately 278 stockholders of
record of the Company's stock. The closing bid price quoted on the OTC Bulletin
Board sheets for the Company's Common Stock at March 17, 1997 was $8.50.
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 declared or 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 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.
The following table sets forth for the period indicated, the high and low
closing prices for the period from October 2, 1996 (the date first quoted)
through December 31, 1996 and from January 1, 1997 through February 28, 1997.
Common Stock
High Low
---- ---
October 2, 1996 - December 31, 1996 $9.05 $6.30
January 1, 1997 - February 28, 1997 10.00 7.90
The above quotation reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other than historical and factual statements, the matters and items discussed in
this Annual Report on Form 10K-SB are forward-looking statements that involve
risks and uncertainties. Actual results of the Company may differ materially
from the results discussed in the forward-looking statements. Certain factors
that could contribute to such differences are discussed with the forward-looking
statements throughout this report.
GENERAL
The Company was formed in 1987, and commenced limited operations in 1991
when it obtained worldwide manufacturing and marketing rights to the Purifiner
products. The growth in the Company is primarily due to the increasing
acceptance of the Company's products by the marketplace. This acceptance is the
result of various factors, including the increased credibility of the product as
a result of its commercial relationship with well-known entities and the growing
desire of users to reduce maintenance costs, extend engine life and preserve the
environment.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's statements of
operations.
Percentage of Revenues
----------------------
Year
Ended December 31,
------------------
1995 1996
---- ----
Net sales 100% 100%
Operating costs and expenses:
Cost of sales (48) (72)
Selling expenses (42) (97)
General and administrative expenses (36) (77)
Other - (1)
----- -----
Total operating costs and expenses (126) (247)
----- -----
Operating loss (26)% (147)%
===== ======
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales decreased by 10% from $1,480,037 in 1995 to
$1,327,230 in 1996. This decrease was primarily attributable to the effect of
the Company's price reductions implemented in 1996 and related merchandise
credits. During 1996, the Company had approximately $254,000 of sales to Ltd.,
the Company's newly formed joint venture in 1996 compared to approximately
$85,000 to one of Ltd.'s shareholders in 1995. Approximately, $17,000 of
intercompany profit on these sales to Ltd. have been deferred at December 31,
1996.
Effective October 15, 1996, the Company implemented a new product pricing
strategy to reduce the Company's selling prices to thus enable end users to
obtain a significantly improved return on investment. The Company believes this
new strategy will promote the sale of the Company's products and result in
increased long-term revenues from unit and replacement filter sales and also
provide the Company with the ability to reduce its product costs, primarily
through 1) volume purchase discounts, 2)utilization of excess fixed
manufacturing capacity and 3) improved production processes. If the Company does
not realize these cost savings, its gross margin will be adversely effected. In
the fourth quarter of 1996, as a result of this price reduction, various
merchandise credits were issued by the Company, to those of its distributors who
met certain conditions. These merchandise credits have had an adverse effect on
the Company's results of operations in such period.
Cost of Sales. Cost of sales increased by 34% from $712,714 in 1995 to
$956,628 in 1996. The Company's gross margin decreased from 51.8% to 28%,
substantially all due to the 19% of 1996 sales made to Ltd. at substantially
lower sales prices than the Company's existing exclusive international
distributor pricing, and the significant price reductions implemented in 1996.
To the extent that additional sales are made by the Company to Ltd., or if its
international distributors account for an increasing proportion of sales, the
Company's aggregate gross margin will be adversely affected as compared to prior
periods.
Selling Expenses. Selling expenses increased by 109% from $616,569 in 1995
to $1,290,563 in 1996. The primary reasons for this increase were the increases
in other selling expenses such as salaries for new personnel, compensatory stock
options, commissions, brochures and catalogs, consulting, travel and trade show
expenses in 1996 versus 1995. Additionally, in the fourth quarter of 1996, the
Company received approval of its United States patent for the next generation of
the Purifiner. Accordingly, the Company wrote off approximately $200,000 of
patent costs related to its prior generation of Purifiners. As a percentage of
revenues, selling expenses increased from 42% in 1995 to 97% in 1996.
General and Administrative Expenses. General and administrative expenses
increased by 92% from $531,646 in 1995 to $1,022,475 in 1996 and, as a percent
of revenues, increased from 36% to 77%. This dollar increase was generally due
to the increased level of business activity, specifically including increases in
personnel, compensatory stock options, travel and professional fees.
Operating Loss. As a result of the foregoing, the Company's operating
loss increased from $380,892 in 1995 to $1,959,759 in 1996.
<PAGE>
Interest Expense. Interest expense decreased by 12% from $28,915 for 1995
to $25,354 for the 1996. This change resulted from a decrease in average short
and long term borrowings outstanding in 1996, versus the comparable period for
1995. The loans were 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 $409,807 for 1995 to $1,983,270 for 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 existing and new 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 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.
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. As a result of
additional employees and consultants, salary and consulting expenses increased
from approximately $209, 000 in 1994 to approximately $252, 000 in 1995. 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. The increase in 1995 over 1994 resulted
from increased average short-and long-term borrowings outstanding.
<PAGE>
Net Loss. As a result of the foregoing, the Company' s net loss
decreased from $424,197 in 1994 to $409,807 in 1995.
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. To fund its
activities, the Company has been dependent upon available cash generated from
operations, the proceeds of sales of its securities to investors and
stockholders, and other loans. The Company's 1996 auditors report included an
explanatory paragraph which stated that because the Company has sustained
recurring operating losses and negative cash flows from operating activities,
these factors raise substantial doubt about the Company's ability to continue as
a going concern.
At December 31, 1996, the Company had working capital of $1,727,933 and
its current ratio (current assets to current liabilities) was 3.1 to 1, as
compared with a working capital deficiency of $894,117 and a current ratio of
.25 at December 31, 1995. At December 31, 1996, the Company had $928,960 of cash
and subscription receivables of $1,041,594 collected subsequent to December 31,
1996. Outstanding short-term debt from lenders and shareholders was $180,767 at
December 31, 1996 and included a shareholder loan of $167,342 due to the Estate
of Willard Taylor (See Note 4 to the Notes to Financial Statements and "Part I -
Item 3. Legal Proceedings - Stockholder Litigation" relating to repayment terms
to the Estate). The balance of long term debt was $360,648 at December 31, 1996,
and included a shareholder loan of $334,684 due to the Estate of Willard Taylor.
