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, 1999
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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 ____________
Commission file number 0-29192
Puradyn Filter Technologies, Incorporated
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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. [ X ]
State issuer's revenues for its most recent fiscal year. $______
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 $.001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on March 19, 1999. Based on the
closing price of the Common Stock quoted on the OTC Bulletin Board as reported
on March 19, 1999 ($.8125), the aggregate market value of the 1,700,520 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 $1,381,000. 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 Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes _____ No _____
(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: March 20, 2000: 12,870,469
This report contains a total of 60 pages.
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PART I
The term "Company" refers to Puradyn Filter Technologies, Incorporated (formerly
known as T/F Purifiner, Inc.) and T/F Systems, Inc., as described more fully
below, unless the context otherwise implies.
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.
Recent Events and Strategy
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Beginning in March 1998, several key employees and Directors were
either terminated or resigned from their positions with the Company and Richard
C. Ford, the present Chief Executive Officer and Director returned to the
Company and in June 1998 Alan J. Sandler, joined the Company. At or about the
same time, the Company curtailed its operations and reduced its remaining
workforce to key personnel to reduce the amount of cash required to maintain
operations of the Company. To provide the cash to sustain operations, Richard C.
Ford, loaned the Company $150,000 in May and June, 1998. In August, 1998, the
Company entered into a Revolving Note Agreement, guaranteed by Mr. Ford, with
its bank for $250,000 which was revised in January, 1999, to $350,000. In March,
1999, Mr. Ford agreed to guarantee an addition of $175,000 to the bank Revolving
Note Agreement. In November, 1999, the Company formulated a plan to convert
$3,175,000 of debt into stock, to obtain forgiveness of $714,000 in interest on
the notes payable, and to offer 3,500,000 shares of its Common Stock for sale at
$1.00 per share. Prior to December 31, 1999, the Company sold 500,000 shares of
this stock offering. Also in December, 1999, the Company obtained discounts
totaling $347,000 from certain note holders and vendors on the settlement of
amounts owed. The Company completed the conversion of $3,175,000 of debt into
stock on January 24, 2000 as well as the forgiveness of the related accrued and
unpaid interest of $714,000. The sale of stock was completed on February 28,
2000, with a total of 4, 172,000 shares being sold for net proceeds of
approximately $4,100,000. The Company now has sufficient cash for the
foreseeable future.
On January 17, 2000, the Company hired an individual (formerly with
Detroit Desiel as a Senior Supplier Quality Engineer for 8 years, and Ford Motor
Co. as Supplier Quality Assurance Engineer for 7 years) as Director of
Manufacturing and Product Development. Also on March 1, 2000, The Company hired
a National Sales Manager to help recruit, train and manage an expanded sales
effort.
The Puradyn Onboard Oil Refiner ("Puradyn"), formerly called the
Purifiner, has had limited acceptance in the marketplace, the Company's strategy
has been to obtain
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product credibility by disproving the long-held conviction that oil must be
changed regularly in accordance with manufacturers' recommended guidelines.
Gradually, the credibility of the Puradyn and the concept of extended oil
replacement intervals is becoming more readily accepted. The Company believes
that this increasing acceptance is due to successful third-party testing of the
product, awards and other recognition the Puradyn has received, and the
increased awareness of consumers as well as vehicle, engine and oil companies,
that oil if kept continually clean will have a significantly longer, useful life
resulting in significant cost and environmental benefits. As an example, in
December, 1998, the Company obtained the results from Vulcan Chemicals, a
division of Vulcan Materials Company, a customer whose truck equipped with the
Company's Purifiner traveled 616,000 miles without an oil change and whose
engine parts showed no appreciable wear over that period. The oil report showed
all measurement levels to be normal. Management believes the favorable response
from potential customers will result in improved sales in future years, however,
there can be no assurance such improvements will occur.
The Company is currently working with certain original equipment
manufacturers ("OEM's") to enable them to evaluate the benefits of the Puradyn
with the goal of obtaining their approval of the product and eventually to
install the Puradyn on their products at their factories under either the
Puradyn brand or a private label name, and distribute the product throughout
their dealer networks (see "Marketing"). These OEM's are mindful of the
significant competitive benefits of extended drain intervals and the
environmental and related regulatory considerations of the use of an oil
purification system such as the Puradyn.
Currently the Company is refocusing its new distribution network and
direct sales activities, primarily in the heavy-duty truck marketplace and
primarily in the United States, although it does have some international
distributors to which it allocates limited amounts of resources. The Company
also formed a foreign joint venture effective in January, 1996, to market the
Puradyn through Europe, in the Middle East, the former Soviet Union, Egypt and
South Africa See "Distribution" for recent events related to this joint venture.
In the future, the Company plans to expand its distribution channels worldwide,
as well as the number of market segments on which it focuses.
The Company had employed direct sales personnel to help establish and
service its aftermarket distributors and to directly sell its products to
certain major national accounts. Additionally, the Company employs technical and
installation personnel to assist customers in analyzing the benefits of the
Puradyn through oil analysis, as well as answering technical questions and
assisting with the training and installation on the use of the Puradyn. In the
future, the Company may also consider additional joint ventures to manufacture
and/or market its products in various parts of the world.
The Company believes that business, economic, competitive,
environmental and governmental factors are now converging to provide fertile and
opportunistic conditions for achieving profitable business outcomes. One such
example of a noteworthy development was a video the Company commissioned in
December, 1998, of an engine
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teardown of a Vulcan Chemicals Company truck with an M-11 Cummins engine
equipped with a Puradyn filter unit that went 616,000 miles without a single oil
change. The engine wear and oil analysis reports stated the engine parts and oil
were well within specifications and normal. Because the content of the video
provides validation and assurance of the Puradyn's benefits to end-users, it has
been a catalyst for establishing sales opportunities with numerous prospects
since the beginning of 1999. Management believes the favorable response will
result in improved sales, however, there can be no assurance such improvements
will occur.
Risk Factors
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Potential for Continuing Losses and Accumulated Deficit
Prior to 1993, the Company was engaged in limited sales activities.
Consequently, the Company has had a limited operating history upon which an
evaluation of the Company's prospects and performance can be made. The Company's
prospects must be considered in light of risks, expenses, difficulties and
delays frequently encountered in connection with the formation and early phase
of operation of a new business, the development and commercialization of new
products based on innovative technology and the high level of competition in the
industry in which the Company operates. The Company has had significant losses
in each year of its operations. In addition, the Company has an accumulated
deficit, which amounted to approximately $11,889,000 as of December ,31, 1999.
It is likely that significant losses will continue until such time, if ever, as
the Company is able to generate a level of revenue sufficient of offset these
continuing early-phase expenditures. There can be no assurance that the Company
will be able to successfully implement its business strategy, that its revenues
will increase in the future or that it will ever be able to achieve profitable
operations.
Dependence on Significant Customers
During 1999, eleven of the Company's customers accounted for
approximately -50% of the Company's revenues, and one customer accounted for 9%
of the Company's revenues. Termination of the arrangements with any of these
significant customers could have a material adverse effect on the Company's
financial condition or operations. There can be no assurance that the Company
will retain any or all of these customers or, if such customers are not
retained, that the Company would be able to attract and retain new customers to
replace the revenues currently generated by these significant customers.
Uncertainty of Product and Technology Development; Technological Factors
The Company has not completed development and testing of certain of its
proposed products and proposed enhancements to its products, some of which are
still in the planning stage or in relatively early stages of development. The
Company's success will depend in part upon the ability of its proposed products
to meet targeted performance and cost objectives, and will also depend upon
their timely introduction into the marketplace. The Company will be required to
commit considerable time, effort and resources to finalize development of its
proposed products and product enhancements. Although the Company anticipates
that the development of its products and technology will be successfully
concluded, its product development efforts are subject to all of the risks
inherent in the development of new products and technology (including
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unanticipated delays, expenses and difficulties). There can be no assurance as
to when, or whether, such product development efforts will be successfully
completed. In addition, there can be no assurance that the Company's products
will satisfactorily perform the functions for which they are designed, that they
will meet applicable price or performance objectives or that unanticipated
technical or other problems will not occur which would result in increased costs
or material delays in their development. There can be no assurance that, despite
testing by the Company and by current and potential end users, problems will not
be found in the new products after the commencement of commercial shipments,
resulting in loss of or delay in market acceptance.
Limited Marketing Activity; Uncertainty of Market Acceptance
The Company has commenced limited marketing and sales activities
relating to its products. To date, the Company has generated limited revenues
from the sale of its products, which have achieved limited market acceptance.
Demand for the Company's products and the Company's proposed products will
depend principally upon consumer demand for the Puradyn. 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 for the
Company's existing and proposed products will require substantial marketing and
sales efforts and the expenditure of a significant amount of funds to inform
consumers of the benefits and cost advantages of its products and achieve name
recognition. There can be no assurance that the Company will be able to
penetrate existing markets on a wide scale basis or position its products to
appeal to mainstream consumer markets or that any marketing efforts undertaken
by the Company will result in increased demand for or market acceptance of the
Company's existing and proposed products. The Company relies, and intends to
continue to rely, in part, on arrangements with third parties for the marketing
of its products, including arrangements with distributors and other strategic
partners. There can be no assurance that they or the company will be able to
successfully market the Company's products or that their efforts will result in
any significant increase in revenues.
Dependence on Suppliers
A substantial portion of the component parts of the Company's products'
are manufactured by various suppliers for assembly by the Company. The Company
believes its relationships with its suppliers are satisfactory and that
alternative suppliers are available if relationships falter or existing
suppliers are unable to keep up with the Company's requirements. However, there
can be no assurance that the Company's current or future suppliers will be able
to meet the Company's requirements on commercially reasonable terms or within
scheduled delivery times. An interruption of the Company's arrangements with
suppliers could cause a delay in the production of the Company's products for
timely delivery to distributors and customers. The absence of suitable
manufacturing arrangements would have a material adverse effect on the Company's
operations.
Dependence on Distributors
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The Company currently sells a relatively small portion of its products
through distributors for resale to other distributors or customers, and is
dependent to some extent upon acceptance of its products by such distributors,
customers and their active marketing and distribution efforts relating to the
Company's products. Most of the distributors to whom the Company sells it
products, including those that are contractually obligated to purchase the
Company's products in order to maintain their distribution territories, could
discontinue carrying the Company's products at any time. Due to increasing
competition, distributors are increasingly in a stronger position to negotiate
favorable terms of sale, including price discounts and product return policies.
There can be no assurance that the Company will be able to increase or maintain
its distribution, and as a result, the Company's operating results could be
somewhat adversely affected.
Competition; Technological Obsolescence
Although there is limited competition in the electric mobile oil
purification system market, the market for full-flow oil filters, in general,
and by-pass oil filters, in particular, is characterized by intense competition.
To the extent that the Company's products reduce oil consumption, full-flow oil
filter sales and disposal costs and extend engine life, the Company's products
compete with, or affect the sales of many well established companies. These
companies have substantially greater financial, technical, personnel and other
resources than the Company and have established reputations for success in the
development, licensing and sale of their products and technology. Certain of
these competitors have the financial resources necessary to enable them to
withstand substantial price competition or downturns in their markets. In
addition, certain companies may be expected to develop technologies or products
which may be functionally similar to some or all of those being developed by the
Company. Industry standards with respect to the markets for the technology and
products being developed by the Company may be characterized as evolving, which
often results in product obsolescence or short product life cycles. Accordingly,
the ability of the Company to compete will depend on its ability to complete
development and introduce into the marketplace in a timely manner its proposed
products and technology, to continually enhance and improve such products and
technology, to adapt its proposed products to be compatible with specific
products manufactured by others, and to successfully develop and market new
products and technology. There can be no assurance that the Company will be able
to compete successfully, that its competitors or future competitors will not
develop technologies or products that render the Company's products and
technology obsolete or less marketable or that the Company will be able to
successfully enhance its proposed products or technology or adapt them
satisfactorily.
Dependence on Key Personnel
The success of the Company will be largely dependent on the efforts of
the members of the management of the Company. The Company has not as yet entered
into employment agreements with some members of the management of the Company,
and there can be no assurance that such persons will continue their employment
with the Company. The loss of the services of one or more of such key personnel
could have a material adverse effect on the Company's ability to maximize its
use of its products and technologies or to develop related products and
technologies. The success of the
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Company also in dependent upon its ability to hire and retain additional
qualified executive, engineering and marketing personnel. There can be no
assurance that the Company will be able to hire or retain such necessary
personnel. The Company does not presently have "key man" life insurance with
respect to members of its management.
Product Concentration
Although the Company has taken steps to broaden its product offerings,
sales of the Puradyn and related products and enhancements are expected to
continue to account for a substantial portion of the Company's sales for the
foreseeable future. Future growth will depend upon acceptance of the Puradyn by
a broader group of customers. Failure to achieve broader acceptance would have a
material adverse effect on the Company's financial condition and results of
operations. In addition, any factors adversely affecting the Puradyn, such as
the introduction of superior products or shifts in the needs of the marketplace,
would have a material adverse effect on the Company's financial condition and
results of operations.
