-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AgVzDOa+Oshcn7J6YVFV3LxOaaSo3QhGnae3q2lgkjLHf4MPsx9Cf/hESgL7yJw+ ZywN1zMZfJZCovfeuM3mrg== 0001116502-02-000664.txt : 20020515 0001116502-02-000664.hdr.sgml : 20020515 20020515145142 ACCESSION NUMBER: 0001116502-02-000664 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURADYN FILTER TECHNOLOGIES INC CENTRAL INDEX KEY: 0001019787 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 141708544 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11991 FILM NUMBER: 02651245 BUSINESS ADDRESS: STREET 1: 3020 HIGH RIDGE ROAD STE 100 CITY: BOYTON BEACH STATE: FL ZIP: 33426 BUSINESS PHONE: 4075479499 MAIL ADDRESS: STREET 1: 3020 HIGH RIDGE ROAD STE 100 CITY: BOYTON BEACH STATE: FL ZIP: 33426 FORMER COMPANY: FORMER CONFORMED NAME: T F PURIFINER INC DATE OF NAME CHANGE: 19960726 10QSB 1 puradyn-10qsb.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-QSB (Mark one) [x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2002 --------------------------------------------- [ ] 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 ------------------------------------------------------------------------------- (Name of small business issuer in its charter) Delaware 14-1708544 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3020 High Ridge Road, Suite 100, Boynton Beach, Florida 33426 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (561)-547-9499 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 [ ] (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Check whether the issuer has filed all documents and reports required to be filed by Section12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes _____ No _____ (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: May 10, 2002: 15,574,423 Puradyn Filter Technologies Incorporated Index to Quarterly Report on Form 10-QSB
Part I. Financial Information Page Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheet - March 31, 2002..................................................... 3 Condensed Consolidated Statements of Operations - Three months ended March 31, 2002 and 2001...................................................................................................... 4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2001...................................................................................................... 5 Notes to Condensed Consolidated Financial Statements...................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 10 Part II. Other Information Item 1. Legal Proceedings......................................................................................... 14 Item 2. Changes in Securities and Use of Proceeds................................................................. 14 Item 4. Submission of Matters to a Vote of Security Holders....................................................... 14 Item 5. Other Information.......................................................................................... 14 Item 6. Exhibits and Reports on Form 8-K.......................................................................... 14 Signatures.................................................................................................................. 15
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Puradyn Filter Technologies, Incorporated Condensed Consolidated Balance Sheet March 31, 2002 (Unaudited)
Assets Current assets: Cash and cash equivalents $ 1,102,571 Restricted cash 22,238 Short-term investments 603,938 Accounts receivable, net of allowance for uncollectible accounts of $81,800 386,956 Inventories 974,613 Accrued interest receivable 41,930 Deferred financing costs 318,000 Prepaid expenses and other current assets 280,504 ------------ Total current assets 3,730,750 Property and equipment, net 660,102 Other noncurrent assets 12,045 ------------ Total assets $ 4,402,897 ============ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 315,636 Accrued liabilities 187,415 Current portion of capital lease obligation 4,551 Deferred revenue 125,005 Note payable secured by investments 97,750 ------------ Total current liabilities 730,357 Capital lease obligation, less current portion 6,407 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value: Authorized shares - 500,000; none issued and outstanding -- Common stock, $.001 par value, Authorized shares - 20,000,000; issued and outstanding - 15,574,423 15,574 Additional paid-in capital 31,685,807 Stockholder notes receivable (875,256) Accumulated deficit (27,136,474) Accumulated other comprehensive loss (23,518) ------------ Total stockholders' equity 3,666,133 ------------ Total liabilities and stockholders' equity $ 4,402,897 ============
See accompanying notes. 3 Puradyn Filter Technologies, Incorporated Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2002 and 2001 (Unaudited) Three Months Ended March 31, 2002 2001 ------------ ------------ Net sales $ 604,644 $ 365,454 Investment income 88,940 167,068 ------------ ------------ 693,584 532,522 Costs and expenses: Cost of products sold 570,041 403,038 Salaries and wages 391,149 364,489 Selling and administrative 493,695 906,998 Interest expense 31,862 1,020 ------------ ------------ 1,444,447 1,675,545 ------------ ------------ Net loss $ (750,863) $ (1,143,023) ============ ============ Basic and diluted loss per common share $ (0.05) $ (0.08) ============ ============ Weighted average common shares outstanding 15,545,706 14,209,775 ============ ============ See accompanying notes. 4 Puradyn Filter Technologies, Incorporated Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2002 and 2001 (Unaudited)