At December 31, 1996, the Company owed approximately $426,000 in current
liabilities to various trade and other unrelated creditors. Of this amount
approximately $84,000 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 made certain payments and intends to use a
portion of existing funds 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.
<PAGE>
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 currently is not generating sufficient revenues to fund its
existing and planned expansion of its operations. Accordingly, the Company has
embarked and is implementing plans to raise additional capital. The Company
intends to use such additional financing to increase its marketing and sales
efforts, including the hiring of additional sales and technical personnel and
related costs, implementation of advertising, promotional and marketing
programs, and additional fleet testing programs. Additionally, the Company
intends to continue hiring additional manufacturing, operating, and
administrative personnel and acquire additional capital equipment and leasehold
improvements to meet expected production increases.
The above is not an all inclusive listing of the Company's planned
expenditures. In the event that the proceeds from future offerings or financings
are not received, the Company will not be able to implement its current plans.
The inability to obtain additional financing when needed would have a material
adverse effect on the Company, including possibly requiring the Company to
curtail or cease its operations.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations.
However, any significant decrease in the price for oil or labor, environmental
compliance costs, and engine replacement costs could adversely impact the
Company's end users cost/benefit analysis as to the use of the Company's
products.
QUARTERLY FLUCTUATIONS
The Company's operating results may fluctuate significantly from period to
period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the Company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company and its competitors, technological factors,
variations in sales by product and distribution channel, and competitive
pricing. Consequently, the Company's product revenues may vary significantly by
quarter and the Company's operating results may experience significant
fluctuations.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
T/F Purifiner, Inc.
Contents
Page
----
Report of Independent Auditors .............................................F-2
Audited Financial Statements
Balance Sheet as of December 31, 1996.......................................F-3
Statements of Operations for the years ended December 31, 1995 and 1996.....F-4
Statements of Changes in Stockholders Equity (Capital Deficiency)
for the years ended December 31, 1995 and 1996...........................F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1996.....F-6
Notes to Financial Statements..............................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders of
T/F Purifiner, Inc.
We have audited the accompanying balance sheet of T/F Purifiner, Inc. as
at December 31, 1996, and the related statements of operations, changes in
stockholders' equity (capital deficiency) and cash flows for each of the years
in the two-year period ended December 31, 1996. 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, 1996 and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1996 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 and
negative cash flows from operating activities 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 uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
February 14, 1997
With respect to last paragraph Note 9
February 26, 1997
F-2
<PAGE>
T/F Purifiner, Inc.
Balance Sheet
December 31, 1996
Assets
Current assets:
Cash and cash equivalents $ 928,960
Subscriptions receivable 1,041,594
Trade accounts receivable, net of allowance for doubtful
accounts of $40,000 126,806
Inventories 440,239
Prepaid expenses and other current assets 18,037
-----------
Total current assets 2,555,636
Property and equipment, net 172,370
Patents and trademarks, net of $12,855 of accumulated
amortization 152,770
Costs in excess of net assets acquired, net of $5,589
of accumulated amortization 132,686
Other assets 26,218
-----------
$ 3,039,680
===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 314,234
Accrued expenses 77,077
Customer deposits and other 255,625
Current portion of note payable and capital lease obligations 13,425
Shareholder loans 167,342
-----------
Total current liabilities 827,703
Shareholder loans 334,684
Capital lease obligations 25,964
Deferred rent 13,390
Liability to equity investee 23,351
-----------
Total liabilities 1,225,092
Commitments and contingencies
Stockholders' Equity:
Common Stock, $.001 par value, 20,000,000 shares
authorized, 5,097,080 issued and outstanding 5,097
Preferred Stock, $.001 par value, 500,000 shares authorized --
Additional paid-in capital 6,323,505
Unearned compensatory options (123,114)
Accumulated deficit (4,390,900)
-----------
1,814,588
-----------
$ 3,039,680
===========
See accompanying notes to financial statements.
F-3
<PAGE>
T/F Purifiner, Inc.
Statements of Operations
Years ended December 31, 1995 and 1996
1995 1996
---- ----
Net sales $ 1,480,037 $ 1,327,230
Cost of sales 712,714 956,628
----------- -----------
Gross profit 767,323 370,602
Operating expenses:
Selling 616,569 1,290,563
General and administrative 531,646 1,022,475
Deferred profit -- 17,323
----------- -----------
1,148,215 2,330,361
----------- -----------
Operating loss (380,892) (1,959,759)
Other income (expenses):
Interest expense (28,915) (25,354)
Interest income -- 1,843
----------- -----------
Net loss $ (409,807) $(1,983,270)
=========== ===========
Loss per common share $ (.15) $ (.60)
=========== ===========
Weighted average common shares outstanding 2,768,775 3,322,250
=========== ===========
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
T/F Purifiner, Inc.
Statements of Changes in Stockholders' Equity
(Capital Deficiency)
Total
Redeemable Stockholders'
Common Stock Common Stock Additional Unearned Equity
--------------- ----------------- Paid-In- Compensatory Accumulated Subscription (Capital
Shares Amount Shares Amount Capital Options Deficit Receivables Deficiency)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 - $ - 2,736,000 $2,736 $955,748 $ - $(1,997,823) $ - $(1,039,339)
Issuance of common stock,
net of issuance costs - - 57,000 57 4,951 - - (7,000) (1,992)
Net loss - - - - - - (409,807) - (409,807)
--------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - - 2,793,000 2,793 960,699 - (2,407,630) (7,000) (1,451,138)
Proceeds from sale of
redeemable Common Stock,
net 393,443 594,000 - - (23,163) - - - (23,163)
Issuance of Common Stock
to acquire D.B. Filters - - 90,773 91 136,909 - - - 137,000
Accrued interest on
redeemable Common Stock - 30,335 - - (30,335) - - - (30,335)
Collection of subscription
receivables - - - - - - - 7,000 7,000
Other issuances of
Common Stock - - 24,738 25 54,773 - - - 54,798
Proceeds from sale of
Common Stock, net - - 1,331,453 1,331 3,085,671 - - - 3,087,002
Issuance of Common Stock
in exchange for
notes payable - - 338,673 339 828,562 - - - 828,901
Proceeds from exercise of
stock options, net - - 125,000 125 244,160 - - - 244,285
Issuance of compensatory
stock options - - - - 442,287 (123,114) - - 319,173
Expiration of redeemable
common stock put option (393,443)(624,335) 393,443 393 623,942 - - - 624,335
Net loss - - - - - - (1,983,270) - (1,983,270)
------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 - $ - 5,097,080 $5,097 $6,323,505 $(123,114) $(4,390,900) $ - $ 1,814,588
=================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
T/F Purifiner, Inc.
