<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997 Commission File Number 0-12817
PERFECTDATA CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3087593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 West Easy Street
Simi Valley, California 93065-1689
(Address of principal executive offices)
(Zip Code)
(805) 581-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 1997, there were 3,163,606 shares of common stock outstanding.
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PERFECTDATA CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Balance Sheets - September 30, 1997 and
March 31, 1997 2
Statements of Earnings - quarters
ended September 30, 1997 and 1996
and six months ended September 30, 1997
and 1996 3
Statements of Shareholders' Equity -
six months ended September 30, 1997 4
Statements of Cash Flows - six months
ended September 30, 1997 and 1996 5
Notes to Financial Statements 6 - 7
Management's discussion and analysis of
financial condition and results of
operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
- 1 -
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PERFECTDATA CORPORATION
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except number of shares)
<TABLE>
<CAPTION>
Sept. 30, March 31
1997 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents, including
short-term certificates of deposit of
$361 at September and $160 at March $ 1,132 $ 891
Accounts receivable, less allowance
for doubtful receivables of
$10 at September and $9 at March 355 707
Inventories 846 1,183
Prepaid expenses and other current assets 73 77
Marketable securities, short-term 443 399
Current assets of discontinued operations 42 115
Deposit on litigation award 75 305
Deferred income tax benefit 59 61
-------- --------
Total current assets 3,025 3,738
Property, plant and equipment, net 138 155
Deferred Income Tax benefit 397 369
Investment in affiliate 5 5
Other assets, net 31 31
-------- --------
$ 3,596 $ 4,298
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 36 $ 324
Accrued expenses 117 153
Accrued salaries, wages and vacation 47 56
Current liabilities of discontinued
operations 83 265
-------- --------
Total current liabilities 283 798
-------- --------
Shareholders' equity:
Preferred stock. Authorized 2,000,000
shares; none issued - -
Common stock, no par value. Authorized
10,000,000 shares; issued and
outstanding 3,093,700 shares at
September and at March 8,051 8,051
Accumulated deficit (4,702) (4,546)
Allowance for gain (loss) on
marketable securities (36) (5)
-------- --------
Net shareholders' equity 3,313 3,500
-------- --------
$ 3,596 $ 4,298
-------- --------
-------- --------
</TABLE>
See accompanying notes to financial statements.
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PerfectData Corporation
STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 740 $ 1,474 $ 2,192 $ 2,910
Costs and Expenses:
Cost of sales 470 1,012 1,440 1,930
Selling, general and
administrative 351 493 851 1,004
------- ------- ------- -------
Total costs and expenses 821 1,505 2,291 2,934
Income (loss) from operations (81) (31) (99) (24)
------- ------- ------- -------
Other income and (expense):
Interest income, net 8 5 16 14
Other, net 18 23 38 31
------- ------- ------- -------
Total other income and (expense) 26 28 54 45
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes (55) (3) (45) 21
Income tax (provision) benefit (49) 2 (48) (1)
------- ------- ------- -------
Income (loss) from continuing
operations (104) (1) (93) 20
Gain (loss) on disposal of
discontinued operations (53) - (63) (19)
------- ------- ------- -------
Net income (loss) $ (157) $ (1) $ (156) $ 1
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per common share:
Income (loss) from continuing
operations $ (.03) $ - $ (.03) $ .01
Gain (loss) on disposal of
discontinued operations (.02) - (.02) (.01)
------- ------- ------- -------
$ (.05) $ - $ (.05) $ -
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 3,094 3,084 3,094 3,084
</TABLE>
See accompanying notes to financial statements.
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PerfectData Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
(In thousands)
Period from March 31, 1997 through September 30, 1997
- --------------------------------------------------------------------------------
Allowance Net
Common Stock for gain/ share-
-------------- Accumulated (loss) on holders'
Shares Amount deficit mkt. sec. equity
- --------------------------------------------------------------------------------
Balance at
March 31, 1997 3,094 $8,051 $(4,546) $ (5) $3,500
Net unrealized gain/
(loss) on marketable
securities - - - (31) (31)
Net earnings - - (156) - (156)
- --------------------------------------------------------------------------------
Balance at
September 30, 1997 3,094 $8,051 $(4,702) $ (36) $3,313
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
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PERFECTDATA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Month Period Ended
September 30,
----------------------
1997 1996
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (156) $ 1
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
(Gain) loss on disposal of
discontinued operations 63 19
Depreciation and amortization 19 63
Deferred income tax (benefit) provision (26) 1
Decrease in litigation deposit 230 -
(Increase) decrease in accounts
receivable 352 49
(Increase) decrease in inventories 337 (22)
(Increase) decrease in prepaid
expenses and other current assets 4 (25)
(Increase) decrease in other assets - -
Increase (decrease) in accounts
payable (288) (107)
Increase (decrease) in accrued
expenses (36) (31)
Increase (decrease) in accrued
salaries, wages and vacation (9) (16)
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NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 490 (68)
------ -----
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment $ (2) $ (9)
(Increase) decrease in investment
securities, net (75) 10
------ -----
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (77) 1
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options - 29
Repurchase of common stock - (2)
------ -----
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES - 27
------ -----
NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS 413 (40)
CASH PROVIDED (USED) IN
DISCONTINUED OPERATIONS (172) (19)
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Increase (decrease) in cash and
cash equivalents 241 (59)
Cash and cash equivalents at
beginning of period 891 711
------ -----
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $1,132 $ 652
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See accompanying notes to financial statements.