THREE MONTHS ENDED MARCH 31 2002 2001 ----------- ----------- OPERATING ACTIVITIES Net cash used in operating activities $(1,343,250) $ (937,000) INVESTING ACTIVITIES Proceeds from sales and maturities of investments 5,287,684 600,000 Purchases of property and equipment -- (12,023) ----------- ----------- Net cash provided by investing activities 5,287,684 587,977 FINANCING ACTIVITIES Proceeds from exercise of stock options 87,019 7,500 Proceeds from note payable secured by investments 1,300,500 -- Collection of notes receivable from officer -- 150,000 Payments on note payable secured by investments (5,186,332) -- Payment of capital lease obligations (1,066) (7,025) ----------- ----------- Net cash (used in) provided by financing activities (3,799,879) 150,475 Effect of exchange rate changes on cash and cash equivalents 6,215 -- ----------- ----------- Increase (decrease) in cash and cash equivalents 150,770 (198,548) Cash and cash equivalents at beginning of period 974,039 479,158 ----------- ----------- Cash and cash equivalents at end of period 1,124,809 280,610 Less restricted cash (22,238) (22,238) ----------- ----------- Unrestricted cash and cash equivalents $ 1,102,571 $ 258,372 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 31,862 $ -- =========== =========== NONCASH INVESTING AND FINANCING ACTIVITIES Net unrealized loss on available-for-sale investments $ (28,283) $ -- =========== =========== Increase in deferred financing costs resulting from the issuance of stock purchase warrants $ 318,000 $ -- =========== ===========
See accompanying notes. 5 Puradyn Filter Technologies Incorporated Notes to Condensed Consolidated Financial Statements March 31, 2002 (Unaudited) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2002 may not necessarily be indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to Puradyn Filter Technologies Incorporated (the Company) consolidated financial statements and footnotes thereto included on the Form 10-KSB for the year ended December 31, 2001. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141 Business Combinations (SFAS 141) and SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The Company has adopted SFAS 141 and SFAS 142 as of January 1, 2002. The adoption of these statements had no impact on the Company's financial position or the results of its operations. In September 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 144), which supersedes SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of (FAS 121), and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB 30), for the disposal of a segment of a business. SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of. It also addresses certain significant implementation issues under SFAS 121. The provisions of SFAS 144 were effective for the Company on January 1, 2002. Management will assess the recoverability of its long-lived assets when indicators of impairment are present. The Company does not believe that the adoption of the standard will have a material effect on its consolidated financial statements. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Puradyn Filter Technologies Ltd, formed during May 2000. All significant inter-company transactions and balances have been eliminated. Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 6 Basic and Diluted Loss Per Share The Company has adopted FASB Statement No. 128, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. However, because of the Company's net losses, the effect of stock options and warrants would be anti-dilutive and, accordingly, are excluded from the computation of loss per share. The number of such shares excluded from the computation of loss per share totaled 2,299,611 and 3,779,054 at March 31, 2002 and 2001, respectively. Restricted Cash Restricted cash consists of funds set aside in accordance with the order of a court for attorney's fees and court costs in connection with certain litigation (see Note 5). Inventories Inventories are stated at the lower of cost or market using the first in, first out (FIFO) method. Production costs are applied to ending inventories at a rate based on estimated production capacity and any excess production costs are charged to cost of products sold. Inventories consisted of the following at March 31, 2002: Raw materials $797,279 Finished goods 177,334 -------- $974,613 ======== Revenue Recognition The Company recognizes revenue from product sales to customers, distributors and resellers when products that do not require further services or installation at the customer's site are shipped, there are no uncertainties surrounding customer acceptance and for which collectibility is reasonably assured in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Cash received by the Company prior to shipment is recorded as