Risks Associated With Proposed International Operations and International
Distribution
The Company may enter joint ventures with foreign partners, and the
Company has already entered into one joint venture at this time. Although there
can be no assurances that this will occur on a large scale, if they were to
occur, such operations would be subject to a number of risks, including longer
payment cycles, unexpected changes in regulatory requirements, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, the burden of complying with a variety of foreign laws, greater
difficulty in accounts receivable collection, potentially adverse tax
consequences, currency fluctuations and political and economic instability.
Additionally, the protection of intellectual property of the Company may be more
difficult to enforce outside of the United States. In the event that the Company
is successful in expanding its international operations, the imposition of
exchange or price controls or other restrictions on foreign currencies could
materially affect the Company's business, operating results and financial
condition.
Part of the company's sales are made through distributors in foreign
countries. Sales through these distribution channels are also subject to a
number of risks, including unexpected changes in regulatory requirements, import
and export restrictions and tariffs, and currency fluctuations and political and
economic instability.
Product Protection, Expiration of Patents and Patents Pending Infringement
The Company's success is heavily dependent upon its proprietary
technology. The Company relies on a combination of contractual rights, patents,
trade secrets, trademarks, non-disclosure agreements and technical measures to
establish and protect its proprietary rights.
There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to prevent misappropriation of
the technology or independent development by others of products with features
based upon, or otherwise
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similar to, those of the Company's products. In addition, although the Company
believes that its technology has been independently developed and does not
infringe on the proprietary rights of others, there can be no assurance that the
Company's technology does not and will not so infringe or that third parties
will not assert infringement claims against the Company in the future. In the
case of infringement, the Company would, under certain circumstances, be
required to modify its products or obtain a license. There can be no assurance
that the Company would be able to do either in a timely manner or upon
acceptable terms and conditions, and such failure could have a material adverse
effect on the Company. In addition, there can be no assurance that the Company
will have the resources to defend a patent infringement or other proprietary
rights infringement action.
One patent licensed by the Company expired in September 1998 and the
other patent under this license, used in a small number of the Company's
products, will expire in June, 2008. The Company has patents for a redesigned
Puradyn (the basis for the next generation of the Puradyn products), and the TFP
Filter Plus which have been issued in the United States and certain other
foreign countries in 1997, a U.S. patent for its new oil flow meter and a U.S.
patent issued in 1998 on another method of introducing additives into the oil.
These patents expire from May, 2014 to October, 2016. There can be no assurance
that such patents withstand competitive threats to their patentability or, in
the case of the redesigned Puradyn, be developed into commercially viable
products. The expiration of these patents may have an adverse competitive effect
on the Company and there can be no assurance that the patents pending for these
new products in various foreign countries will be issued or that they will
provide meaningful proprietary protection.
Possible Fluctuations in Operating Results
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, distributors and other strategic partners, 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.
Limited Market for the Company's Securities
There is currently only a limited trading market for the Common Stock
of the Company. The Common Stock of the Company trades on the OTC Bulletin Board
under the symbol "PFTI", which is a limited market and subject to substantial
restrictions and limitations in comparison to the NASDAQ System. While the
Company expects to apply for inclusion of its Common Stock on NASDAQ (Small Cap)
at such time as its securities comply with applicable criteria for inclusion,
there can be no assurance the Company's Common Stock will ever qualify for
inclusion within the NASDAQ System or that more than a limited market will ever
develop for its Common Stock.
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Certain Legal Proceedings
Certain legal matters that may present risks to the Company relating to
patent infringements, license agreements and other claims can be found below in
"Item 3, Legal Proceedings".
The Company
Introduction
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The Company owns the rights to manufacture, market and distribute
worldwide the Puradyn, a bypass oil refining system for use with substantially
all internal combustion engines, generators and other types of equipment that
use lubricating oil. The Puradyn cleans oil by continually removing solid and
liquid contaminants from the oil through a sophisticated and unique filtration
and evaporation process. The Puradyn 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 Puradyn.
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 Puradyn Filter Technologies, Incorporated
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The patents issued on the oil purification system that, after further
development, has evolved into the current Puradyn units, were issued in the
early 1980's. The owners of such patents attempted to market and sell the
original system under various other trade names, 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
Puradyn; (c) the absence of acceptance and endorsement by engine and vehicle
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,
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currently an employee 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, and
a failure of the manufacturer to meet this supply commitment, Systems obtained
the worldwide manufacturing and marketing rights to the Purifiner in 1990.
In February 1988, Puradyn Filter Technologies, Incorporated (formerly
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." The Company 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 by 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, the Company 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, Puradyn Filter Technologies, Incorporated
("Puradyn"), was the exclusive distributor and Systems was the exclusive
manufacturer of the Purifiner. On December 31, 1995, in exchange for any claims
Puradyn had in the delay damage award, Puradyn 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 other parties discussed above, and (b) liabilities related to
certain stockholder advances made to Systems by Ford and Taylor. Accordingly,
Puradyn currently owns all manufacturing and marketing 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 had been hampered by, among other things,
insufficient capital. Commencing in early 1996 through January 1998, the Company
has raised net proceeds of approximately $6.6 million through the issuance of
debt or equity securities to finance its operations. In January, 2000, the
Company completed the conversion of $3,175,000 of debt into its Common Stock and
in February, 2000, it completed the sale of 4,172,000 shares of its Common Stock
for net proceeds of approximately $4,100,000. However, the Company continues to
incur operating losses, which has resulted in cash outflows and the continuing
need for additional financing. The inability of the Company to obtain adequate
future financing when needed, will have a material adverse effect on the
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Company, including requiring the Company to significantly curtail or cease its
operations.
On February 4, 1998, the Company filed a Certificate of Amendment to
its Certificate of Incorporation which changed its name from T/F Purifiner, Inc.
to Puradyn Filter Technologies Incorporated.
Products
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The Puradyn Oil Refining System (formerly called 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 Puradyn, can be 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
Puradyn is extracting from the oil solid particles down to less than one micron
(1/39 millionth of an inch), as well as liquid contaminants (water, fuel and
antifreeze). As the Puradyn 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 Puradyn reduces maintenance costs by decreasing oil
consumption, engine wear, and the necessity for overhauls and certain other
types of general maintenance as well as aiding increased fuel economy. All these
savings are achieved from utilizing the Puradyn which has a relatively short
payback period, which in some cases is less than one year. Accordingly, the
Puradyn achieves great savings and, therefore, increased profits for its end
users.
The Puradyn is manufactured in six different sizes suitable for
placement on engines or equipment with oil sump capacities ranging from 5 to 240
quarts. The Puradyn also can be used in multiples for larger oil sumps.
Qualified personnel can usually install the Puradyn on engines and other
equipment in approximately 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 Puradyns, a preheater, a pump and other miscellaneous parts.
All Puradyns 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 Puradyn 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.
11
<PAGE>
The Puradyn 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 Puradyn. The oil passes slowly through the Element,
where solid contaminants in the oil are trapped. The Element includes 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 15-30 microns. According to a paper published by the Society
of Automotive Engineers in its SAE Paper No. 660081, dated January 1966,
"filtering 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 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 Puradyn 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 or vented to atmosphere. (On
hydraulic applications, the water vapor is vented into the atmosphere.) The
cleaned oil then flows back to the hydraulic sump or engine crankcase via
gravity. These processes continue whenever the equipment or engine is operating.
The Company also manufactures and distributes its replacement Elements
for the Puradyn with the exception of the TF8SP. 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 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 or as oil analysis
dictates). The Company recently introduced a U.S. patent approved oil-flow meter
which enables the user to visually confirm that the oil is flowing through the
Puradyn. 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 fifteen minutes by the customer.
12
<PAGE>
The Company estimates that the current cost of an oil and full
flow-filter change (assuming a person does not do the oil change himself or
herself) is approximately $100 or more for heavy duty trucks. The cost varies
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 Puradyn
Element, the current suggested prices for retail end-users of the Elements range
from approximately $10.10-33.25 and the cost of an oil analysis purchased
through the Company currently costs approximately $9.45 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 Clean 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
helps compensate 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. The Company's performance warranties for product used in the United
States and Canada requires 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 Puradyn has an oil sample valve to expedite the taking of the
oil sample. The current customer cost of testing an oil sample ranges up to
approximately $8.50. The cost of an oil sample may exceed $8.50 in certain
foreign countries.
Users must maintain a record of the laboratory oil analysis results in
order for the Company's warranties to remain in effect. Management believes that
the risk of losing the Puradyn's warranties encourages customers to complete the
oil analysis and replace Elements in a timely manner, making the Puradyn 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 material 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 Puradyn 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.
13
<PAGE>
The Puradyn has no moving parts and consequently requires no
significant ongoing maintenance. The Puradyn 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, and
other standard preventive maintenance procedures are performed, the Company
believes that the Puradyn will perform as designed. Puradyns 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 Puradyn. 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 Puradyn 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.
Marketing
- ---------
The Company' s products are eventually expected to be marketed to
numerous market segments, including trucking, marine, agricultural, bus,
recreational vehicle, generator, construction, mining, industrial and hydraulic
applications, and other users of engines or equipment that utilize up to 50
weight oil for lubrication. Currently, the primary focus is on the on-highway
and construction segment.
To date, the Company has not expended any material amounts to advertise
its products in the marketplace and has relied upon editorials, trade shows and
other methods to promote its products. However, the Company has expended
material amounts in its selling efforts. The Company's products have achieved
recognition from well-known sources, including (i) certification (in 1994) and
recertification (in 1998) 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), (iv) receipt of the World Trade Center's
(Ft. Lauderdale, Florida) 1996 Award for Outstanding Achievement in
International Trade (Manufacturing), and (v) being selected as one of the
finalists in the 1998 Discover Magazine awards for Technological Innovation.
Management believes that such
14
<PAGE>
recognition has and will continue to enable the Company to 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 Puradyn and increase its 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 through Leasing Services,
Incorporated ("LSI") , with principal offices located in Solana Beach,
California and Boston, Massachusetts, 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. Many customers have found the
up-front cost of purchasing the Puradyn 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 Puradyn 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.
With this arrangement, the Company and its distributor network are able
to provide to its customers a complete product package that includes the
Puradyn, installation assistance and third party 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 and to date this arrangement with
LSI has not resulted in any material increase in revenues.
The Company relies on management's ability to determine the existence
and extent of available markets for its product. Company management and
consultants had considerable sales and marketing backgrounds and devoted a
significant portion of their time to sales 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 Nashville, Tennessee, the
ConAgra Show in Las Vegas, Nevada and others.
Management believes that the ultimate success of its product will
depend on the approval of and sales directly to OEMs and through their
distribution networks. A number of international and domestic engine and truck
OEMs are currently evaluating the Company' s products, such as Mack Trucks, Ford
Motor Company, and Detroit Diesel Corporation (engines). There can be no
assurance that these or other OEMs will accept the Company's products for
original placement on their equipment or directly approve the use of the Puradyn
with their equipment. To date, the Company's customers have requested that the
Puradyns be installed at a Volvo USA factory (North Carolina),
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<PAGE>
Navistar International factory and a Mack Truck factory on a very limited number
of vehicles.
Distribution
- ------------
The Company currently distributes its products through several channels
under the Puradyn trademark. To date, purchasers of the Company's products have
included USF Dugan, Carroll's Foods, Cyprus Bagdad Corporation, Miami-Dade
County Schools, Fort Worth Carriers, Coca Cola Enterprises, Sysco Foods, Vulcan
Chemicals and others.
The Company currently does not have written distribution agreements
with its smaller domestic and Canadian distributors, however the Company did
require these 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.
The Company has warehouse distributors located in the United States and
Canada, primarily in the heavy-duty trucking industry. The remaining
distributors 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. Late in 1997, the
Company decided to curtail the use of substantially all U.S. manufacturers
representatives, except for one primarily industrial agent in the Mid-Central
U.S., whose job it was to establish and service warehouse distributors and
introduce the Company's products to selected fleets. These responsibilities are
now performed primarily by direct employees. The Company does utilize
manufacturers representatives in the recreational vehicle market, and in Canada,
to enable the Company's personnel to focus its efforts on the US on-highway
segment. The Company pays its manufacturer's representatives negotiated
commission rates, depending on the level of services provided. The manufacturers
representatives' contracts can be canceled by either party on 30 to 60 days
notice.
In 1995, 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 part 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.
Navistar was the first major truck manufacturer that has agreed to an
aftermarket program with the Company, however, the Company's arrangement with
Navistar in the
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<PAGE>
U.S. was cancelled during 1999. Management plans to work with other truck
manufacturers, to establish other 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.
During 1999, 11 customers accounted for approximately 50% of the
Company's net sales, and one customer accounted for approximately 9% of Company
net sales. There are no assurances that each or all of these customers will
continue to do business with the Company and the loss from one or a combination
of the Company's significant 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 Albert N. Davies, of
Devon, England (who is not an affiliate of Centrax or the Barr Family).
Ltd.'s primary purpose is to market and establish distribution for the
Puradyn 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 had
the option to manufacture the products based upon market acceptance and other
factors which it exercised in 1997.