Statements of Cash Flows
Years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Operating activities
Net loss $ (409,807) $(1,983,270)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 5,255 22,009
Write off of patent costs -- 200,000
Issuances of Common Stock and compensatory options -- 341,628
Depreciation and amortization of property and equipment 25,823 39,365
Changes in operating assets and liabilities:
Trade accounts receivable, net (26,490) (42,684)
Inventories (12,729) (270,612)
Prepaid expenses and other current assets 8,839 (10,088)
Other assets (15,300) 10,691
Accounts payable - trade 27,648 121,049
Accrued expenses 76,051 (88,281)
Customer deposits and other 86,572 121,648
Accrued interest and other payables - related parties 52,477 (61,663)
Deferred rent 3,959 (8,903)
----------- -----------
Net cash used in operating activities (177,702) (1,609,121)
Investing activities
Patents and trademarks (92,199) (227,146)
Purchases of property and equipment (16,302) (89,920)
Increase in other assets -- (22,033)
Acquisition of DB Filters -- (1,275)
----------- -----------
Net cash used in investing activities (108,501) (340,374)
Financing activities
Decrease (increase) in deferred issuance costs (1,992) 4,224
Proceeds from issuances of Common Stock
and exercise of stock options, net -- 2,892,873
Collection of subscription receivables -- 7,000
Proceeds from notes payable 495,000 300,000
Payment on notes payable and capital lease obligations (199,676) (312,407)
Proceeds from shareholder loans 75,500 23,458
Payment on shareholder loans (85,000) (58,671)
Borrowing from investee 51,340 64,400
Repayment to investee (18,235) (74,154)
----------- -----------
Net cash provided by financing activities 316,937 2,846,723
----------- -----------
Increase in cash and cash equivalents 30,734 897,228
Cash at beginning of year 998 31,732
----------- -----------
Cash and cash equivalents at end of year $ 31,732 $ 928,960
=========== ===========
Cash paid for interest $ 13,052 $ 19,366
=========== ===========
</TABLE>
During 1995 and 1996, the Company entered into capital lease obligations in the
amount of approximately $2,000 and $27,200, respectively. See Notes 4, 6, and 15
for description of non-cash issuances of Common Stock.
See accompanying notes to financial statements.
F-6
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements
December 31, 1995 and 1996
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 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 licenses for various patents (see Note 8) and
through direct ownership of various issued and pending patents.
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 has completed several private placements of its Common Stock and
expects to complete additional financings in 1997. 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 achieved. 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.
F-7
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
under terms allowing certain limited rights of return and other limited product
and performance warranties for which no material 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 1995 and 1996, engineering and development expenses were approximately
$61,000 and $75,000, respectively, and are expensed as incurred.
IMPAIRMENT
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". Management reviews long lived
assets and intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted net cash flows estimated to be generated by those assets
F-8
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT (CONTINUED)
to the asset's carrying amount. In the fourth quarter of 1996 the Company
received approval of its U.S. patent for the next generation of Purifiner units.
Accordingly, the Company wrote off approximately $200,000 related to patent
costs incurred primarily to defend the prior generation patent rights which have
been included in selling expenses.
COMPENSATORY STOCK OPTIONS
The Company accounts for the difference between the issue or grant price of
compensatory stock and warrants and fair value as "Unearned Compensatory
Options," which the Company charges to operations over their vesting period.
STOCK BASED COMPENSATION
During 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No.123). The provision of
SFAS No. 123 allow companies to either expense the estimated fair value of stock
options or to continue to follow the intrinsic value method set forth in APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) but disclose
the pro forma effects on net income (loss) at the fair value of the options been
expensed. The Company has elected to continue to apply APB 25 in accounting for
its stock option plan. (See Note 16).
CREDIT RISK
The Company minimizes the concentration of credit risk associated with cash and
cash equivalents by maintaining its cash and cash equivalents with a high
quality federally insured financial institution. At December 31, 1996, deposits
in excess of federally insured limits are approximately $829,000. Cash
equivalents consist of investments with original maturities of three months or
less.
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.)
F-9
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Loss per share is calculated by dividing net loss by the weighted average number
of common shares outstanding during each period. The effect of the Company's
stock options and warrants have not been included in the Company's computation
of loss per share since they are anti-dilutive.
INCOME TAXES
Prior to April 1996, the Company had elected to be treated as an "S" corporation
under the provisions of the Internal Revenue Code ("IRC"). Accordingly, its
taxable income or loss was includable in the current taxable income of its
shareholders, and no federal or state income tax provision or benefit had been
recorded in the accompanying financial statements.
If the Company had been subject to corporate income taxes for 1995 and for the
first quarter of 1996, 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, 1996, inventories consist of the following:
Raw materials $291,957
Finished goods 139,245
Supplies 9,037
--------
$440,239
========
3. PROPERTY AND EQUIPMENT
At December 31, 1996, property and equipment consists of the following:
F-10
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Machinery and equipment $229,482
Furniture and fixtures 37,603
Leasehold improvements 33,486
--------
300,571
Less accumulated depreciation and
amortization (128,201)
--------
$172,370
========
At December 31, 1996, machinery and equipment includes approximately $49,000 of
equipment held under capital leases with related accumulated amortization of
approximately $13,300.
4. SHAREHOLDER LOANS AND OTHER NOTES PAYABLE
During 1994, the Company and its principal shareholder instituted legal action
against the estate of a former 50% owner of the Company ("the Estate"). This
litigation sought a declaratory judgment approving the dilution of the Estate's
interest in the Company from 50% to approximately 10% as a result of the
issuance of additional Common Stock in 1994 to the principal shareholder and his
children. Subsequently, the beneficiaries of the Estate filed counterclaims
against the Company and its principal shareholder and his children seeking
declaratory relief, cancellation of additional stock issuances by the Company,
an injunction against further issuances, appointment of a receiver and damages
against the principal shareholder. In June 1995, the Estate demanded repayment
of the non interest bearing shareholder loans due to the Estate for which there
were no stated due dates ($502,026 at December 31, 1996). In September 1996, the
Company entered into an Agreement in Partial Settlement of T/F Purifiner, Inc.