deferred revenue. Sales are made to 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. Comprehensive Income SFAS No. 130, Reporting Comprehensive Income (SFAS 130) establishes rules for reporting and display of comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions reported in the consolidated statement of changes in stockholders' equity. Other comprehensive income transactions that currently apply to the Company result from changes in the market value of the available-for-sale investments and changes in exchange rates from translating the financial statements of the Company's foreign subsidiary. Comprehensive loss consisted of the following at March 31, 2002: Net loss $(728,649) Other comprehensive income (loss): Net unrealized loss on available-for-sale securities (28,283) Foreign currency translation adjustment 4,765 --------- Comprehensive loss $(752,167) ========= Presentation of comprehensive income for the three-month period ended March 31, 2001 is not presented, as it was immaterial to the net loss. 7 Reclassification Certain prior period amounts have been reclassified to conform to the current period presentation. 2. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS The Company's financial statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained losses since inception and used net cash in operations of $1,343,250 and $937,000 during the three months ended March 31, 2002 and 2001, respectively. As a result, the Company has had to rely principally on private equity funding, including the conversion of debt into stock, to fund its activities to date. The Company anticipates increased cash flows from 2002 sales activity, however, additional cash may still be needed to support operations. As of March 2002, the Company has fully borrowed against its investment portfolio and has liquidated approximately $5.29 million of its investment portfolio to repay the outstanding loan on investments of $5.19 million. In April 2002, the loan on investments was paid in full and the Company has no further plans to draw upon it. On March 28, 2002, the Company executed a commitment letter with one of its shareholders to fund up to $2.5 million through the end of 2002. Under the terms of the commitment, the Company may draw amounts as needed in multiples of $500,000 to fund operations subject to Board of Director approval. Amounts drawn will bear interest at 8% and will become due and payable on December 31, 2003 or upon a change in control of the Company or consummation of any other financing over $3 million. In consideration, the Company granted such shareholder 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant (see Note 4). Management believes that the commitment received from its shareholder and net cash expected from the liquidation of its investments will be sufficient to sustain the Company's operations through December 31, 2002. However, if the commitment is not funded for any reason or budgeted sales levels are not achieved, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for part of its assets to continue as a going concern through 2002. The Company is contemplating various other sources of funding such as a private placement and a bank line of credit. 3. NOTE PAYABLE SECURED BY INVESTMENTS In April 2001, the Company entered into a revolving loan agreement with Salomon Smith Barney that is collateralized by its investment portfolio. The maximum loan value is calculated as 75% of the fair market value of corporate bonds and 60% of money market and certificate of deposit fair values. The interest rate at March 31, 2002 was 3.125% and the Company recorded $31,442 of interest expense related to the loan. In March 2002, the Company liquidated approximately $5.29 million of its investment portfolio to repay the outstanding balance of notes payable on investments of approximately $5.19 million. As of March 31, 2002, the outstanding loan balance is $97,750. In April 2002, the note was paid in full and the Company has no further plans to draw upon it. 4. STOCK-BASED COMPENSATION In January 2001, the Company granted one of its non-employee Board of Directors 7,500 stock options for past services. Such options were recorded at their fair value of approximately $48,000 and included in general and administrative expenses for the quarter ended March 31, 2001. During the three-month period ended March 31, 2002 and 2001, the Company recognized a credit to operations of approximately $138,000 and compensation expense of approximately $95,000, respectively, relating to variable option awards outstanding. On March 28, 2002, the Company recorded a deferred charge of approximately $318,000 for the issuance of 100,000 warrants to purchase common stock relating to a financing agreement with one of its shareholders to fund up to $2.5 million through the end of 2002 (see Note 2). The fair value of the warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk free interest rates of 4.65, volatility factors of the expected market price of the Company's common stock of 1.39; and an expected life of 3 years. The deferred charge will be amortized over the commitment period. 