Puradyn owns approximately 45% of Ltd. and has a 50% voting interest,
however, the Board of Directors is controlled by Centrax representatives.
Forty-five (45%) percent is owned by Centrax and the remaining approximately 10%
is owned by Mr. Davies. Puradyn is not obligated to fund any of the operations
of Ltd. which, pursuant to the Centrax Agreement, may be provided (i) by
borrowings by 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 has
taken over the servicing of existing Company distributors in various countries,
including the United Kingdom, Italy, France, Turkey, the Czech and Slovak
Republics, Norway, Denmark, Bahrain, The Netherlands, Sweden, Hungary, Republic
of Ireland, Poland, Finland, Spain and Portugal. There can be no assurance that
such distributors will be successful in introducing the Puradyn in their
territories as they will face obstacles similar to those the Company and its
other distributors have encountered in introducing an innovative
17
<PAGE>
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 Puradyn 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, however, this fleet has decided not to purchase the
Puradyn, even though the engine company has approved its use.
Centrax has filed patents pending on a product consisting of a full
flow and bypass oil filter, all housed in one Puradyn unit, as well as a
side-by-side full-flow and Puradyn bypass filter design. These patent pending
products were designed primarily for original equipment placement by OEMs. The
Company is commencing to negotiate with Centrax regarding the
ownership/licensing of these pending patents and the rights to distribute these
products within and outside the Territory. There can be no assurance that such
negotiations can be successfully completed. The Company has the right to
distribute any new products developed by Ltd. everywhere other than the
Territory. Additionally, the Company is negotiating with Centrax concerning
other matters, including the possible discontinuation of the joint venture with
Centrax. The ultimate outcome of the negotiations cannot be determined at this
time.
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. Typically these larger customers,
and some smaller customers, have required an evaluation period, usually ranging
from three to twelve months, to ensure that the Company's products perform as
advertised. Management believes that this evaluation period will continue to be
shortened as the Company's products gain wider acceptance and support from
well-known customers and OEM's, such as Ford Motor Company, Mack Truck and
others.
Currently, the Company' s products are being evaluated by numerous
potential end users, including Ford Motor Company, Detroit Diesel, Mack Truck,
Kinsley Construction, Arlington ISD, Nabors Drilling, Anthony Crane Rental Co.,
Trinity Industries, I.E. Miller Co., Texas Department of Transportation, Detroit
Edison, City of Houston, Miami-Dade Water and Sewer G.S.A., Asplundh Tree Expert
Co., Corporate Express Delivery Systems, 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 pursuant to a contract which
expired in June 1998. The Company negotiated a new contract which the Company
received in July 1999. The Company believes this will enable the Company to more
efficiently sell its products to the U.S. Government and its agencies.
18
<PAGE>
Recent sales efforts by the Company have resulted in the following:
Contract negotiations with Florida school districts for Puradyn unit
installation to their buses; product purchases of approximately 1000-1500 units
by Miami-Dade County during 2000 with an initial recommendation for purchase
submitted of $255,000; negotiations are in process with an agency of a large
state for specification of Puradyn units as an option for their vehicles; a
large truck manufacturer has begun tests with Puradyn units; a major transit
system in the United States is conducting an extensive test of Puradyn units; a
major water and sewer utility (sixth largest in the United States) has finished
testing Puradyn units; a large metropolitan dairy (owned by a national food
maker/distributor) has placed on order for approximately 300 Puradyn units; a
major Canadian industry association is testing Puradyn units for its members; a
national tree trimming company began testing Puradyn units; a major GM
modification company has agreed to include Puradyn products as an equipment
option in their customer catalog; a major utility issued a $99,950 blanket
purchase order for Puradyns; two prominent bus manufacturers have agreed to
offer installation of Puradyns on their buses as an equipment option and other
numerous evaluations are in progress that management feels should close during
2000. Also, the Company recently awarded exclusive aftermarket sales rights for
representation in the State of Michigan, and hired a marketing and public
affairs consultant to promote Puradyns to municipalities in Florida and other
specified states. Additionally, the Company received approval for Florida's
State Negotiated Agreement Price Schedule (SNAPS) to allow easier marketing of
Puradyns to Florida's local and state government agencies at discounted prices.
International Sales. The Company directly and/or with the assistance of
commission based manufacturer's representatives have established primarily
non-exclusive distributors in various countries, including Australia, Thailand,
Colombia, Panama, Pakistan, China, Hong Kong, Brazil and other countries. 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. The Company's sales to its Asia/Pacific
distributors in 1999 was $6,000 ($14,000 in 1998) and has been adversely
affected by the weakened local economies of these nations and future sales to
these distributors are expected to be adversely affected due to these continuing
economic problems. Additionally, sales to Ltd. were insignificant in both 1999
and 1998 as a result of Ltd. commencing its own manufacturing operation.
Finally, sales to Latin America in 1999 amounted to $60,000 versus $81,000 in
1998. Due to focus by the Company on the US marketplace and other factors, it is
anticipated that sales in this and other international regions may be difficult
to increase in 2000. 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
Puradyn units and manufactures substantially all of its Elements. The component
parts
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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 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 to obtain additional
tooling and dies and to upgrade certain of its existing manufacturing equipment
and may expand its vendor network for the purpose of limiting its exposure to
its single source suppliers. However, there can be no assurances that its volume
of sales will increase or 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. The Company is in the early process of implementing QS 9000 to
ensure that the Company's product quality will consistently meet the
requirements of the trucking and automotive industries.
Warranties.
- -----------
The Puradyn carries a six-month performance warranty, and is currently
generally warranted to the original user to be free of defects in material and
workmanship for ten years (previously five years), except for the heating
element which is currently warranted for five years (previously two 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, limited performance warranties for recreational vehicles,
including a twelve-month performance warranty, and some limited performance
warranties with a specific industrial user. The Company maintains $2,000,000
aggregate ($1,000,000 per occurrence) product liability insurance coverage in
both the US and certain foreign markets.
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 oil filtration products such as the
Spinner II unit of T.F. Hudgins, Inc., and the bypass filter made by Luberfiner,
Inc., Parker Hannifin Corporation - Racor division, 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. Additionally, the Company's other direct competitors include Premo
Lubrication Technologies, Incorporated and Certified Technologies, Corp.
Patents and Trademarks.
- -----------------------
20
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The Company has patents for a redesigned Puradyn, the basis for the next
generation of the Puradyn products, and the TFP Filter Plus which have been
issued in the United States and certain other foreign countries in 1997 (See
"Distribution - TF Purifiner Ltd.). In 1997, the Company obtained a U.S. patent
for its new oil flow meter which enables the user to visually determine that oil
is flowing through the Purifiner and a U.S. patent issued in 1998 on another
method of introducing additives into the oil. These patents expire from May,
2014 to October, 2016. There can be no assurance that such patents withstand
competitive threats to their patentability or, in the case of the redesigned
Puradyn, be developed into commercially viable products.
The Company has a license and royalty agreement (See Item 3, "Legal
Proceedings") with the owner of two of the U.S. patents which covered most of
the Company's existing Puradyns. One of these patents expired in September 1998
and the other patent under this agreement, used in a small number of the
Company's products, expires in June 2008. This agreement also covers several
foreign issued and pending patents in several other countries, the earliest of
which will expire in June 2004. The term of the agreement is for the life of the
patents and any improvements thereto and requires the payment of a 5% royalty
based on the net sales price, as defined, of the covered products. This
agreement also covers the Purifiner trademark in the United States for which the
Company pays a 1% royalty based on net Purifiner sales, as defined. The Company
is primarily responsible for maintaining and defending the integrity of these
patents and the Purifiner trademark.
The Company has registered the product trademark, "Purifiner" in
substantially all the countries of the industrialized world (other than in the
United States, where the Company's licensor has registered the trademark) and is
registering the Puradyn trademark in the United States.
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 1994,
and recertification in July 1998, 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 1998 and older model year vehicles with
pressure oil systems.
Engineering and Development.
- ----------------------------
The Company's engineer is the inventor and originator of four U.S.
patents issued to the Company in 1996 and 1997 and the most recently issued
patent licensed to the Company. During the last two to three years the inventor
has devoted substantially all of his time to the engineering, development and
enhancement of the Company's products. Since 1998, the Company's engineering
resources have focused on improving product quality, including redesigning the
Puradyn lid, improving sealing and heating characteristics, improving mounting
and other hardware and banjo fittings. Certain of these improvements were
required in order to eliminate leaks from the Puradyn which
21
<PAGE>
occurred under certain circumstances and resulted in various Company product
evaluations being extended, or in some cases, curtailed. The Company's
Engineering Department has focused on the underlying reasons for these leaks and
has successfully implemented product enhancements to resolve these problems.
Employees.
- ----------
At March 20, 2000, the Company had 17 employees, 5 of whom were engaged
in manufacturing, assembly, quality control, warehousing and shipping, 5 in
marketing, technical and installation assistance and sales, 2 in engineering and
development and 5 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 was
leased for a term ending March 31, 1999 which has been extended on a month to
month basis at a monthly rate of approximately $10,000.
ITEM 3. LEGAL PROCEEDINGS.
------------------
Malt Litigation
On January 13, 1997, Robert C. Malt ("Malt"), as owner of certain
patents licensed to the Company, filed an action against Puradyn Filter
Technologies, Incorporated and T/F Systems, Inc. (collectively the "Defendants")
in the Circuit Court of the 15the Judicial Circuit of Florida in Palm Beach
County alleging that the Defendants are in breach of their license agreement
with Malt. Malt was 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. After a four day trial to the court, the court ruled on
March 2, 1999 that Malt was not entitled to any injunctive relief and was
awarded a total judgement of $20,168.48 which the Company has paid.
Searcy, Denny, Scarola et. al and Related Claims:
On June 24, 1997, Searcy, Denny, Scarola, Barnhardt & Shipley, P.A.
("Plaintiff") filed an action in the Circuit Court of the Fifteenth Judicial
Circuit in and for Palm Beach County, Florida, against Systems, the Company,
Richard C. Ford, individually, and Controlled Fuel Systems, Inc., an inactive
Company controlled by Richard C. Ford ("Defendants") for unpaid legal fees and
costs of approximately $313,000 plus interest and attorney's fees.
In late 1990 and early 1991, the Plaintiff was engaged by Systems to
represent it in obtaining the manufacturing and marketing rights to the
Purifiner and to perform other general matters for Systems. The Plaintiff was
ultimately successful in assisting Systems
22
<PAGE>
in obtaining such rights. 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 $75,000, and thereby remove the possibility of the Company being
held liable for such fees. On February 26, 1997, the appellate court ruled
against Systems and, accordingly, the funds discussed above are not currently
available to Systems to satisfy such claims and the case involving these funds
has been remanded to the trial court for a retrial. Puradyn did not assume these
obligations as part of its purchase of Systems, and was indemnified by Systems
with regard to these claims and related expenses. Management believes such
amounts are not the responsibility of Puradyn Filter Technologies, Incorporated
and intends to vigorously defend against this action. However, Systems is an
inactive company whose only asset is the claim that was reversed on appeal and
maybe retried by Systems. Accordingly, the ability to collect such funds, as
required, from Systems is uncertain. The ultimate outcome of this litigation
against the Company cannot be determined at this time. However, based on the
opinion of counsel, a favorable outcome is likely, as the only company who
obtained legal services from this law firm was T/F Systems.
Other Matters:
The Company settled the claim by a former supplier, Z Post, by paying $57,500 in
December 1999.
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 March 20, 2000, there were approximately 273 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 20, 2000 was $4.50. The
Company currently trades under the symbol "PFTI", and prior to its name change
in February, 1998 it traded under the symbol "TFPU".
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
23
<PAGE>
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 quarterly periods in 1998 and 1999, and from January
1, 2000 through March 20, 2000.
Common Stock
High Low
---- ---
January 1, 1998 - March 31, 1998 3.12 1.10
April 1, 1998 - June 30, 1998 1.63 .38
July 1, 1998 - September 30, 1998 .69 .38
October 1, 1998 - December 31, 1998 .44 .10
January 1, 1999 - March 31, 1999 1.75 .17
April 1, 1999 - June 30, 1999 1.06 .44
July 1, 1999 - September 30, 1999 .56 .25
October 1, 1999 - December 31, 1999 1.49 .25
January 1, 2000 - March 20, 2000 4.50 1.25
The above quotation reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
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 10-KSB 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(R) product, now called the Puradyn Onboard Oil Refiner or "Puradyn".
The Puradyn system can be attached to any engine and filters impurities from the
oil in the engine. Acceptance of the Puradyn products is dependent on various
factors, including the desire of potential users to extend oil change intervals,
to reduce maintenance costs, to extend engine life and to preserve the
environment.
Through 1997, the Company had been unable to significantly increase its
revenues through its distribution network which caused the Company to change its
sales strategy. In 1998, it began to refocus its sales effort toward the
development of
24
<PAGE>
commercial relationships with original equipment manufacturers ("OEM's") and
companies having medium to large size fleets of vehicles.