Issues ("Agreement") which released the Company, with prejudice, from all
litigation pending or contemplated by the Taylor Family, the beneficiaries of
the Estate, and individually, against the Company related to any actions taken
by the Company before the date of the Agreement. In return, the Company agreed
to repay the Estate's loans of $502,026 as follows: $167,342 due 90 days after
any equity financings which raise in excess of $5,000,000 of gross proceeds;
$167,342 on the first and second anniversaries of such equity financings. If the
equity financings are less than $5,000,000 the amount of the periodic debt
repayment will be reduced and the term extended proportionately. The Estate has
agreed not to commence any action for loan repayment as long as the Company is
in compliance with the Agreement and raises gross proceeds of at least
$2,000,000 within one year of the Agreement. Since the Company has made all
required payments to the Estate and has raised in excess of $2,000,000, the
appropriate amounts of shareholder loans due to the Estate have been properly
classified as current and long term in the accompanying balance sheet.
F-11
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
5. SHAREHOLDER LOANS AND OTHER NOTES PAYABLE (CONTINUED)
On July 31, 1996, a shareholder received 49,770 shares of Common Stock in
exchange for his loans and unpaid interest in the aggregate amount of $99,540.
These loans bore interest at 10% per annum ($9,711 in 1995 and $6,132 in 1996).
On August 1, 1996, the Company's principal shareholder received 251,013 shares
of Common Stock in exchange for his non interest bearing shareholder loans in
the aggregate amount of $502,026.
In 1996, the Company issued unsecured notes payable in the aggregate amount of
$275,000 to several parties, $125,000 of which bore interest at 10% per annum.
The principal and interest on these notes were repaid prior to December 31,
1996.
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 1995 and 1996, the Company incurred approximately
$4,000 and $500, respectively, of interest expense on principal shareholder
loans.
6. COMMON STOCK
In June 1995, pursuant to agreements entered into on December 15, 1994, TFP
issued an aggregate of 57,000 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. In June 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 stockholders 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 December
31, 1996). On January 1, 1997, the Board of Directors and shareholders approved
F-12
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
6. COMMON STOCK (CONTINUED)
a 2.5:1 stock split distribution for common stockholders 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.
In 1996, the Company issued 17,500 shares of its Common Stock to one of its law
firms in payment for approximately $40,000 of professional services rendered.
In 1996, the Company issued 7,238 shares of its Common Stock for nominal
consideration to certain employees, distributors, a not-for-profit environmental
group, and other parties for past services and support given to the Company
which has been recorded based upon the estimated fair value of such Common Stock
($5.00 per share) as determined by the Board of Directors.
In 1996, the Company sold 1,331,453 shares of its Common Stock for net proceeds
(including subscription receivables collected in 1997) of approximately
$3,087,000 through various private placements at prices ranging from $2.00 to
$3.40 per share. At December 31, 1996, subscription receivables of $1,041,594
had been recorded in the accompanying balance sheet, all of which were
subsequently collected.
In October 1996, a noteholder received 37,890 shares of Common Stock in exchange
for outstanding loan and unpaid interest, due at 10% per annum, in the aggregate
amount of $227,340.
See Notes 4, 14, 15 and 16 for discussions of additional common stock issuances.
7. 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 using the
straight-line method over the term of this lease and recorded a deferred rent
payable. At December 31, 1996, the schedule of future minimum lease payments
under this lease is as follows:
1997 $85,000
1998 87,000
1999 22,000
--------
$194,000
========
F-13
<PAGE>
TF Purifiner, Inc.
Notes to Financial Statements (continued)
7. LEASES (CONTINUED)
Total rent expense was approximately $75,000 and $72,000 for 1995 and 1996,
respectively.
The Company also has entered into several obligations for certain office and
manufacturing equipment which have been accounted for as capital leases. At
December 31, 1996, future minimum commitments under this noncancelable capital
lease are as follows:
1997 $18,497
1998 18,497
1999 12,570
2000 891
--------
Total minimum lease payments 50,455
Less amount representing interest at 16% (12,238)
Present value of minimum lease payments
($12,253 due in 1996) $38,217
========
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 this 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 1995 and 1996 was approximately $49,000 and $48,000,
respectively.
In January 1997, this patent holder filed an action against the Company for non
payment of approximately $21,000 of unpaid royalties claimed by him and seeking
a permanent injunction against the Company's manufacturing and selling of the
covered Purifiner products. The Company has filed an answer to this case and is
proceeding to discovery. Although the
F-14
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
8. ROYALTIES (CONTINUED)
Company believes it has meritorious defenses against the monetary amounts
alleged by the licensor patent owner, it has agreed to pay the patent holder
such alleged unpaid royalties, which amount relates primarily to the timing of
the royalty payment and legal fees regarding defending certain patents pending
of the licensor. The Company, upon advice of counsel, does not believe the
license holder will be in a position to obtain an injunction against the
Company's manufacturing and selling of the Purifiner products. The Company
believes that the licensor patent holder initiated litigation in order to
extract a favorable settlement.
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 meritorious defenses and will eventually prevail in these
actions.
In April 1996, the Company became a party to an action filed by a former
independent contractor claiming certain commissions and other damages due him
pursuant to an agreement. Pursuant to the agreement, as adjudicated by the
Court, the Company will resolve this case through arbitration and, although the
ultimate outcome of this matter cannot be determined at this time, the Company,
upon advice of counsel, believes it has meritorious defenses and will eventually
prevail in this matter. No action has been taken by the plaintiff on this matter
since mid 1996.
In late 1996, TF Systems, Inc.'s (See Note 11) former law firm claimed that it
was due approximately $285,000 in legal fees related primarily to obtaining the
manufacturing and marketing rights to the Purifiner for TF Systems, Inc. ("TFS")
and the Company. TFS was awaiting the judgment of an appellate court which, if
adjudicated in TFS's favor, would have provided TFS with sufficient funds to pay
such legal fees and other possible legal fee claims aggregating approximately
$100,000. On February 26, 1997, the appellate court ruled against TFS and,
accordingly, the funds discussed above are not currently available to TFS to
satisfy such claims. T/F Purifiner, Inc. did not assume these obligations as
part of its purchase of Systems and management believes such amounts are not the
responsibility of T/F Purifiner, Inc. However, the ultimate outcome of the
claims against the Company cannot be determined at this time. No liability has
been recorded for this claim in the accompanying balance sheet.