8 During the three month period ended March 31, 2002, employees of the Company exercised approximately 81,500 and 20,000, respectively, common stock options. The Company received approximately $87,000 and $7,500 in proceeds in exchange for the shares issued. 5. CONTINGENCIES SEARCY, DENNY, SCAROLA ET. AL AND RELATED CLAIMS 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. Ford, demanding payment of approximately $313,000 of legal fees and other costs, 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 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 based on advice of legal counsel, management believes such amounts are not the responsibility of the Company. On January 30, 2002, the action was dismissed without prejudice. The law firm did not receive any payment from the Company and both parties agreed to be responsible for their own litigation expenses. In connection with the Company being granted worldwide manufacturing and marketing rights for certain of the Purifiner products, a royalty agreement was entered into with a term equal to the life of the related patents or any improvements thereto. Pursuant to this royalty agreement, the owner of the patents was to receive 5% of the net unit sale price of all covered Purifiner products, as defined. Additionally, 1% of the net sales price of replacement oil filter elements was to be paid as a royalty on certain Puradyn filters for the use of the U.S. Purifiner trademark. The Company is no longer retaining the Purifiner patents or trademarks and accordingly is not renewing them upon expiration. In May 1994, the Company and the patent owner entered into a settlement agreement relating to royalties under which the patent owner was entitled, including a minimum annual royalty of $24,000, payable in monthly installments of $2,000. In February 1997, the patent owner filed an action against the Company for nonpayment of approximately $20,000 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 but was entitled to $20,169 in past royalties, which the Company paid. The patent owner filed a motion for additional damages and attorney fees and on December 13, 2000 the Court found the patent owner was entitled to an additional $15,505. The Company appealed that judgment but has paid the additional judgment. Thereafter, on February 22, 2001, the trial court ordered the Company to pay the sum of $18,049 for the patent owner's attorney's fees and court costs, which is included in accrued liabilities. That order has been appealed and has been combined with the first appeal. On April 24th, 2002, the judgment for attorney's fees and court costs was reversed and upon the receipt of a mandate by the court the bond will be discharged. Management does not expect the ultimate resolution of this matter to have a significant effect on the Company's financial position or results of operations. 6. SUBSEQUENT EVENTS On April 1, 2002, the Company executed an agreement with a related party who is affiliated with an executive officer and a third party to receive web site and advertising consulting services. The agreement is for a term of 15 weeks and the two consultants will receive 10,000 stock options each as well as cash payments for services rendered. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk free interest rates of 4.65, volatility factors of the expected market price of the Company's common stock of 1.39; and an expected life of 3 years. The deferred charge of approximately $64,000 will be amortized over the commitment period. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Form 10-KSB for the year ended December 31, 2001. Other than historical and factual statements, the matters and items discussed in this Quarterly Report on Form 10-QSB 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 was inactive until it commenced limited operations in 1991 when it obtained worldwide manufacturing and marketing rights to the Purifiner(R) product, now called the Puradyn By-pass Oil Filtration System or "Puradyn". Through 1997, the Company had minimal revenues from its distribution network, which caused the Company to change its sales strategy. In 1998 the Company changed its name from T/F Purifiner, Inc. to Puradyn Filter Technologies, Incorporated in anticipation of its new business plan. The Company reduced its workforce and operational overhead in an effort to reduce cash expenditures until it had sufficient funds to support operations based on its new sales plan. Puradyn began to refocus its sales effort toward the development of commercial relationships with original equipment manufacturers ("OEM's") and companies having medium to large size fleets of vehicles. The sales effort not only involves educating the potential customer on the benefits of the Puradyn, but also 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 that have large vehicle fleets to enable them to evaluate the benefits of the Puradyn. Effective June 1, 2000, the Company formed a wholly owned subsidiary (Puradyn Filter Technologies, Ltd., "PFTL") in the United Kingdom to sell the Company's products in Europe, the Middle East and Africa. The subsidiary was the result of the dissolution of a joint venture (TF Purifiner, Ltd.) with Centrax, Ltd. The results of PFTL have been consolidated with the Company since June 1, 2000. 