The sales effort not only involves selling the benefits to the
potential customer, but allowing the customer to test the Puradyn on its fleet
vehicles. Consequently the sales cycle is long. The Company is currently working
with several large OEM's and a large number of companies having large vehicle
fleets to enable them to evaluate the benefits of the Puradyn. In the case of
OEM's, the goal is to obtain their approval of the Puradyn to eventually install
it on their products at their factories and distribute the Puradyn throughout
their dealer networks. In the case of large vehicle fleets, the goal is to
obtain performance approval and to retrofit existing fleet vehicles with the
Puradyn and to have the Puradyn installed on all new vehicle engines. (See
"Marketing")
Largely as a result of the Company's sales efforts there is increasing
awareness on the part of vehicle and engine manufacturers and vehicle fleet
managers of the cost benefits of the Puradyn, the Company's warranties, and the
environmental benefits of conserving oil and reducing the disposal of waste oil.
The credibility of the Puradyn and the concept of extended oil replacement
intervals is now becoming more readily accepted. The Company believes that this
increasing acceptance is also due to third-party testing of the product and
awards and other recognition the Puradyn has received. However, there can be no
assurance that such efforts to develop commercial OEM and major fleet business
relationships will result in significant sales revenues.
Increasing operating losses and negative cash flow caused the Company
to make a change in management personnel in March 1998 underwhich several key
employees and directors were either terminated or resigned from their positions.
The Company curtailed its operations and reduced its remaining workforce to key
personnel. These actions were taken to reduce the amount of cash required to
maintain operations of the Company. At the same time, the Company sought to
arrange additional financing.
In November 1999, the Company formulated a plan to convert $3,175,000
of debt into stock, to obtain the forgiveness of interest on notes payable
totaling $715,000, and to offer 3,500,000 shares of its Common Stock for sale at
$1.00 per share. Prior to December 31, 1999, the Company sold 500,000 shares of
this stock offering. Also, in December 1999, the Company obtained discounts
totaling $347,000 from certain note holders and vendors on the settlement of
amounts owed. On January 24, 2000, the Company completed the conversion of
$3,175,000 of debt to its Common Stock and obtained forgiveness of $715,000 in
related accrued but unpaid interest. On February 28, 2000, the Company completed
the sale of 4,172,000 shares of its Common Stock with net proceeds of
approximately $4,100,000.
While this debt restructuring and sale of stock will improve the
balance sheet of the Company and provide cash for the foreseeable future, there
is no assurance that sales will increase to the level required to generate
profitable operations and to provide positive cash flow from operations, and
there is no assurance that the Company will not have to seek additional
financing in the future.
25
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the amounts in
thousands of net sales and the categories of operating costs and expenses,
interest expense and interest income for each of the years ended December 31,
1999 and 1998 together with the amount of increase or decrease from the
preceding year.
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands)
----------------------------------------
1999 vs 1998 1998 vs 1997
---------------------------------- ------------------
Increase Increase
1999 1998 (Decrease) 1997 (Decrease)
------ ------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 580 $ 708 $ (128) $ 1,353 $ (645)
------ ------- ------- ------- -------
Operating costs and expenses:
Cost of sales 585 580 5 1,019 (439)
Selling expenses 338 1,060 (722) 2,740 (1,680)
General and administrative expenses 509 630 (121) 1,122 (492)
Engineering and development 72 152 80 184 (32)
Deferred profit -- -- -- (9) 9
Impaired assets -- -- -- 324 (324)
------- ------- ------- ------- -------
Total operating costs and expenses 1,504 2,422 (918) 5,380 (2,958)
------- ------- ------- ------- -------
Operating loss (924) (1,714) (790) (4,027) (2,313)
Forgiven indebtedness (347) -- (347) -- --
Interest (Expense) (437) (354) 83 (460) (106)
Interest Income 1 7 6 63 56
------- ------- ------- ------- -------
Net Loss $(1,013) $(2,061) $(1,048) $(4,424) $(2,363)
======= ======= ======= ======= =======
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales. Net sales decreased by $128,000 from $708,000 in 1998 to
$580,000 in 1999. The Company experienced declining sales from the latter part
of 1997 through 1998 and for the first half of 1999 due to problems which began
in 1997 related to product quality. These problems were fixed in 1998, but had a
negative effect on sales after that time. Also during that period, the Company
changed the focus of its sales efforts toward OEM's and companies having large
fleets of trucks. Effects of this change in focus began to show late in 1999.
The Company experienced increased sales results in the latter months of 1999,
but had an overall decrease for the year compared to 1998.
Cost of Sales. Cost of sales increased by $5,000 from $580,000 in 1998
to $585,000 in 1999. The Company's gross margin decreased from 18.1% in 1998 to
negative 0.9% in 1999. The Company's gross margin was adversely affected by the
write off of $57,000 in excess and obsolete inventory and by its excess
manufacturing capacity.
26
<PAGE>
Selling Expenses. Selling expenses decreased by $722,000 from
$1,060,000 in 1998 to $338,000 in 1999. The decrease is due to the effect in
1999 of the reduction by management of many sales related expenses that began in
April 1998. Salaries and benefit expenses were reduced by approximately
$271,000, advertising expenses by $143,000 and costs related to the sales force
reduction such as travel, entertainment and communication by $149,000.
Commissions were lower by $24,000 due to lower sales and consulting was lower by
$27,000 due to spending cut backs in 1998.
General and Administrative Expenses. General and administrative
expenses decreased by $121,000 from $630,000 in 1998 to $509,000 in 1999.
Several categories of expenses decreased to offset to some extent increases in
several other areas. Expenses for consulting and insurance were reduced $43,000
and $15,000, respectively, from spending cutbacks and bad debt expense for trade
accounts and notes receivable by $105,000 due to higher provisions for expense
in 1998. Travel expenses by executives for sales contacts increased $27,000 and
salaries increased $28,000.
Engineering and Development Expenses. Engineering and development
expenses decreased by $80,000 from $152,000 in 1998 to $72,000 in 1999 due
primarily to the salaries expense related to staff cutbacks in 1998.
Forgiveness of Indebtedness. In 1999, the company obtained discounts
from vendors and a note holder totaling $347,000 to settle amounts owed by the
Company.
Interest Expense and Income. Interest expense increased by $83,000 from
$354,000 in 1998 to $437,000 in 1999 related to higher bank borrowings
outstanding in 1999. Interest income was not significant in either 1998 or 1999
due to reduced amounts of excess cash.
Net Loss. The loss in both 1998 and 1999 was due to the low amount of
net sales and the low amount of related gross profit from product sales. The
Company made a concerted effort to reduce operating expenses in both years to
minimize the amount of loss and the amount of negative cash flow. Consequently,
the net loss decreased from $2,061,000 to $1,013,000 in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales decreased by $645,000 from $1,353,000 in 1997 to
$708,000 in 1998. This decrease was a continuation of a decline in sales that
began in the third fiscal quarter of 1997 due in part to unsuccessful product
evaluation results from a redesign that caused leaks in the products and due to
an unsuccessful revision of the Company's sales strategy. During 1998, the
Company experienced reduced international and marine sales due to prior
management's discontinuation of its efforts in these markets, continued
inability to turn product evaluations into sales, continued overall market
resistance to purchase the Purifiner in large volume amounts without long term
evaluation periods, and cancellation of sales efforts planned for the
recreational vehicle and military markets. However, during 1998, the Company
completed improvements to
27
<PAGE>
the quality of the Purifiner product and has since obtained documentation from
potential customers on successful tests of the product.
Cost of Sales. Cost of sales decreased by $439,000 from $1,019,000 in
1997 to $580,000 in 1998. The Company's gross margin decreased from 24.6% in
1997 to 18.1% in 1998. The decrease in cost of sales is primarily due to excess
fixed and indirect manufacturing costs related to the decrease in sales
discussed above. Although the Company reduced many of its manufacturing expenses
during 1998, its gross margin will continue to be adversely affected by its
excess manufacturing capacity.
Selling Expenses. Selling expenses decreased by $1,680,000 from
$2,740,000 in 1997 to $1,060,000 in 1998. The decrease is due to the reduction
by management of many sales related expenses in 1998 to reduce spending.
Salaries and benefit expenses were reduced by approximately $800,000, related
travel expenses by $267,000, use of outside consultants by $185,000 and costs
related to product evaluations by $100,000.
General and Administrative Expenses. General and administrative
expenses decreased by $492,000 from $1,122,000 in 1997 to $630,000 in 1998. This
decrease was due to reductions in personnel resulting in a decrease in salaries
of $240,000 and $50,000 in related travel expenses, and a reduction in legal
expenses of $80,000. In addition, expenses related to the amortization of the
cost of stock options given to outside consultants decreased in 1998 by
$100,000.
Engineering and Development Expenses. Engineering and development
expenses decreased by $32,000 from $184,000 in 1997 to $152,000 in 1998 due
primarily to the expense in 1997 of $32,000 related to the cashless exercise of
stock options in that year.
Impaired Assets. In the fourth quarter of 1997, the Company wrote down
the unamortized amount of costs in excess of net assets acquired and wrote down
to $1 each the amount of patents and trademarks due to impairment of the
respective amounts based on anticipated cash flows. Such costs amounted to
$324,330 for the year ended December 31, 1997. There were no such expenses in
1998.
Interest Expense and Income. Interest expense decreased by $106,000
from $460,000 in 1997 to $354,000 in 1998. Interest expense in 1997 included
$447,000 related to the $2,000,000 short term loan received from Quantum
Industrial Partners ("QIP"), including the amortization of a discount on the
loan due to the issuance of a warrant to purchase shares of the Company's Common
Stock. In 1998 the QIP loan was converted to a 12% Senior Subordinated
Convertible Note Payable and increased in amount to $2,500,000. There was no
such discount amortization in 1998. Interest income decreased from $63,000 in
1997 to $7,000 in 1998 as a result of smaller amounts of idle cash balances to
invest in 1998 and a decrease in interest earned on a note receivable from the
Company's former president, which was repaid in June 1997.
Liquidity and Capital Resources
28
<PAGE>
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 the proceeds of sales of its
securities to investors and stockholders and other loans, including the
$2,000,000 loan from QIP in June, 1997 and an additional loan of $500,000 from
QIP in January, 1998. The Company also borrowed $250,000 in 1998 and $275,000 in
1999 from its bank and borrowed $150,000 in 1998 from the Company's Chairman of
the Board of Directors.
In November 1999, the Company formulated a plan to convert $3,175,000
of debt into stock, to obtain the forgiveness of interest on notes payable
totaling $715,000, and to offer 3,500,000 shares of its Common Stock for sale at
$1.00 per share. Prior to December 31, 1999, the Company sold 500,000 shares of
this stock offering. Also, in December 1999, the Company obtained discounts
totaling $347,000 from certain note holders and vendors on the settlement of
amounts owed. The Company completed the conversion of $3,175,000 of debt into
stock on January 24, 2000 as well as the forgiveness of related accrued and
unpaid interest of $715,000. The sale of stock was completed on February 28,
2000, with a total of 4,172,000 shares being sold and net proceeds of
approximately $4,100,000
At December 31, 1999, the Company had negative working capital of
$4,109,187 and its current ratio (current assets to current liabilities) was .07
to 1, as compared with negative working capital of $867,596 and a current ratio
of .25 to 1 at December 31, 1998. On a proforma basis after giving effect to the
conversion of debt to stock, forgiveness of the related accrued and unpaid
interest in January, 2000, and the completion of the sale of 4,172,000 shares of
its common stock for approximately $4,100,000 in February, 2000, the Company had
working capital of $3,881,197 and its current ratio was 7.51 to 1. The Company
believes it has sufficient cash for the foreseeable future, however there is no
assurance that sales will increase to the level required to generate profitable
operations and to provide positive cash flow from operations, and there is no
assurance that the Company will not have to seek additional financing in the
future.
Management believes the favorable response from potential customers it
has seen in 1999 will result in improved sales in 2000, however, there can be no
assurance such improvements will occur or that such improvements will be
sufficient to generate positive cash flow from its operations.
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. 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.
29
<PAGE>
Sales of the Company's products will depend principally on end user
demand for such products and acceptance of the Company's products by original
equipment manufacturers ("OEM's"). 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 and
sales efforts and the expenditure of a significant amount of funds to inform
customers of the perceived benefits and cost advantages of its products.
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.
Impact of Year 2000 Issue
The Company has not experienced any adverse effect of Year 2000 issues
on its systems or operations, or the systems or operations of its customers and
trade suppliers.
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
and general economic conditions throughout the industrialized world.
Consequently, the Company's product revenues may vary significantly by quarter
and the Company's operating results may experience significant fluctuations.