F-15
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
10. MAJOR CUSTOMERS AND EXPORT SALES
The Company currently operates in a single business segment and its products are
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:
South America ($343,000), Europe ($241,000), Asia/Pacific ($207,000) and others
($30,000). During 1996, nine customers accounted for approximately 56% of the
Company's net sales, one of which accounted for approximately 19% of this amount
(See Note 13). In 1996, export sales amounted to approximately $662,000 in
geographic regions as follows: South America ($159,000), Europe ($254,000), and
Asia/Pacific ($249,000). The loss of business from one or a combination of the
Company's significant customers could adversely effect its operations. During
1995, the Company had net sales of approximately $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. 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 prior to this acquisition were sales of product to
TFP which have been eliminated in accounting for this acquisition.
F-16
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
12. FINANCIAL INSTRUMENTS
At December 31, 1996, the carrying amounts and estimated fair values of the
Company's financial instruments which consist of cash, cash equivalents,
accounts and subscription receivables, accounts payable and debt, excluding
capital leases and $502,026 of shareholder loans, approximated $2,745,000 due to
the short-term maturity and interest rates of these instruments. The Company's
noninterest bearing shareholder loans have a carrying amount of $502,026 and an
estimated fair value of approximately $450,000 (See Note 4).
13. JOINT VENTURE
Effective January 1, 1996, the Company entered into a joint venture agreement
whereby such venture, TF Purifiner Ltd. ("Ltd"), will sell and distribute the
Company's product in Europe, the Middle East and certain African countries. The
Company has an approximate 45% interest in Ltd's operations (50% voting
interest) and is accounting for Ltd using the equity method. The Company is not
required to fund Ltd and will sell product to Ltd until such time as Ltd decides
to exercise its rights under the agreement to manufacture the Company's
products. Ltd was initially capitalized with approximately $88,000 provided by
one of its shareholders. In December 1995 and 1996, Ltd advanced the Company
approximately $51,000 and $64,000, respectively, to be used to fund certain
patent and trademark filings for the venture's exclusive territory. At December
31, 1996, approximately $23,000 remained unexpended. In 1995 and 1996, the
Company had sales of approximately $254,000 and $85,000 to Ltd and to one of
Ltd's shareholders, respectively, at negotiated prices. At December 31, 1996,
approximately $17,000 has been recorded as unrealized intercompany profit
related to the inventory sold to Ltd which is included in Ltd's inventory at
December 31, 1996.
At December 31, 1996 and for the year then ended, summarized financial
information of Ltd is as follows:
Total assets $555,000
Total liabilities (1) 1,059,000
Capital deficiency 504,000
Total revenues 198,000
Gross profit 76,000
Net loss (562,000)
(1) Includes approximately $856,000 of loans due to one of Ltd's foreign
shareholders, collateralized by substantially all the tangible assets of Ltd.
F-17
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
14. REDEEMABLE COMMON STOCK
During 1996, the Company sold 393,443 shares of its Common Stock for gross
proceeds of $594,000. The subscription agreements provided that if the Company
had not registered any amount of class of its Common Stock under the Securities
Act of 1933 or the Securities and Exchange Act of 1934, as amended, within two
years, the shareholders would have an option to put the shares back to the
Company at their original purchase price plus 10% per annum from the date of
issuance. Accordingly, such Common Stock was being treated as Redeemable Common
Stock until the expiration of the put options and the redemption price was being
accreted at the rate of 10% and charged to additional paid in capital. On
September 28, 1996, the Company registered Common Stock under the Securities Act
of 1934, as amended, and, therefore, the put option expired and such Common
Stock was no longer redeemable and has been reclassified in the accompanying
balance sheet.
15. 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 90,773 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, was the right to 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.
16. STOCK OPTION PLAN AND WARRANTS
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
up to 1,625,000 options for both incentive and non-qualified stock options to
key personnel, including officers, directors, consultants and advisors to the
Company, based upon the determination of the Board of Directors. The exercise
price of the options may be no less than fair value of the Common Stock on the
date of grant for incentive stock options and 25% less than fair value for
non-qualified stock options, and the option term may not exceed five or ten
years. Generally, options to employees vest over four years at 25% per annum,
F-18
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
16. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
except for certain grants to employees which vested 50% upon grant with
remaining amounts over two years at 25% per annum. At December 31, 1996,
1,500,000 shares of Common Stock have been reserved for issuance under the 1996
Option Plan.
Additional information concerning the activity in the 1996 Option Plan is as
follows:
Number of Weighted Average
Shares Exercise Price
--------- --------------
Options outstanding, January 1, 1996
Granted 1,593,750 $2.67
Exercised (125,000) $2.00
Cancelled (108,750) $4.76
---------
Options outstanding, December 31, 1996 1,360,000 $2.57
=========
Options exercisable at December 31, 1996 524,898 $2.78
=========
Options available for grant at
December 31, 1996 140,000
=========
Summarized information with respect to 1996 Option Plan options outstanding at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Contractual Average Exercise Number Average Exercise
Exercise Price Outstanding Life (in Years) Price Exercisable Price
- -------------- ----------- --------------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$2.00 - $2.20 1,161,625 5.70 $2.02 415,273 $2.02
$4.00 - $6.00 198,375 4.75 5.81 109,625 5.66
---------- -------
1,360,000 524,898
========== =======
</TABLE>
The Company applies APB 25 in accounting for its 1996 Option Plan and,
accordingly, recognizes compensation expense for the difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant. The effect of applying SFAS No. 123 on 1996 proforma net loss and
recognizing compensation expense for consultants and the Board of Advisors as
stated below are not necessarily representative of the effects on reported net
loss for future years due to, among other things, (1) the vesting period of the
stock options and the (2) fair value of additional stock options in future
years. Had compensation cost for the Company's 1996 Option Plan grants to
employees been determined based upon the fair value at the grant date for awards
under the 1996 Option Plan consistent with the methodology prescribed under
F-19
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
16. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
SFAS No. 123, the Company's net loss in 1996 would have been approximately
$2,119,000 or $.64 per share. The fair value of the options granted to employees
during 1996 are estimated as $.44 per share, on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield 0%, volatility of 40%, risk-free interest rate of
5.8% and expected life of 1.8 years.
During 1996, the Company expensed approximately $243,800 related to the granting
of 1,091,250 stock options to various consultants and the Board of Advisors. The
fair value of these options granted was $.34 on the date of grant using the
Black-Scholes Option Pricing model with the following weighted average
assumptions: dividend yield 0%, volatility 40%, risk free interest rate of 5.6%
and expected life of 1 year.
Further, during 1996, the Company expensed $75,400 related to the granting of
47,125 stock options to officers and an employee at $1.60 less than the quoted
market value ($7.60) of the Company's Common Stock.