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. Based on the results of some of the evaluations as well as orders placed and indications from several customers, the Company anticipates a significant increase in revenues in 2002. The Company recognizes revenue upon shipment of its products that do not require further services or installation at the customer's site and for which collectibility is reasonably assured in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Cash received by the Company prior to shipment is recorded as deferred revenue. 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. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the amounts reported in the financial statements. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, warranty obligations and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 10 The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition Revenue is recognized when earned. The Company's revenue recognition policies are in compliance with the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). Revenue from product sales to customers, distributors and resellers is recorded when products that do not require further services or installation at the customer's site are shipped, there are no uncertainties surrounding customer acceptance and for which collectibility is reasonably assured. Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on customer specific identification and historical collection experience. If market conditions decline, actual collection experience may not meet expectations and may result in increased bad debt expense. Estimation of Product Warranty Cost The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company's warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company's estimates, revisions to the estimated warranty liability would be required. Estimation of Inventory Obsolescence The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Results of Operations for the Three-months Ended March 31, 2002 Compared to the Three-months Ended March 31, 2001 The following table sets forth for the amount of increase or decrease represented by certain items reflected in the Company's statements of operations in comparing the three-months ended March 31, 2002 to the three-months ended March 31, 2001: Three Months Ended March 31, (in thousands) ------------------------------------------- Increase 2002 2001 (Decrease) ------- ------- ------- Net sales $ 605 $ 365 $ 240 Investment income 89 167 (78) ------- ------- ------- 694 532 162 Operating costs and expenses: Cost of products sold 528 403 125 Salaries and wages 391 364 27 Selling and administrative 494 907 (413) Interest expense 32 1 31 ------- ------- ------- 1,445 1,675 (230) ------- ------- ------- Net loss $ (751) $(1,143) $ (392) ======= ======= ======= 11 NET SALES. Net sales increased by approximately 66% from $365,000 in 2001 to $605,000 in 2002 as a result of the Company's continuing efforts to refocus its marketing toward OEMs and companies having large fleets of trucks. Several large OEMs comprised a majority of the sales for the three-month period ended March 31, 2002. Late in 2000, Asplundh Tree Expert Company, the world's largest vegetation management Company with one of the nation's largest, privately held fleet of trucks and equipment, began purchasing the Puradyn for new equipment including trucks, chippers and aerial devices. In 2001, Puradyn sold over 1,400 units to Asplundh, totaling approximately $330,000. Through April 30, 2002, sales to Asplundh have exceeded sales to Asplundh in 2001 by approximately 37%. The UK subsidiary's sales of $115,800 contributed 19% of total net sales. INVESTMENT INCOME. Investment income decreased by approximately $78,000 or 47% in 2002 over the 2001 period due to the reduction in the Company's investments in various` securities. The investment securities were purchased from proceeds received from the Company's private placements in 2000 and 2001. The Company sold substantially all of these securities by the end of March 2002 to pay off its note payable, which was collateralized by the investments. COST OF PRODUCTS SOLD. Cost of sales increased by approximately 31% from $403,000 in 2001 to $528,000 in 2002 due primarily to an increase in sales of approximately $240,000. In addition to the foregoing, excess overhead production capacity also contributed to the Company generating low to negative margins on products sold during the 2002 and 2001 periods, respectively. Additionally, approximately 20% of the excess capacity has been utilized for the rework of existing inventory for product design improvements on the PFT product line. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses decreased by approximately 46% from $907,000 in 2001 to $494,000 in 2002. Salaries and wages increased approximately $27,000 due to the addition of several employees. General selling and administrative expenses in the 2001 period included $94,538 in compensation expense due to the effect of variable options accounting for options granted to certain employees whereas the effect of such variable options for 2002 resulted in a credit of approximately $138,000. Excluding these transactions, general selling and administrative expenses decreased by approximately 22% in 2002 as compared to 2001 primarily as a result of a significant decrease in the Company's advertising efforts. INTEREST EXPENSE. Interest expense increased by approximately $31,000 in 2002 over the 2001 period due to the interest paid on the note payable secured by the Company's investment portfolio, which the Company first began to draw upon in April 2001. Liquidity and Capital Resources As of March 31, 2002, the Company had cash and cash equivalents of $1,102,571. For the period ended March 31, 2002, net cash used in operating activities was $1,343,250, which primarily resulted from the net loss of $750,863. Net cash provided by investing activities was $5,328,652 resulting from net proceeds from sales of our investments. Net cash used in financing activities was $3,799,879 for the period, primarily due to repayments on the note payable collateralized by the investments. The Company has incurred net losses each year since inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations. At March 31, 2002, the Company had working capital of $3,000,393 and its current ratio (current assets to current liabilities) was 5.11 to 1. The Company anticipates increased cash flows from 2002 sales activity, however, additional cash may still be needed to support operations. During 2000, the Company invested the funds received from its private placements into corporate bonds, certificates of deposits and for a brief period, in international bonds. The investment portfolio is managed by Salomon Smith Barney, who in April 2001, executed an express credit line loan with the Company, which is collateralized by the investment portfolio. The maximum borrowing capacity is calculated as 75% of the fair market value of the corporate bonds and 60% of cash equivalents. In March 2002, the Company sold approximately $5.29 million of its investment portfolio to pay the outstanding loan on investments of $5.19 million. As of March 31, 2002, the Company had $97,750 outstanding through the credit line. In April 2002, the Company paid the loan in full and is now utilizing the cash account as needed instead of borrowing on the line-of-credit. 12 On March 28, 2002, the Company executed a commitment letter with one of its shareholders to fund up to $2.5 million through the end of 2002. Under the terms of the commitment, the Company may draw amounts as needed in multiples of $500,000 to fund operations subject to Board of Director approval. Amounts drawn will bear interest at 8% and will become due and payable on December 31, 2003 or upon a change in control of the Company or consummation of any other financing arrangement over $3 million. In consideration, the Company granted such shareholder 100,000 common stock purchase warrants at an exercise price equal to the closing market price of the Company's stock on the date of grant. Management believes that the commitments received from its shareholder and net cash from sales and maturities or sales of investments will be sufficient to sustain its operations at its current level through December 31, 2002. However, if the commitment is not funded for any reason or its budgeted sales levels are not achieved, the Company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for part of its assets to continue as a going concern through 2002. The Company is contemplating various other sources of funding such as a private placement and a bank line of credit. The Company believes it has sufficient cash for fiscal year 2002, and while the Company believes it can attain profitable operations in the future, there is no assurance that sales will increase to the level required to generate profitable operations 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. The Company is currently negotiating to lease a new office and warehouse facility, with an anticipated move by the September 1, 2002. This new facility, which will be located near our existing office and warehouse facility, will consist of approximately 20,000 square feet for manufacturing and distribution plus 5,000 square feet of office space. The lease will include the option to expand the space by the sixth month of the lease up to an additional 24,000 square feet. 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. 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. 13 Part II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Certain litigation involving the Company is described in the Company's Form 10-KSB for the year ended December 31, 2001. Subsequent to the filing of such Form 10-KSB, no material developments have occurred with respect to such litigation with the exception of the reversal on April 24th, 2002 of the judgment for attorney's fees and court costs related to the Searcy, Denny, Scarola et. al and Related Claims case. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits: None b) Reports on Form 8-K. None 14 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PURADYN FILTER TECHNOLOGIES INCORPORATED (Registrant) Date: May 15, 2001 By /s/ Lisa M. De La Pointe ---------------------------------------- Lisa M. De La Pointe, Chief Financial Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----