30
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report .................................................................F-2
Balance Sheets................................................................................F-3
Statements of Operations......................................................................F-4
Statements of Changes in Stockholders'Deficiency..............................................F-5
Statements of Cash Flows......................................................................F-6
Notes to Financial Statements.................................................................F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Puradyn Filter Technologies Incorporated
Boynton Beach, Florida
We have audited the accompanying balance sheets of Puradyn Filter Technologies
Incorporated as of December 31, 1999 and 1998 and the related statements of
operations, changes in stockholders' deficiency and cash flows the years then
ended. 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 referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998 and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
February 24, 2000 except for the second
paragraph of Note 19, as to which the date
is March 6, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
Puradyn Filter Technologies Incorporated
Balance Sheets
December 31,
1999
----------------------------
Proforma Historical 1998
-------- ---------- ----
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,608,121 $ 8,121 $ 0
Accounts receivable, net of allowance for
doubtful accounts of $8,000 and $35,000 78,876 78,876 30,623
Inventories 209,531 209,531 342,439
Prepaid expenses and other current assets 4,031 4,031 207
------------ ------------ ------------
Total current assets 3,900,559 300,559 373,269
------------ ------------ ------------
FIXED ASSETS
Property and equipment, net 182,347 182,347 289,317
------------ ------------ ------------
Total fixed assets 182,347 182,347 289,317
------------ ------------ ------------
OTHER ASSETS
Other assets 4,102 10,236 16,370
------------ ------------ ------------
Total other assets 4,102 10,236 16,370
------------ ------------ ------------
$ 4,087,008 $ 493,142 $ 678,956
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Cash overdraft $ 0 $ 0 77,693
Accounts payable-trade 179,544 179,544 422,252
Accounts payable and accrued expenses-related parties 169,942 194,240 14,360
Accrued expenses 97,263 97,263 153,301
Customer deposits 60,076 60,076 48,568
Current portion of capital lease obligations 12,537 12,537 20,960
Note payable to bank 0 525,000 250,000
Note payable to shareholder 0 150,000 150,000
Note payable to former shareholder 0 0 294,756
Note payable and accrued interest to QIP, a shareholder 0 3,191,086 2,821,396
------------ ------------ ------------
Total current liabilities 519,362 4,409,746 4,253,286
------------ ------------ ------------
LONG TERM DEBT
Capital lease obligations 0 0 12,851
------------ ------------ ------------
Total long term debt 0 0 12,851
------------ ------------ ------------
Total liabilities 519,362 4,409,746 4,266,137
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock, $.001 par value, 500,000 shares
authorized; none issued and outstanding 0 0 0
Common Stock, $.001 par value, 20,000,000 shares
authorized; 12,845,6238, (proforma) 5,998,628
and 5,223,493 issued and outstanding, respectively 12,846 5,999 5,223
Additional paid-in capital 14,785,551 8,017,398 7,309,201
Unearned compensatory options 0 (2,560)
Loans receivable, net of allowance for doubtful
accounts of $10,000 and $38,000 (50,931) (50,931) (22,931)
Deficit (11,179,820) (11,889,070) (10,876,114)
------------ ------------ ------------
Total stockholders' equity (deficiency) 3,567,646 (3,916,604) (3,587,181)
------------ ------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 4,087,008$ $ 493,142 $ 678,956
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Puradyn Filter Technologies Incorporated
Statements of Operations
Year ended December 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 580,480 $ 708,028
Cost of sales 585,658 579,508
----------- -----------
Gross Profit (5,178) 128,520
----------- -----------
Operating expenses:
Selling 337,728 1,059,573
General and administrative 509,541 630,502
Engineering and development 71,793 152,016
----------- -----------
Total operating expenses 919,062 1,842,091
----------- -----------
Operating Loss (924,240) (1,713,571)
----------- -----------
Other income (expense):
Interest expense (436,392) (354,281)
Interest income 656 6,763
Forgiveness of debt 347,020 0
----------- -----------
Total other income (expense) (88,716) (347,518)
----------- -----------
Net Loss $(1,012,956) $(2,061,089)
=========== ===========
Net loss per common share $ (.19) $ (.40)
=========== ===========
Weighted average common shares outstanding 5,300,189 5,213,752
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
Puradyn Filter Technologies Incorporated
Statements of Changes in Stockholders' Deficiency
Common Stock Additional Unearned Total
----------------- Paid In Compensatory Loans Stockholders'
Shares Amount Capital Options Receivable Deficit Deficiency
------ ------ ------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 5,205,879 $5,206 $ 7,297,522 $ (17,320) $(73,931) $(8,815 $ (1,603,548)
Year ended December 31, 1998:
- ----------------------------
Exercise of stock options, net 500 0 1,000 0 0 0 1,000
Issuance of common stock 17,114 17 10,679 0 0 0 10,696
Amortization of unearned
compensation 0 0 0 14,760 0 0 14,760
Collection of loan receivable 0 0 0 0 13,000 0 13,000
Provision for loss on loan
receivable 0 0 0 0 38,000 0 38,000
Net loss 0 0 0 0 0 (2,061,089) (2,061,089)
---------- ----------- ------------ ----------- ------------ ------------ ------------
BALANCE, December 31, 1998 5,223,493 5,223 7,309,201 (2,560) (22,931) (10,876,114) (3,587,181)
Year ended December 31, 1999:
- -----------------------------
Exercise of stock options 196,994 198 131,194 0 0 0 131,392
Issuance of stock for cash 500,000 500 499,500 0 0 0 500,000
Issuance of stock for services 81,340 81 81,259 0 0 0 81,340
Cancellation of common stock (3,199) (3) (3,756) 0 0 0 (3,759)
Amortization of unearned
compensation 0 0 0 2,560 0 0 2,560
Provision for loss on loan
receivable 0 0 0 0 (28,000) 0 (28,000)
Net loss 0 0 0 0 0 (1,012,956) (1,012,956)
---------- ----------- ------------ ----------- ------------ ------------ ------------
BALANCE, December 31, 1999 5,998,628 $ 5,999 $ 8,017,398 $ 0 $ (50,931) $(11,889,070) $ (3,916,604)
========== ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
Puradyn Filter Technologies Incorporated
Statements of Cash Flows
Year ended December 31
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,012,956) $(2,061,089)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 103,033 104,941
Issuance of stock for services 81,340 0
Provision for doubtful accounts (807) (15,000)
Provision for uncollectible loan receivable (28,000) 38,000
Write down of leasehold improvements 8,376 0
Issuances of common stock and compensatory options 130,232 14,760
Forgiveness of debt, former shareholder (204,756) 0
Forgiveness of debt, vendors (142,264) 0
Changes in operating assets and liabilities:
Trade accounts receivable (47,446) 71,521
Inventories 132,908 187,001
Prepaid expenses and other current assets (3,824) 112,270
Other assets 0 769
Accounts payable-trade (100,445) 233,553
Accounts payable and accrued expenses -related parties 179,880 14,360
Accrued expenses (56,038) (22,558)
Accrued interest payable - QIP 369,690 313,396
Customer deposits 11,508 (66,272)
----------- -----------
Net cash used by operating activities (579,569) (1,074,348)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment 0 (31,360)
Sale of equipment 1,696 0
----------- -----------
Net cash used by investing activities 1,696 (31,360)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 500,000 11,698
Collection of loans receivable 0 13,000
Payment on notes payable and capital lease obligations (21,274) (46,056)
Proceeds from note payable to QIP 0 500,000
Proceeds from note payable to bank 275,000 250,000
Proceeds from note payable to shareholder 0 150,000
Payment of note payable to former shareholder (90,000) (103,501)
Increase (decrease) in cash overdraft (77,693) 77,693
Other (39) 0
----------- -----------
Net cash provided by financing activities 585,994 852,834
----------- -----------
Increase (decrease) in cash 8,121 (252,874)
CASH, beginning of year 0 252,874
----------- -----------
CASH, end of year $ 8,121 $ 0
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 38,398 $ 14,486
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
Puradyn Filter Technologies Incorporated
Notes to Financial Statements
December 31, 1998 and 1999
1. The Company and Summary of Significant Accounting Policies
The Company Puradyn Filter Technologies Incorporated (formerly known as T/F
Purifiner, Inc.) ("Puradyn" or the "Company"), a Delaware corporation, is
engaged in the manufacturing, distribution and sale of oil refining systems
under the trademarks Purifiner(R) and Puradyn(TM). The Company holds the
exclusive worldwide manufacturing and marketing rights for the Purifiner
products pursuant to licenses for two patents (see Note 10) and through direct
ownership of various patents.
(a) 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 liablilities and
disclosure of contingent assets and liablilities at the date of the financial
statements, and those reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) 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 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.
(c) Inventories Inventories are stated at the lower of cost (first-in, first-out
method) or market.
(d) Property and equipment Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets, including assets held under capital leases.
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. Upon sale or retirement, the costs and
related accumulated depreciation are eliminated from their respective accounts,
and the resulting gain or loss is included in the results of operations. Repairs
and maintenance charges, which do not increase the useful lives of the assets,
are charged to operations as incurred.
(e) Patents and trademarks Patents and trademarks have been written down to $1
each, due to impairment of the respective amounts based on anticipated cash
flows. Accordingly, expenditures for patents and trademarks are expensed as
incurred. Patent and trademark expenses in 1999 and 1998 were $200 and $28,300,
respectively.
F-7
<PAGE>
(f) Advertising costs Advertising costs are generally charged to operations in
the year incurred. During the years ended December 31, 1999 and 1998, these
costs totaled $11,200 and $159,400, respectively, and are presented in selling
expenses. The 1998 amount includes $70,000 in expenses related to the pending
litigation discussed in Note 12.
(g) Engineering and development Engineering and development costs are expensed
as incurred.
(h) Impairment 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 to the asset's carrying amount.
(i) Stock based compensation The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No.123). The Company has elected to continue to apply APB No. 25 in accounting
for its employee stock option plan and to disclose in footnotes the proforma
effects on net income (loss) as if the fair value of the options has been
expensed. Under the provisions of APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of grant over the amount the employee must
pay to acquire the stock. (See Note 14)
(j) 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. 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 is sufficient to cover potential credit losses. (See
Note 17)
(k) Fair value of financial instruments The following methods and assumptions
were used in estimating the indicated fair values of financial instruments:
Cash and cash equivalents: The carrying amount approximates the fair value due
to the short maturity of these instruments.
Short term debt: The carrying amount approximates fair value due to the short
term maturity of these instruments.
Long term debt: The fair value of the Company's borrowings approximates the
carrying value based on current rates offered to the Company for similar debt.
(l) Basic and diluted loss per share The Company has adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) which
requires a dual presentation of basic and diluted earnings per share. However,
because of losses from
F-8
<PAGE>
operations, the effect of stock options, warrants and convertible debt (in 1999)
is anti-dilutive.
2. Inventories At December 31, inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 192,064 $ 298,008
Finished goods 15,576 43,431
---------- ---------
$ 207,640 $ 341,439
========== =========
</TABLE>
3. Property and Equipment At December 31, property and equipment at cost
consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Machinery and equipment $ 504,862 $ 509,102
Furniture and fixtures 47,193 47,193
Leasehold improvements 0 45,698
----------- ---------
552,055 601,993
Less accumulated depreciation
and amortization (369,708) 312,676
----------- ---------
$ 182,347 $289,317
=========== =========
</TABLE>
At December 31, 1999, machinery and equipment includes approximately $103,000 of
equipment held under capital leases with related accumulated amortization of
approximately $68,000.
4. Leases Beginning April 1, 1999, the Company's manufacturing, warehouse and
office facilities are leased under on a month-to-month basis for $10,000 per
month. Total rent expense was approximately $107,000 and $86,000 for 1999 and
1998, 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, future minimum commitments under these noncancelable capital leases
are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Total minimum lease payments $ 13,221 $ 33,811
Less amount representing interest at
approximately 16% (684) (5,630)
--------- ---------
Present value of minimum lease payments $ 12,537 $ 28,181
========= =========
</TABLE>
5. Accounts Payable Forgiveness During the year, the Company settled certain
accounts payable with unrelated parties totaling $142,264 which was credited to
forgiveness of debt in the accompanying financial statements.
F-9
<PAGE>
6. Note Payable to Shareholder On May 21, 1998 and on June 24, 1998, Richard C.
Ford, Chairman of the Board of Directors and a major shareholder of the Company,
loaned the Company $110,000 and $40,000, respectively. For each loan, the
Company issued notes payable due one year from the date of issuance, at 12%
interest, and secured by accounts receivable and inventories. The principal and
interest accrued to December 31, 1999 totaling $24,300 has not been paid. On
January 24, 2000, Mr. Ford converted these loans into 150,000 shares of common
stock and the related interest accrued to December 31, 1999 totaling $24,300 was
forgiven by Mr. Ford. This transaction is reflected in the December 31, 1999
Proforma Balance Sheet (see Note 19).
7. Note Payable to Bank On August 21, 1998, the Company borrowed $250,000 from
its bank under a revolving note payable due one year from the date of issuance,
with interest at 8.75%, payable monthly. The note was secured by substantially
all assets of the Company.
On January 21,1999, the Company converted its loan to a $350,000 revolving line
of credit, due on demand, with interest at the bank's prime rate (7.75% at
inception). The revolving line of credit is secured by certificates of deposit
in the name of Richard C. Ford and held by the bank. On January 21, 1999, the
Company borrowed an additional $100,000 under the new revolving line of credit.