During 1996, the Company granted a consultant 250,000 options (included in
1,091,250 discussed above) to purchase Common Stock at $2.00 per share, which
are outstanding, and not exercisable, at December 31, 1996. The Company has
reserved 250,000 shares of Common Stock related to this option. At December 31,
1996, this option has a remaining contractual life of seven months.
At December 31, 1996, the Company had 325,000 warrants outstanding issued in
connection with a private placement which are exercisable at $2 per share and
expire on December 31, 1999.
17. INCOME TAXES
At December 31, 1996, the Company has a net operating loss carryforward of
approximately $1,480,000 for income tax purposes which expires in 2011. Due to
the Company's net losses, no provision was made for income taxes from April 1,
1996 to December 31, 1996.
The significant components of the net deferred tax asset as of December 31, 1996
are as follows:
F-20
<PAGE>
T/F Purifiner, Inc.
Notes to Financial Statements (continued)
17. INCOME TAXES (CONTINUED)
Deferred tax assets:
Net operating loss $557,000
Excess tax basis of
manufacturing rights acquired
from Systems 70,000
Other 136,000
--------
$763,000
Valuation allowance (763,000)
--------
Net deferred tax asset $ -
========
The difference between the statutory tax rate of 34% and the Company's effective
tax rate of 0% is due to the valuation allowance of $763,000.
During 1995 and the first quarter of 1996, 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.
18. SUBSEQUENT EVENTS
In January 1997, as amended, the Company loaned Richard C. Ford, its President
and principal shareholder, $200,000 bearing interest at 10% per annum and due in
June 1997 secured by 40,000 shares of the Company's Common Stock owned by Mr.
Ford.
From January 1, 1997 to February 14, 1997, the Company granted 207,500 options
to purchase Common Stock to various employees at exercise prices ranging from
$8.50 to $10.00 per share and options to a consultant for 40,000 shares at an
exercise price of $9.50 per share.
F-21
<PAGE>
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
----------------------------------------------
Not applicable.
ITEM 9. 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 53 President, Treasurer, Chief
Executive and Chief Financial
Officer and Director
Byron Lefebvre 59 Director
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 has served as a consultant to the
Company since late 1993. From 1985 to 1990, he was President of Refineco
Manufacturing Company, Inc., the Company which manufactured and marketed the
Purifiner prior to the Company. He is the inventor of the Purifiner TF-8 spin-on
unit and also the inventor of the new TFP Filter Plus and redesigned Purifiner.
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 Purifiner 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 who served in the United States Air Force, oversees the
engineering, development and evaluation of all of the Company's new products and
product enhancements.
<PAGE>
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 a Bachelor's degree in English from Florida State
University in 1993. He is the son of Richard C. Ford.
Board of Advisors
- -----------------
The Company formed a Board of Advisors in August 1996. The Company's Board
of Advisors provides guidance to the Company's Board of Directors and
Management, but does not function in a policymaking capacity.
The following individuals currently serve as 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), was Chief of Staff of the United States Air
Force from June 1974 to June 1978; from June 1978 to June 1982, General Jones
was Chairman of the Joint Chiefs of Staff, and served as 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
and has served on the Board of Directors of General Electric, NBC, RCA, USX,
Kemper Insurance, USAir Group and Hay Systems.
JOYCE SHIELDS, PH.D., is the Vice President and General Manager of Hay
Management Consultants --Southeast, where she manages and directes 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 President of SRA International, Inc., a company which
provides computer, communications and management consulting services and
software to business and government organizations.
<PAGE>
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,
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 12,500 shares of Common Stock through August 2, 2006 at $2.00, of which
4,167 Shares vested on August 2, 1996, 4,167 shall vest on August 2, 1997, and
4,166 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.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Cash Compensation
- -----------------
The following table shows, for the three year period ended December 31,
1996, 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
<TABLE>
<CAPTION>
Name and Other All
Principal Annual Options/ LTIP Other
Position Year Salary Bonus Compensation(l) (#) Payouts Compensation(2)
- -------- ---- ------ ------ --------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard C. Ford(3) 1996 $120,000(1) -0- $1,200 275,000 - $11,000
President, CEO 1995 $104,000 -0- $1,370 - - $12,000
Treasurer, CFO 1994 $104,000 -0- $1,355 - - $12,000
</TABLE>
(1) This amount represents payments made by the Company for health insurance
premiums. Mr. Ford's current annual salary is $156,000.
(2) This amount represents payments made to Mr. Ford for performing various
product field testing.
(3) Mr. Ford served as Secretary of the Company until August 1996.
Employment Agreements
- ---------------------
The Company currently does not have employment agreements with any of its
executive officers but does intend to enter into written agreements with certain
of them in the future.
<PAGE>
Option Grants in Last Fiscal Year
- ---------------------------------
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1996 to each person named in the Summary Compensation Table.
Number of % of total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal year ($ / Shares) Date
- ---- ----------- ----------- ------------ ----
Richard C. Ford 275,000 17% $2.00/200,000 August 2006
$2.20/50,000 August 2001
$6.00/25,000 August 2006
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 Annual Meeting held on August 28, 1996.
The Plan will work to increase proprietary interest in the Company of the
employees', Board of Advisors, consultants, and non-employee Directors' 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 had reserved an aggregate of 1,625,000 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
<PAGE>
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 and cannot be less than 75% of the Company's
Common Stock fair value.
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
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.
<PAGE>
As of December 31, 1996, incentive stock options to purchase 396,625 shares
of Common Stock were outstanding and non-qualified options to purchase 963,375
shares of Common Stock were outstanding under the Plan.
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 50,000 shares of Common Stock at $2.20 per Share through August 2, 2001, of
which 25,000 vest on August 2, 1996, 12,500 vest on August 2, 1997, and 12,500
vest on August 2, 1998. On August 2, 1996, the Company granted Richard C. Ford
nonqualified options to purchase an aggregate of 200,000 shares of Common Stock
at $2.00 per Share through August 2, 2006, of which 100,000 vest on August 2,
1996, 50,000 vest on August 2, 1997, and 50,000 vest on August 2, 1998. On
December 3, 1996, the Company granted Richard C. Ford nonqualified options to
purchase an aggregate of 25,000 shares of Common Stock at $6.00 per share
through December 3, 2006, all of which vested on December 3, 1996.
On August 2, 1996, the Company granted Byron Lefebvre incentive Plan
Options to purchase an aggregate of 75,000 shares of Common Stock at $2.00 per
Share through August 2, 2006, of which 37,500 vest on August 2, 1996, 18,750
vest on August 2, 1997, and 18,750 vest on August 2, 1998.
On August 2, 1996, the Company granted Richard J. Ford incentive Plan
Options to purchase an aggregate of 18,750 shares of Common Stock at $2.20 per
Share through August 2, 2001, of which 9,375 vest on August 2, 1996, 4,688 vest
on August 2, 1997, and 4,687 vest on August 2, 1998. On December 3, 1996, the
Company granted Richard J. Ford nonqualified options to purchase an aggregate of
3,375 shares of Common Stock at $6.00 per share through December 3, 2006, all of
which vested on December 3, 1996. On January 16, 1997, the Company granted
Richard J. Ford nonqualified options to purchase an aggregate of 62,500 shares
of Common Stock at $8.75 per share through January 16, 2007 of which 31,250 vest
on January 16, 1997, 15,625 vest on January 16, 1998 and 15,625 vest on January
16, 1999.
Option Exercises and Holdings
- -----------------------------
The following table sets forth information with respect to the exercise of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1996 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1996 fiscal year.
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Securities Value of
Number of Underlying Unexercised
Shares Unexercised in-the-Money
Acquired Options/SARS Options/SARs
on Value at FY-End (#) at FY-End ($)
Exercise Realized Exercsiable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable (1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard C. Ford - - 150,000/125,000 $787,500/$738,750
President, Chief Executive
Officer, Treasurer, and CFO
</TABLE>
(1) In accordance with the Securities and Exchange Commission's rules, values
are calculated by subtracting the exercise price from the fair market value of
the underlying common stock. For purposes of this table, fair market value is
deemed to be $7.95, the closing price reported on December 31, 1996.
LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number Performance Estimated Future Payouts Under
of Shares, or Other Non-Stock Price-Based Plans
Units or Period Until ---------------------------
Other Rights Maturation Threshold Target Maximum
Name (#) or Payout ($ or #) ($ or #) ($ or #)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard C. Ford - - - - -
President, Chief
Executive Officer,
Treasurer, and CFO
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information regarding the Company'
s Common Stock beneficially owned on February 28, 1997 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
February 28, 1997, there were 5,143,455 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.
<PAGE>
No. of Shares Percent of
Name and Address or of Common Stock Beneficial
Identity of Group Beneficially Owned Ownership
- ----------------- ------------------ ---------
Richard C. Ford (l)(2) 1,719,708 32.2%
Richard J. Ford (2)(3) 427,000 8.2%
Traci M. Ford (2) 380,750 7.4%
Jennifer D. Ford/Roe (2) 364,250 7.1%
Byron Lefebvre (4) 107,175 2.1%
J.W. Taylor (2) (5)(6) 285,000 5.5%
Garo Armen (7) 850,000 15.2%
Harvey Stober (8) 275,000 5.3%
All Executive Officers
and Directors as
a group (3 persons) 2,253,883 41.6%
(1) Mr. Ford is the Company's President, Treasurer, Chief Executive and Chief
Financial Officer and a Director. Includes 37,875 shares owned by Catherine
Ford, Mr. Ford's wife, of which Mr. Ford disclaims beneficial ownership.
Also includes options to purchase (i) 25,000 shares of Common Stock at
$2.20 per Share through August 2, 2001; 100,000 shares of Common Stock at
$2.00 per Share through August 2, 2006; and 25,000 shares of Common Stock
at $6.00 per share through December 3, 2006, (iii) options issued to Mrs.
Catherine Ford to purchase 31,250 shares of Common Stock at $8.75 through
January 16, 2007 and 18,750 shares of Common Stock at $6.00 per share
through December 3, 2006 for which Mr.
Ford disclaims beneficial ownership.
(2) Ownership of approximately 1,100,000 shares owned by Mr. R.C. Ford and his
children was being contested by members of the Taylor Family. On January
23, 1997, the Taylor Family, the Company, Systems and Richard C. Ford
entered into a Memorandum of Settlement which provided for, among other
things, the dismissal of any remaining litigation against Systems and the
Ford Family provided that Mr. Ford obtains a buyer for the Taylor Family's
285,000 shares of T/F Purifiner, Inc. Common Stock. Such commitment extends
to May 6, 1997 and Mr. Ford believes he will be in a position to locate
purchasers for such shares or obtain an extension of time to obtain such
buyers.
(3) Mr. Ford is a Vice President, the Secretary and a Director of the Company.
Includes options to purchase 9,375 shares of Common Stock at $2.20 per
Share through August 2, 2006 and 3,375 shares of Common Stock at $6.00 per
share through December 3, 2006 and 31,250 shares of Common Stock at $8.75
through January 16, 2007.
<PAGE>
(4) Mr. Lefebvre is a Director of the Company. Includes options to purchase
32,500 shares of Common Stock at $2.00 per Share through August 2, 2006.
(5) Includes 71,250 shares owned by each of Margaret A. Taylor, Barbara A.
Taylor and John F. Taylor, of which James W. Taylor has voting power.
(6) The address is c/o N.A. Taylor and Company, 10 W. 9th Avenue,
Gloversville, N.Y. 12078.
(7) Includes 325,000 and 50,000 shares of Common Stock owned by Armen Partners,
L.P. and Armen Partners Offshore Fund Ltd. of which Garo Armen is the
general partner. Includes warrants to purchase 162,500, 25,000 and 12,500
shares of Common Stock at $2.00 per share through December 31, 1999 owned
by Armen Partners, L.P., Armen Partners Offshore Fund Ltd., and Garo Armen,
respectively. Includes options to purchase 250,000 shares of Common Stock
at $2.00 per share through August 2, 1998 owned by Armen Capital Management
Corp.
(8) Includes 150,000 shares of Common Stock and Warrants to purchase 75,000
shares of Common Stock at $2.00 per share through December 31, 1999 owned
by Greystone Partners, LP.
Beneficial Ownership Reporting Compliance
- -----------------------------------------
Section 16 (a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent (10%) stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16 (a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended December 31, 1996, all Section 16
(a) filing requirements applicable to its officers, directors and greater than
ten percent (10%) beneficial owners were completed except that Mr. Garo Armen
did not timely file his initial statement of beneficial ownership on Form 3.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
TRANSACTION WITH TAYLOR FAMILY. During 1995, the Company had sales of
approximately $8,400 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.
<PAGE>
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.
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 2,166,000 shares of the
Company's Common Stock.