Both the initial loan and the revolving line of credit were personally
guaranteed by Richard C. Ford.
On March 25, 1999, the Company increased the line of credit from $350,000 to
$525,000. The additional $175,000 was drawn down during March 1999. At December
31, 1999, the total balance owed on the line of credit is secured by
certificates of deposit in the name of Richard C. Ford and held at the bank.
On January 24, 2000, Mr. Ford and his daughter, Traci Ford, personally repaid
the bank and simultaneously converted the loan into 525,000 shares of the
Company's common stock. This transaction is reflected in the December 31, 1999
Proforma Balance Sheet (see Note 19).
8. Note Payable to Former Shareholder In 1996, the Company entered into an
Agreement (the "Agreement") with the beneficiaries of the estate of a former 50%
owner of the Company ("the Estate") in partial settlement of the issues
underwhich the Company agreed to repay the Estate's loans of $502,026 based on a
formula related to the amount of equity financings by the Company. The Estate
agreed not to commence any action for loan repayment as long as the Company is
in compliance with the Agreement. Based upon equity raised through December 31,
1998, future repayments due on January 31 each year are: 1999 $104,328; 2000
$104,328; and 2001 $86,100. However, the Company did not make the required
payment on January 31, 1999 and the Estate has issued a letter to the Company to
declare the Agreement in default and to demand immediate payment of the entire
remaining balance. Consequently, the entire remaining balance was classified as
current as of December 31, 1998.
On December 28, 1999, the Company paid the Estate $90,000 and obtained the
forgiveness of the remaining $204,756 which was credited to forgiveness of debt
in the accompanying financial statements.
F-10
<PAGE>
9. Notes Payable to QIP, a Shareholder On January 26, 1998, the Company and
Quantum Industrial Partners LDC ("QIP") entered into a Note Exchange Agreement
whereby a $2,000,000 promissory note issued June 19, 1997 to QIP was exchanged
for a $2,000,000 12% Senior Subordinated Convertible Note ("Note") due 2003.
Interest is payable quarterly commencing April 1, 1998, provided, however, that
at the option of the Company, unpaid interest may be added to the principal
balance of the Note in lieu of a cash payment, which the Company has elected to
do each quarter through December 31, 1999. Such unpaid interest bears interest
at 15% per annum and is payable on demand. Total accrued interest at December
31, 1999 was $691,086. The Note is senior to all indebtedness of the Company
except bank or financial institution debt. The Notes could be redeemable at the
option of QIP on or after the earlier of January 1, 2001, or the date on which
the Company raises cash proceeds aggregating $10 million from the sale of debt
or equity securities or assets, based upon a conversion price of $2.75 per
share. As long as the Note is outstanding, the Company cannot, without the
consent of QIP, declare or pay any dividends, purchase, redeem or acquire any of
its common stock, retire its existing indebtedness other than existing required
periodic payments, or enter into transactions with any affiliate.
In addition, on January 26, 1998, the Company and QIP entered into a Note
Purchase Agreement whereby the Company issued QIP a 12% Senior Subordinated
Convertible Note in the aggregate principal amount of $500,000. The terms and
conditions of this $500,000 note are identical to the $2,000,000 Note described
above.
On January 24, 2000, QIP converted the principal balance of the Notes totaling
$2,500,000 into 2,500,000 shares of the Company's common stock, and agreed to
forgive the payment of the accrued interest. This transaction is reflected in
the December 31, 1999 Proforma Balance Sheet (see Note 19).
In connection with the $2,000,000 promissory note originally issued to QIP on
June 19, 1997, the Company issued a Common Stock Purchase Warrant to QIP for the
purchase of 500,000 shares of the Company's Common Stock, exercisable at $2.75
per share and expiring on December 31, 2000. QIP agreed to surrender these
warrants in connection with the conversion of its Notes to stock and the waiver
of accrued interest discussed above.
10. Royalties In connection with the Company being granted worldwide
manufacturing and marketing rights for certain of the Purifiner products, a
royalty agreement was entered into over a term 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 net unit sale price and 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 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.
F-11
<PAGE>
In February 1997, the patent owner filed an action against the Company for non
payment of approximately $21,000 of royalties claimed by him, seeking a
permanent injunction against the Company's manufacturing and selling of the
covered Purifiner products. On March 2, 1999, the trial court ruled that the
patent owner was not entitled to any injunctive relief an was entitled to
approximately $20,000 in past royalties.
In June, 1999, the Company settled the action filed against the Company by the
patent owner for non payment of royalties by paying approximately $21,000.
Royalty expense for 1999 and 1998 was approximately $2,100 and $21,000,
respectively.
11. Income Taxes In accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, deferred income taxes (benefits) are provided for certain income
and expenses which are recognized in different periods for tax and financial
reporting purposes. At December 31, 1999, the Company has a net operating loss
carry-forwards of approximately $1,400,000, $4,300,000, $2,100,000 and
$1,000,000 for Federal income tax purposes expiring in 2016, 2017, 2018 and
2019, respectively. Due to the Company's net losses, no provision was made for
income taxes in 1999.
The significant components of the net deferred tax asset as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net operating losses $ 3,300,000
Excess tax basis of manufacturing
rights acquired from related party 60,000
Compensatory options and warrants 240,000
Intangible assets 110,000
Other 25,000
-----------
3,735,000
Valuation allowance (3,735,000)
-----------
Net deferred tax asset $ 0
===========
</TABLE>
The difference between the statutory tax rate of 34% and the Company's effective
tax rate of 0% is due to the increase in valuation allowance.
As a result of certain ownership changes, the Company may be subject to an
annual limitation on the utilization of its net operating loss carryforward
pursuant to Section 382 of the Internal Revenue Code.
The impact on income taxes due to subsequent events discussed in Note 19 would
create the utilization of approximately $700,000 of prior losses and tax asset
recognition to offset liability of approximately $260,000.
12. Contingencies TF Systems, Inc. ("Systems"), a related party (previously
under common ownership with the Company), formerly owned the manufacturing and
marketing rights to the Purifiner and transferred or sold such rights to the
Company in 1995. In June, 1997, the former law firm of Systems filed a complaint
against the Company, Systems, Richard C. Ford, individually and an inactive
company controlled by Richard C.
F-12
<PAGE>
Ford, demanding payment of approximately $313,000 of legal fees and cost, plus
interest and attorney fees, related primarily to obtaining the manufacturing and
marketing rights to the Purifiner for Systems and the Company. Systems was
awaiting a judgment of an appellate court which, if adjudicated in Systems'
favor, would have provided it with sufficient funds to pay such legal fees and
other possible legal fee claims aggregating approximately $75,000. On February
26, 1997, the appellate court ruled against Systems and, accordingly, the funds
discussed above are not currently available to Systems to satisfy such claims.
Puradyn did not assume these obligations as part of its purchase of Systems in
1995 and management believes such amounts are not the responsibility of the
Company. However, Systems is an inactive company whose only asset is the claim
that was reversed on appeal and maybe retried by Systems. Accordingly, the
ability to collect such funds from Systems is uncertain. The ultimate outcome of
this litigation and other unasserted claims against the Company cannot be
determined at this time. However, based upon the opinion of the Company's
counsel, a favorable outcome is likely. No liability has been recorded for these
claims in the accompanying balance sheet.
During 1998, in the ordinary course of business, the Company was named in an
action concerning a balance due to a vendor. In December 1999, the case was
settled for $57,500.
13. Common Stock During 1999, 500,000 shares were issued for cash and 81,340
shares were issued for services, based upon a $1.00 market value. In addition,
during 1999, 196,994 options were exercised. Of the options exercised, 42,650
were paid by 3,199 shares creating, in effect, a cashless transaction.
Common stock reserved for possible future issuance as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Conversion of QIP notes (Note 9) 1,160,395
Stock Options (Note 14) 3,014,581
Warrants (Notes 9 and 15) 600,000
----------
4,774,976
==========
</TABLE>
14. Stock Options The Company has two stock option plans, one adopted in 1996
and amended in July, 1997 (the "1996 Option Plan"), and one adopted in September
1999 (the "1999 Option Plan"). The 1996 Option Plan provides for the granting of
up to 2,200,000 options and the 1999 Option Plan provides for the granting of up
to 2,000,000 options. Each plan provides for the granting of both incentive and
non-qualified stock options to key personnel, including officers, directors,
consultants and advisors to the Company, based upon the determination of the
Board of Directors. Each plan limits the exercise price of the options to be no
less than fair value of the common stock on the date of grant for incentive
stock options and the option term may not exceed five or ten years. Generally,
under both plans, options to employees vest over four years at 25% per annum,
except for certain grants to employees which vested 50% upon grant with
remaining amounts over two years at 25% per annum.
At December 31, 1999 and 1998, 1,753,331 and 1,634,355 shares of common stock
have been reserved for issuance under the 1996 Option Plan, respectively.
Additional information concerning the activity in the 1996 Option Plan is as
follows:
F-13
<PAGE>
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Options outstanding, January 1, 1998 1,669,820 $3.93
Granted 932,685 .47
Exercised (500) 2.00
Canceled (967,650) 3.80
---------
Options outstanding at December 31, 1998 1,634,355 2.03
Granted 799,720 .40
Exercised (196,994) .05
Canceled (483,750) 2.90
---------
Options outstanding at December 31, 1999 1,753,331 1.23
=========
Options exercisable at December 31:
1998 970,320 $2.68
1999 1,261,707 1.42
Options available for grant at December 31:
1998 322,670
1999 6,700
</TABLE>
Summarized information with respect to 1996 Option Plan options outstanding at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life (in Years) Price Exercisable Price
- -------------- ----------- ----------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$.00 (a) 147,576 9.56 $ .00 147,576 $ .00
.21 - .94 1,249,835 8.87 .49 771,211 .45
2.00 - 2.75 229,670 6.72 2.05 229.670 2.05
4.50 -10.00 126,250 7.38 8.56 113,250 8.58
---------- ------------
1,753,331 1,261,707
========== ============
</TABLE>
(a) During 1999, stock options were granted at a zero exercise price in
lieu of cash compensation. The company recorded compensation expense for
the aggregate amount of the market value on the dates of grant.
With respect to the 1999 Option Plan, at December 31, 1999 and for the year
ended on that date, 1,241,250 options had been granted and were outstanding at
$1.00 per share, none were canceled or exercised, and 356,250 options were
available for grant. At December 31, 1999, 1,241,250 shares of common stock have
been reserved for issuance under the 1999 Option Plan. Furthermore, at December
31, 1999, outstanding options had a weighted average remaining contractual life
of 9.92-years and had a weighted average exercise price of $1.00. The 356,250
options exercisable had a weighted average exercise price of $1.00.
The effect of applying SFAS No. 123 on 1998 and 1999 proforma net loss and
recognizing compensation expense for consultants and the former Board of
Advisors as
F-14
<PAGE>
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 and 1999 Option
Plan grants to employees and directors been determined based upon the fair value
at the grant date for awards under the plans consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss in 1999 and 1998 would
have been approximately $1,460,000 or $.25 per basic and diluted share and
$2,142,000 or $.41 per basic and diluted share, respectively. The fair value of
the options granted to employees during 1999 are estimated as $.45 per share
($.39 per share in 1998), on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: dividend yield 0%
in 1998 and 1999, volatility of 213% in 1999 and 161% in 1998, risk-free
interest rate of 5.5% in 1999 and 1998 and expected life of 4 years in 1999 and
4 years in 1998.
Options granted to a consultant to purchase 20,000 shares of Common Stock at
$9.00 per share are outstanding at December 31, 1999, which are not under either
the 1996 Option Plan or the 1999 Option Plan. These options are all exercisable
and have a remaining contractual life of 3 months.
15. Warrants Warrants to purchase 10,000 shares of Common Stock at $10.00 per
share which were granted in 1997 to various consultants and were outstanding at
December 31, expired on January 27, 1999. Also, 325,000 warrants to purchase
Common Stock at $2.00 per shares which were issued in connection with a private
placement and were outstanding at December 31, 1998 expired on December 31,
1999. Warrants to purchase 500,000 shares of Common Stock at $2.75 per share
which were issued to QIP, were surrendered in connection with the conversion of
QIP's notes payable to the Company's Common Stock as discussed in Note 19.
On December 21, 1999, the Company issued warrants to purchase 100,000 shares of
the Company's Common Stock at $1.00 per share. The Company has reserved an
aggregate of 100,000 shares of Common Stock for shares issuable in connection
with these warrants.
16. Joint Venture Effective January 1, 1996, the Company entered into a joint
venture agreement whereby such venturer, 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 Ltd was initially
capitalized with approximately $88,000 provided by one of its shareholders. The
Company is negotiating with Ltd's other 45% shareholder (Centrax Ltd.) relating
to the ownership/licensing of various pending patents filed by Centrax, as well
as other matters, including the possible discontinuation of the joint venture
with Centrax. The ultimate outcome of these negotiations cannot be determined at
this time. In 1999, the Company had sales of approximately $300 to Ltd, at
negotiated prices.
At December 31, and for the year then ended, summarized financial information of
Ltd is as follows:
F-15
<PAGE>
1999
----
Total assets $212,000
Total liabilities (1) 1,143,000
Capital deficiency (931,000)
Total revenues 127,000
Gross profit 66,000
Net loss (372,000)
(1) Includes approximately $1,020,000 at December 31, 1999 of loans due to
one of Ltd's foreign shareholders, collateralized by substantially all the
tangible assets of Ltd.
17. Major Customers and Export Sales The Company currently operates in a single
business segment and its products are oil refining 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 1999, 11 customers accounted for approximately 50% of the Company's net
sales, and one customer accounted for approximately 9% of the Company's net
sales. In 1999, export sales aggregated approximately $66,000 in geographic
regions as follows: $60,000 in Latin America, and $6,000 in Asia/Pacific. During
1998, 18 customers accounted for approximately 50% of the Company's net sales,
and one customer accounted for approximately 9% of the Company's net sales. In
1998, export sales aggregated approximately $109,000 in geographic regions as
follows: $81,000 in South America, $14,000 in Europe, and $14,000 in
Asia/Pacific. The loss of business from one or a combination of the Company's
significant customers could adversely effect its operations.
18. Related Party Transaction During 1998, the Company borrowed an aggregate of
$150,000 from Richard C. Ford, Chairman of the Board of Directors and major
shareholder of the Company as discussed in Note 6. In addition, Mr. Ford
personally guaranteed the Company's indebtedness to its bank as discussed in
Note 7. On January 24, 2000, Mr. Ford received 150,000 shares of the Company's
Common Stock as repayment of the $150,000 notes payable and Mr. Ford and Traci
Ford, his daughter, received 525,000 shares of the Company's Common Stock as
repayment for repaying on behalf of the company the $525,000 debt to the bank.
During 1999, Mr. Ford paid certain vendors and incurred certain expenses on
behalf of the company totaling approximately $70,000, and made advances to the
company totaling $97,000 for which he was not reimbursed as of December 31,
1999. These amounts together with $24,300 of unpaid accrued interest payable to
Mr. Ford and approximately $3,000 owed to TF Purifiner Ltd., the Company's joint
venture company (see Note 16) are classified separately in the accompanying
balance sheet as accounts payable and accrued expenses -related parties.
As of December 31, 1999, the Company owed TF Purifiner Ltd., its joint venture
(see Note 16), $3,200 for trade products.
F-16
<PAGE>
19. Subsequent Events On January 24, 2000 Richard C. Ford converted $150,000 of
Notes Payable to 150,000 shares of the Company's common stock and forgave
repayment of accrued interest totaling approximately $24,000 (see Note 6). Also
on January 24, 2000, Mr. Ford and his daughter, Traci Ford, personally repaid
the Company's Notes Payable to its bank totaling $525,000 and simultaneously
converted the loan into 525,000 shares of the Company's common stock (see Note
7). In addition, on January 24, 2000, QIP converted Notes Payable totaling
$2,500,000 into 2,500,000 shares of the Company's common stock and forgave the
repayment of approximately $691,000 (as of December 31, 1999) of accrued and
unpaid interest (see Note 9). QIP on that date also surrendered without
consideration warrants to purchase 500,000 shares of the Company's Common Stock
(see Note 15).
On March 6, 2000, the Company completed the private offering of 4,172,000 shares
of its Common Stock for $1.00 per share. Net proceeds were approximately
$4,100,000. Of this total number of shares, 500,000 shares were sold prior to
December 31, 1999.
The accompanying Proforma Balance Sheet reflects the effects of the transactions
described above assuming that those transactions had occurred on December
31,1999, which are summarized as follows:
Assets:
Cash $ 3,600,000
Writeoff of deferred loan costs (6,134)
Liabilities:
Reduction of note payable to bank $ (525,000)
Forgiveness of accrued interest (24,298)
Reduction of note payable to shareholder (150,000)
Reduction of note payable to QIP (2,500,000)
Forgiveness of accrued interest (691,086)
Stockholders' Equity
Common stock 6,847
Additional paid in capital 6,768,153
Deficit 709,250
F-17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
------------------------------------------------------------
The following table sets forth the names, positions with the Company
and ages of the directors, executive officers and significant employees 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 duly qualified. 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.
Directors and Executive Officers
- --------------------------------
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph V. Vittoria 64 Chairman of the Board of Directors
Richard C. Ford 56 Chief Executive Officer and Director
Alan J. Sandler 62 Vice President, Secretary, Chief Financial
Officer, and Director
</TABLE>
JOSEPH V. VITTORIA was appointed to the Board of Directors and appointed as
Chairman on February 8, 2000. Mr. Vittoria is presently Chairman and Chief
Executive Officer of Travel Services International, Inc. where he has served
since 1998. From 1987 to 1997, Mr. Vittoria served as Chairman and Chief
Executive Officer of Avis, Inc. and was President and Chief Operating Officer of
Avis, Inc. from 1982 to 1987. Mr.Vittoria also serves on the Boards of Directors
of Sirius Satellite Radio, Inc., Carey International, Inc., ResortQuest
International, Inc. and Membertek International, Inc.
RICHARD C. FORD has been a Director of the Company since its inception in 1988.
He served as President of the Company from its inception in 1988 until April
1997 and as Chief Executive Officer and Treasurer until June 1997. He also
served as Secretary of the Company from its inception until August 1996. Mr.
Ford returned to the Company in April 1998 and in January 1999, Mr. Ford was
elected Chairman of the Board of Directors and appointed Chief Executive
Officer. Mr. Ford was also a Director of TF Purifiner Ltd. through July 17, 1997
at which time he resigned, and was re-appointed as a Director in 1999.
ALAN J. SANDLER joined the Company in June, 1998 as President, Chief Operating
Officer, Secretary, Chief Financial Officer, and Director. In January 2000, he
became Vice President and resigned from the positions of President, Chief
Operating Officer, Secretary and Chief Financial Officer. From 1995 until 1997
Mr. Sandler served as President and Chief Executive Officer to Hood Depot, Inc.,
a national restaurant supply manufacturer/distributor. From 1979 to 1995 he was
President and Chief Executive Officer of Sandler & Sons Dental Supply Company, a
regional dental supply and equipment distributor. Previous to this position he
was a Vice President of Gardner Advertising Company, an advertising agency. Mr.
Sandler was appointed as a Director of TF Purifiner Ltd. in 1999.
31
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Cash Compensation
- -----------------
The following table shows, for the three year period ended December 31,
1999, the cash and other compensation paid by the Company to its former
Presidents and Chief Executive Officer and to each of the executive officers of
the Company who had annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Other Annual Number of LTIP All Other
Principal Position Year Salary(1) Bonus Compensation(2) Options Payouts Compensation(3)
- ------------------ ---- --------- ----- --------------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard C. Ford (4) 1999 $145,608 $1,000 1,171 1,064,510 - $ 9,000
CEO and Director 1998 $ 79,000 - 1,800 300,000 - 16,000
1997 85,800 - 700 - - 48,899
</TABLE>
(1) Salary in 1999 includes stock options granted at a nominal exercise
price in lieu of cash compensation for Richard C. Ford (114,519 options
having a value of $50,008). Mr. Ford elected to defer payment of
$53,000 included in his 1998 salary.
(2) This amount represents payments made by the Company for health
insurance premiums.
(3) This amount represents payments made to Mr. Ford for consulting
services in 1997 and 1998, and a car allowance in 1997 and in 1999.
(4) Mr. Ford served as Secretary of the Company until August 1996. Mr. Ford
served as President of the Company until April 1, 1997 and served as
Chief Executive Officer, Treasurer and Chief Financial Officer until
June 19, 1997. Mr. Ford left the employment of the Company on July 17,
1997 and provided consulting services under an agreement with the
Company until April 1, 1998 when he rejoined the Company. In February,
2000, Mr. Ford resigned as Chairman of the Board of Directors, but
remained as a Director. (See Item 12, Certain Relationships and Related
Transactions).
Option Grants in Last Fiscal Year
- ---------------------------------
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1999 to each person named in the Summary Compensation Table.
32
<PAGE>
<TABLE>
<CAPTION>
Number of % of total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Market Price Expiration
Name Granted (#) Fiscal year ($ / Share) ($ / Share) Date
- ---- ----------- ----------- ----------- ----------- ----
<S> <C> <C> <C> <C> <C>
Richard C. Ford 114,510 $.00 $.31-.51(1) Jun-Sep 2009
100,000 .21 .21 Jan 2009
100,000 .56 .56 Apr 2009
175,000 .94 .94 Apr 2009
50,000 1.00 1.00 Aug 2006
225,000 1.00 1.00 Aug-Dec 2006
300,000 52.1%(2) 1.00 1.00 Dec 2009
</TABLE>
(1) Richard C. Ford received 114,510 options, having an aggregate market value
of $50,008, in lieu of cash compensation during the period from June 18 to
September 24, 1999.
(2) The aggregate number of options granted to Richard C. Ford during 1999
(1,064,510 options) were 52.1% of total options granted to all employees.
Incentive and Nonqualified Stock Option Plan
- --------------------------------------------
The Board of Directors adopted the Company's 1999 Stock Option Plan (the
"1999 Plan") on September 15, 1999. The total number of shares authorized under
the 1999 Plan was 2,000,000. The Board of Directors and a majority of the
Company's stockholders adopted the Company's 1996 Stock Option Plan (the "1996
Plan") on July 31, 1996 and the approval was ratified at the Company's Annual
Meeting held on August 28, 1996. The number of shares authorized under the 1996
Plan was increased by the Board of Directors from 1,625,000 to 2,200,000 in July
1997, which increase was subject to stockholder approval.
The 1999 and 1996 Plans 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 1999 Plan and 1996 Plan, the Company had reserved an aggregate
of 2,000,000 and 2,200,000 shares, respectively, of Common Stock for issuance
pursuant to options granted under the Plans ("Plan Options"). The Board of
Directors or a Committee of the Board of Directors (the "Committee") of the
Company will administer the Plans including, without limitation, the selection
of the persons who will be granted Plan Options under the Plans, the type of
Plan Options to be granted, the number of shares subject to each Plan Option and
the Plan Option price.
33
<PAGE>
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 Plans also allow 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 Plans must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee and cannot be less than the par value of the
Company's Common Stock.
The per share purchase price of shares subject to Plan Options granted
under the Plans 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 Plans. 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 generally 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 generally 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
generally 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 generally lapses to the extent unexercised on the earlier
of the expiration date of the option or one year following the date of such
disability.
34
<PAGE>
The Board of Directors or the Committee may amend, suspend or terminate
the Plans at any time, except that no amendment shall be made which (i)
increases the total number of shares subject to the Plans 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 Plans shall theretofore have been suspended or terminated by the
Board of Directors, the 1996 Plan shall terminate on July 31, 2006 and the 1999
Plan shall terminate on September 15, 2009. Any such termination of the Plans
shall not affect the validity of any Plan Options previously granted thereunder.
As of December 31, 1999, incentive stock options to purchase 241,907
shares of Common Stock were outstanding and non-qualified options to purchase
1,511,424 shares of Common Stock were outstanding under the 1996 Plan, and
incentive stock options to purchase 1,021,250 shares of Common Stock were
outstanding and non-qualified options to purchase 220,000 shares of Common Stock
were outstanding under the 1999 Plan.
Options Granted to Officers and Directors
- -----------------------------------------
On January 7, 1999 Richard C. Ford was granted 100,000 non-qualified
options at $.21 per share which were immediately vested and exercisable. On
April 1, 1999, Mr. Ford was granted 175,000 non-qualified options at $.94 per
share of which 100,000 were immediately vested and exercisable and 75,000 vest
on April 1, 2000. On April 14, 1999 Mr. Ford was granted 100,000 non-qualified
options at $.56 per share which vest on April 14, 2001. From June 18, 1999 to
September 24, 1999 Mr. Ford was granted 114,510 non-qualified options at a
nominal price compared to market prices of from $.31 to .51 per share in lieu of
cash compensation. All vested and were exercisable immediately. On December 20,
1999, Mr. Ford was granted 275,000 qualified options which were immediately
vested and exercisable.
On July 8, 1998, Richard C. Ford was granted 300,000 stock options to
purchase shares of the Company's Common Stock at $.38 per share. Of these
options, 50% vest on July 8, 1998 and 50% July 7, 1999.
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 vested on August 2, 1996, 12,500
vested on August 2, 1997, and 12,500 vested on August 2, 1998. Mr. Ford
surrendered these options for cancellation in 1999. On August 2, 1996, the
Company granted Richard C. Ford non-qualified options to purchase an aggregate
of 200,000 shares of Common Stock at $2.00 per Share through August 2, 2006, of
which 100,000 vested on August 2, 1996, 50,000 vested on August 2, 1997, and
50,000 vest on August 2, 1998. Mr. Ford also surrendered these 200,000 options
for cancellation in 1999.
Option Exercises and Holdings
- -----------------------------
The following table sets forth information with respect to the exercise
of options to purchase shares of Common Stock during the fiscal year ended
December 31, 1999 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1999 fiscal year.