During 1994, the Company and its principal shareholder, Richard C. Ford,
instituted legal action against the estate of a former 50% owner of the Company
("the Estate"). This litigation sought a declaratory judgment approving the
dilution of the Estate's interest in the Company from 50% to approximately 10%
as a result of the issuance of additional Common Stock in 1994 to the principal
shareholder and his children. Subsequently, the beneficiaries of the Estate
filed counterclaims against the Company and its principal shareholder and his
children seeking declaratory relief, cancellation of additional stock issuances
by the Company, an injunction against further issuances, appointment of a
receiver and damages against Ford individually. In June 1995, the Estate
demanded repayment of the non interest bearing shareholder loans due to the
Estate for which there were no stated due dates ($502,026 at December 31, 1996).
In September 1996, the Company entered into an Agreement in Partial Settlement
of T/F Purifiner, Inc. Issues ("Agreement") which released the Company, with
prejudice, from all litigation pending or contemplated by the Taylor Family, the
beneficiaries of the Estate, and individually, against the Company related to
any actions taken by the Company before the date of the Agreement. In return,
the Company agreed to repay the Estate's loans of $502,026 as follows: $167,342
due 90 days after any equity financings which raise in excess of $5,000,000 of
gross proceeds; $167,342 on the first and second anniversaries of such equity
financings. If the equity financings are less than $5,000,000 the amount of the
periodic debt repayment will be reduced and the term extended proportionately.
The Estate has agreed not to commence any action for loan repayment as long as
the Company is in compliance with the Agreement and raises gross proceeds of at
least $2,000,000 within one year of the Agreement. The Company has made all
required payments to the Estate and has raised in excess of $2,000,000 as
required by the Agreement. See "Part I, Item 3 - Legal Proceedings-Stockholder
Litigation."
Additionally, in 1995, Mr. Richard C. Ford loaned the Company and Systems
$75,500 at 10% per annum. For 1996, Mr. Ford loaned the Company an additional
$23,458. During 1995 and 1996, the Company incurred approximately $4,000 and
$500 respectively, of interest expense related to these and other loans. See
"Note 4 to the Notes to Financial Statements".
<PAGE>
Mr. Richard C. Ford, during 1995 and 1996, was repaid an aggregate amount
of $85,000 and $58,671 on all outstanding loans. At December 31, 1995, the
amount of outstanding non interest bearing obligations from the Company to Mr.
Ford was $502,026. On August 1, 1996, Mr. Ford received 251,013 shares of Common
Stock in exchange for his shareholder loans in the amount of $502,026.
In January 1997, as amended, the Company loaned Richard C. Ford $200,000
bearing interest at 10% per annum and due in June 1997 secured by 40,000 shares
of the Company's Common Stock owned by Mr. Ford.
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
which all such loans had been repaid as of December 31, 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 90,773 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 $1.51 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.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A) Index to Exhibits
Exhibits Description of Documents
- -------- ------------------------
3.1 Amended and Restated Certificate of Incorporation of T/F Purifiner,
Inc. dated December 30, 1996 (2).
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 (1).
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 (1).
10.8 Exclusive Distributor Agreement / Colombia Effective Date March 1,
1996, between Al Pacific Cali and the Company (1).
10.9 Exclusive Agreement for Distributorship in Singapore dated February
6, 1996 between Kian Seng Hardware Trading Pte. Ltd. and the Company
(1).
10.10 Exclusive Agreement for Distributorship in Malaysia dated February
5, 1995 between Kian Seng Hardware Trading Pte. Ltd. and the Company
(1).
<PAGE>
10.11 Exclusive Agreement for Distributorship in Thailand dated November
17, 1995 between N.Haven Group International Co. Ltd. and the
Company (1).
10.12 Exclusive Agreement for Distributorship in Indonesia dated February
5, 1996 between PT Hista Bayhu and the Company (1).
10.13 Master Distributor Agreement dated January 11, 1995 between Trimex
Korea and the Company (1).
10.14 Promissory Note dated December 21, 1995 between the Company, Richard
C. Ford, individually, T/F Systems, Inc. as maker and Bassett Boat
Company of Florida in the principal amount of $200,000 (1).
24.1 Consent of Independent Auditors (3).
27 Financial Data Schedule (3).
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) Incorporated by reference from the Exhibits to the Company's Form 10-SB
Registration Statement, as amended, as filed with the Securities and
Exchange Commission.
(2) Incorporated by reference from the Exhibit to the Company's Form 8-K,
January 9, 1997, as filed with the Securities and Exchange Commission.
(3) Filed herewith.
B) Report on Form 8-K.
None
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
T/F Purifiner, Inc.
(Registrant)
Date: March 25, 1997
By: /s/ Richard C. Ford
------------------------
Richard C. Ford
Chairman of the Board,
President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
Date: March 25, 1997
By: /s/ Richard C. Ford
------------------------
Richard C. Ford
Chairman of the Board,
President and Chief Financial Officer
Date: March 25, 1997
/s/ Richard J. Ford
-------------------
Richard J. Ford
Vice President and Director
Date: March 25, 1997
/s/ Byron Lefebvre
------------------
Byron Lefebvre
Director
Date: March 25, 1997
/s/ Larry Freedman
------------------
Larry Freedman
Controller
Exhibit 24.1
CONSENT OF INDEPENDANT AUDITORS
T/F Purifiner, Inc.
Boynton Beach, Florida
We consent to the incorporation by reference in the Registration Statement
on Form S-8 of our report dated February 14, 1997 (with respect to last
paragraph Note 9, February 26, 1997) on the financial statements of T/F
Purifiner, Inc., (the "Company") as at December 31, 1996 and for each of the
years in the two-year period then ended, included in the Company's 1996 Annual
Report on Form 10-KSB.
Richard A. Eisner & Company, LLP
New York, New York
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF T/F PURIFINER, INC. FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1996 , AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 928,960
<SECURITIES> 0
<RECEIVABLES> 166,806
<ALLOWANCES> 40,000
<INVENTORY> 440,239
<CURRENT-ASSETS> 2,555,636
<PP&E> 300,571
<DEPRECIATION> (128,201)
<TOTAL-ASSETS> 3,039,680
<CURRENT-LIABILITIES> 827,703
<BONDS> 0
0
0
<COMMON> 5,097
<OTHER-SE> 1,809,491
<TOTAL-LIABILITY-AND-EQUITY> 3,039,680
<SALES> 1,327,230
<TOTAL-REVENUES> 1,327,230
<CGS> 956,628
<TOTAL-COSTS> 956,628
<OTHER-EXPENSES> 2,330,361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,354
<INCOME-PRETAX> (1,983,270)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,983,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,983,270)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