35
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Securities Underlying Value of Unexercised
Number of Unexercised in-the-Money
Shares Acquired Options/SARS Options/SARs
On Exercise Value at FY-End (#) at FY-End ($)
Realized Exercsiable/ Exercisable/ Exercissable/
(#) ($) Unexercisable Unexercisable (1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard C. Ford - - 889,510 / 475,000 $501,146 / $98,500
Chief Executive Officer and
Director
</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 $1.13, the closing price reported on
December 31, 1999.
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
Number Performance Estimated Future Payouts Under
of Shares, or Other Non-Stock Price-Based Plans
Units or Period Until --------------------------------
Other Rights Maturation Threshold Target Maximum
Name (#) or Payout ($ or #) ($ or #) ($ or #)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard C. Ford - - - - -
Chief Executive Officer and
Director
</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 March 20, 2000 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 March 20, 2000, there were 12,870,469 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.
36
<PAGE>
<TABLE>
<CAPTION>
No. of Shares Percent of
Name and Address or of Common Stock Beneficial
Identity of Group Beneficially Owned Ownership
- ----------------- ------------------ ---------
<S> <C> <C>
Quantum Industrial Partners LDC ("QIP") (1) 4,570,000 31.3%
Richard C. Ford (2) 2,301,843 17.9%
Joseph V. Vittoria (3) 1,000,000 7.8%
Alan J. Sandler (4) 191,538 1.5%
All Executive Officers
and Directors as a group (3 persons) 3,493,381 27.1%
</TABLE>
(1) Address is c/o Curacao Corporation Company, N.V., Kaya Flamboyan,
Willenstad Curacao, Netherlands, Antilles.
(2) Mr. Ford serves as Chief Executive Officer and as a Director. Includes
136,875 shares owned by Catherine Ford, Mr. Ford's wife, of which Mr.
Ford disclaims beneficial ownership. Also includes options to purchase
(i) 300,000 shares of Common Stock at $.38 per share through July 7,
2000, options to purchase 100,000 shares at $.21 per share through
January 7, 2009, options to purchase 175,000 shares at $.94 per share
through April 1, 2009, options to purchase 114,510 shares at zero per
share through September 24, 2009 (given in lieu of compensation),
options to purchase 50,000 shares at $1.00 per share through August 2,
2001, 200,000 shares at 1.00 per share through August 2, 2006, and
options to purchase 25,000 shares at $1.00 per share through December
3, 2006; and (ii) options issued to Mrs. Catherine Ford to purchase
9,375 shares of Common Stock at $2.20 through August 2, 2001, options
issued to Mrs. Catherine Ford to purchase 62,500 shares of Common Stock
at $1.00 through January 16, 2007, 18,750 shares of Common Stock at
$1.00 per share through December 3, 2006, options to purchase 75,000
shares of Common Stock at $.75 per shares through April 12, 2009, and
options to purchase 21,000 shares at zero per share through September
24, 2009 (given in lieu of compensation), for which Mr. Ford disclaims
beneficial ownership. Also includes 40,000 shares held in custody by
Mr. Ford for his grandchildren, and 14,000 shares held in custody by
Mrs. Ford for her children for which Mr. Ford disclaims beneficial
ownership. This number does not include options held by Mr. Ford to
purchase 300,000 shares nor options held by Mrs. Ford to purchase
25,000 shares which have not vested at this date.
(3) Mr. Vittoria serves as Chairman of the Board of Directors.
(4) Mr. Sandler serves as Vice President, Chief Financial Officer,
Secretary and Director. Includes options to purchase 130,000 shares of
Common Stock at $.38 per share and options to purchase 12,066 shares at
zero per share (given in lieu of compensation), but does not include
130,000 options which have not vested at this date.
37
<PAGE>
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, 1999, all Section 16
(a) filing requirements applicable to its officers, directors and greater than
ten percent (10%) beneficial owners were completed and filed on a timely basis,
except that reports for Mr. Joseph V. Vittoria, Chairman of the Board of
Directors, Richard C. Ford, Chief Executive Officer and a Director, and Alan J.
Sandler, Vice President and a Director, were not filed on a timely basis.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
Loans and Issuances of Securities to Taylor/Ford. In September 1996,
the Company entered into an Agreement in Partial Settlement of Puradyn 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. The Company failed
to make the required payment on January 31, 1999 and the Estate declared the
Agreement to be in default and demanded immediate payment of the balance due
totaling $294,756. However, the Company paid the Estate $90,000 in December,
1999 and the Estate forgave payment of the remaining $204,756.
Stock Options Granted to Richard C. Ford. On January 7, 1999 Richard C.
Ford was granted 100,000 non-qualified options at $.21 per share which were
immediately vested and exercisable. On April 1, 1999, Mr. Ford was granted
175,000 non-qualified options at $.94 per share of which 100,000 were
immediately vested and exercisable and 75,000 vest on April 1, 2000. On April
14, 1999 Mr. Ford was granted 100,000 non-qualified options at $.56 per share
which vest on April 14, 2001. From June 18, 1999 to September 24, 1999 Mr. Ford
was granted 114,510 non-qualified options at a nominal price compared to market
prices of from $.31 to .51 per share in lieu of cash compensation. All vested
and were exercisable immediately. The aggregate market value of the options on
the dates of grant was $50,008. On December 20, 1999, Mr. Ford was granted
275,000 qualified options which were immediately vested and exercisable.
38
<PAGE>
On July 8, 1998, Richard C. Ford was granted 300,000 stock options to
purchase shares of the Company's Common Stock at $.38 per share. One- half of
these options vested July 8, 1998 and the other vested July 7, 1999.
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 vested on August 2, 1996, 12,500
vested on August 2, 1997, and 12,500 vested on August 2, 1998. Mr. Ford
surrendered these options for cancellation in 1999. On August 2, 1996, the
Company granted Richard C. Ford non-qualified 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 vested on August 2, 1996, 50,000 vested on August 2, 1997, and
50,000 vest on August 2, 1998. Mr. Ford also surrendered these 200,000 options
for cancellation in 1999.
Loans by Richard C. Ford to the Company On May 21, 1998 and on June 24,
1998, Richard C. Ford, Chairman of the Board of Directors and a major
shareholder of the Company, loaned the Company $110,000 and $40,000,
respectively. For each loan, the Company issued notes payable due one year from
the date of issuance, at 12% interest, and secured by accounts receivable and
inventories. The principal and interest accrued to December 31, 1999 totaling
$24,300 was not been paid. On January 24, 2000, Mr. Ford converted these loans
into 150,000 shares of common stock and the related interest accrued to December
31, 1999 totaling $24,300 was forgiven by Mr. Ford.
On August 21, 1998, the Company borrowed $250,000 from its bank under a
revolving note payable due one year from the date of issuance. The bank note
payable was increased to $350,000 on January 21, 1999 and to $525,000 on March
25, 1999. The revolving line of credit was secured by certificates of deposit in
the name of Richard C. Ford and held by the bank. The Company borrowed the full
amount of $525,000. On January 24, 2000, Mr. Ford and his daughter, Traci Ford,
personally repaid the bank and simultaneously converted the loan into 525,000
shares of the Company's Common Stock.
Quantum Industrial Partners LLC. On June 19, 1997, the Company and
members of the Ford Family and Taylor Family entered into a Securities Purchase
Agreement with Quantum Industrial Partners LDC ("QIP") ("the Agreement").
Pursuant to the Agreement, the Company issued QIP a $2,000,000 non-interest
bearing promissory note due December 19, 1997 and received gross proceeds of
$2,000,000. Effective December 19, 1997, the QIP note began accruing interest at
12% per annum. In addition, the Company issued a Common Stock Purchase Warrant
to QIP for the purchase of 500,000 shares of the Company's Common Stock,
exercisable at $2.75 per share and expiring on December 31, 2000. The warrant is
subject to anti-dilution provisions under certain circumstances. The Company has
also agreed to register securities of QIP under certain circumstances.
On January 26, 1998, the Company and QIP entered into a Note Exchange
Agreement whereby the above $2,000,000 promissory note, due December 19, 1997,
was exchanged for a $2,000,000 12% Senior Subordinated Convertible Note (Note)
39
<PAGE>
due 2003. Interest shall be payable quarterly commencing April 1, 1998, provided
however that at the option of the Company, unpaid interest may be added to the
principal balance of the Note in lieu of a cash payment. The Note is senior to
all indebtedness of the Company, except bank or financial institution debt. The
Note can be redeemable at the option of QIP on or after the earlier of January
1, 2001 and the date on which the Company raises cash proceeds aggregate $10
million involving the sale of debt, equity or assets. As long as this Note is
outstanding, the Company cannot, without the consent of QIP, declare or pay any
dividends, purchase, redeem or acquire any of its Common Stock, retire its
existing indebtedness other than existing required periodic payments or enter
into transactions with any affiliate. Prior to January 1, 2003, the Note shall
be convertible, at the option of QIP, into Common Stock in the Company at a
conversion price of $2.75 per share. The Note is subject to anti-dilution
provisions under certain circumstances. The Company has also agreed to register
the securities underlying the Note under certain circumstances.
In addition, on January 26, 1998, the Company and QIP entered into a
Note Purchase Agreement whereby the Company issued QIP a 12% Senior Subordinated
Convertible Note in the aggregate principal amount of $500,000. The loan
proceeds can be used for general operating expenses of the Company and to repay
$103,501 due to a former shareholder. The terms and conditions of this $500,000
Note are identical to the $2,000,000 Note described above. The Company has not
paid the quarterly interest on the $2,000,000 and $500,000 12% Senior
Subordinated Convertible Notes since inception, and has elected to add the
amounts, aggregating approximately $690,000, at December 31, 1999, to the
principal under provisions of the respective note agreements.
On January 24, 2000, QIP converted the aggregate amount of $2,500,000
12% Senior Subordinated Convertible Notes into 2,500,000 shares of the Company's
Common Stock and forgave repayment of the accrued and unpaid interest totaling
approximately $690,000. QIP also surrendered without consideration its Warrants
to purchase 500,000 shares of the Company's Common Stock at $2.75 per share.
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.
40
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A) Index to Exhibits
<TABLE>
<CAPTION>
Exhibits Description of Documents
- -------- ------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of T/F Purifiner, Inc. dated December 30,
1996 (2).
3.1(a) Certificate of Amendment to Certificate of Incorporation dated February 3, 1998 (4)
3.2 Bylaws of T/F Purifiner, Inc. (1).
3.3 Memorandum and Articles of Association of TF Purifiner Ltd. (1).
4.1 Amendment No. 1 to Registration Rights Agreement (4).
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).
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).
10.15 Securities Purchase Agreement and Exhibits thereto (3)
10.16 Note Exchange Agreement dated as of January 26, 1998 (4).
10.17 12% Senior Subordinated Convertible Note in the principal amount of $2,000,000 (4).
10.18 Note Purchase Agreement dated January 26, 1998 (4)
41
<PAGE>
10.19 12% Senior Subordinated Convertible Note in the principal amount of $500,000 (4).
10.20 Stock Option Plan (5)
24.1 Consent of Independent Auditors as of December 31, 1999 (6)
27 Financial Data Schedule (6)
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).
</TABLE>
- ----------
(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) Incorporated by reference from the Exhibit to the Company's Form 8-K,
June 19, 1997, as filed with the Securities and Exchange Commission.
(4) Incorporated by reference from the Exhibit to the Company's Form 8-KA,
February 11, 1998, as filed with the Securities and Exchange
Commission.
(5) Incorporated by reference from Form S-8, September 15, 1999, as filed
with the Securities and Exchange Commission.
(6) Filed herewith.
B) Report on Form 8-K.
January 24, 2000
42
<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.
Puradyn Filter Technologies, Incorporated
(Registrant)
Date: April 6, 2000 By: /s/ Richard C. Ford
------------------------------
Richard C. Ford
Chief Executive 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: April 6, 2000
By: /s/ Richard C. Ford
--------------------------
Richard C. Ford
Chief Executive Officer and Director
By: /s/ Alan J. Sandler
--------------------------
Alan J. Sandler
Vice President, Director and Chief
Financial and Accounting Officer
By: /s/ Joseph V. Vittoria
--------------------------
Joseph V. Vittoria
Chairman of the Board of Directors
43
Exhibit 24.1
Puradyn Filter Technologies, Incorporated
3020 High Ridge Road, Suite 100
Boynton Beach, FL 33426
INDEPENDENT AUDITOR'S CONSENT
Ladies and Gentlemen:
We hereby consent to the incorporation by reference in the Registration
Statement of Puradyn Filter Technologies, Incorporated on Form S-8 of our
reports, dated March 5, 1999 and February 24, 2000 on the financial statements
of the Company, as of December 31, 1998 and 1999 and for the years then ended,
respectively, included in the Company's 1998 and 1999 Annual Reports on Form
10-KSB.
Durland & Company, LLP
Palm Beach, Florida
April 6, 2000
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<FISCAL-YEAR-END> DEC-31-1999
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