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PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of the Company, the unaudited financial statements contained
in this report have been prepared on a basis consistent with the financial
statements contained in the Company's Annual Report on Form 10-K for the
year ended March 31, 1997. All adjustments included in the financial
statements are of a normal recurring nature and are necessary to present
fairly the Company's financial position as of September 30, 1997 and the
results of its operations and cash flows for the six months ended September
30, 1997 and 1996.
2. Marketable securities classified as current assets at September 30, 1997,
include the following (dollars in thousands):
Fair Value Cost
---------- ----
Government Securities $ 135 $ 134
Corporate debt securities 10 10
Marketable equity securities 298 335
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$ 443 $ 479
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3. Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at
September 30, 1997 and March 31, 1997 consist of the following:
(In thousands)
Sept. 30, 1997 March 31, 1997
-------------- --------------
Raw materials $ 275 $ 384
Work in process 94 132
Finished products 477 667
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$ 846 $1,183
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4. Property, plant and equipment consist of (dollars in thousands):
Sept. 30, 1997 March 31, 1997
-------------- --------------
Machinery and equipment $ 481 $ 479
Furniture and fixtures 151 151
Tooling 592 711
Leasehold improvements 155 155
------- -------
1,379 1,496
Less accumulated
depreciation (1,241) (1,341)
------- -------
$ 138 $ 155
------- -------
------- -------
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5. The components of the income tax (benefit) provision were (dollars in
thousands):
September 30, 1997
------------------
Current:
Federal $ -
State 1
-----
1
Deferred:
Net (increase) decrease in
deferred tax asset 97
(Increase) decrease in benefit of
NOL carryforwards (99)
Increase (decrease) in valuation allowance 50
-----
$ 49
-----
-----
At September 30, 1997, the Company had net operating loss (NOL)
carryforwards of approximately $2,867,000 for federal income tax purposes
expiring in varying amounts through 2012. The NOL carryforwards, which are
available to offset future profits of the Company and are subject to
limitations should a "change in ownership" as defined in the Internal
Revenue Code occur, will begin to expire in 2001 if not utilized.
Additionally, the Company has general business tax credit carryforwards of
$174,109 which will begin to expire in 1998.
SFAS 109 requires that the tax benefit of such NOLs be recorded using
current tax rates as an asset to the extent management assesses the
utilization of such NOLs to be more likely than not. Management has
determined that future taxable income of the Company will more likely than
not be sufficient to realize the recorded deferred tax asset of $1,021,000
net of a valuation allowance of $727,000.
Realization of the future tax benefits of the NOL carryforwards is
dependent on a Company's ability to generate taxable income within the
carryforward period. In assessing the likelihood of utilization of
existing NOL carryforwards, management considered the historical results of
continuing operations, the current economic environment in which the
Company operates, and the projected results of the Company's cost-cutting
measures as well as sales projections. Management did not consider any
non-routine transactions in assessing the likelihood of realization of the
recorded deferred tax asset.
6. Net earnings (loss) per share is based on the weighted average number of
shares outstanding during each of the respective periods. Common stock
equivalents are excluded from the calculation of weighted average shares
outstanding as their effect is immaterial or antidilutive.
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<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales from continuing operations for the second fiscal quarter ended
September 30, 1997 were $740,000 compared to $1,474,000 in the year-earlier
period. Net sales for the six months ended September 30, 1997 were $2,192,000
compared to $2,910,000 in the year-earlier period.
As previously disclosed in the Company's Form 10-K for the fiscal year ended
March 31, 1997, during June the Company learned that its bid for the continuing
business of PriceCostco had been rejected. During the first fiscal quarter
ended June 30, 1997, sales to PriceCostco represented 43% of the Company's total
sales. The Company realized the loss of this business during the second fiscal
quarter ended September 30, 1997 and as a result sales declined dramatically
from the year-earlier periods.
The loss from continuing operations for the three months and six months ended
September 30, 1997 is directly related to the loss of this major customer. The
Company continues developing programs to acquire new business as well as
increase business with existing customers. Cost-cutting measures had been
implemented immediately upon notification of the loss of this major customer.
The Company is currently negotiating joint distribution agreements (with
partners that have a global presence) to market some of its product lines into
new markets. Additionally, the Company continues to look for business
combinations through acquisitions or mergers.
As previously discussed in the Company's Form 10-K for the fiscal year ended
March 31, 1997, the Company reached a settlement with a former employee during
May 1997 to settle two legal actions. Unresolved was the amount of attorney's
fees owed to the former employee's counsel. On October 17, 1997 the judge ruled
in favor of the former employee and awarded post judgment attorney fees in the
amount of $96,268.00. At the time of this filing, the parties have agreed to
settle for the sum of $82,500.00. The loss from discontinued operations for the
three months and six months ended September 30, 1997 directly relates to legal
fees incurred by the Company relative to the settlement and additional reserves
to cover the $82,500.00 settlement.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain a strong financial position. Cash at
September 30, 1997 was $1,132,000 including certificates of deposit of $361,000.
The Company has a current ratio of better than 10 to 1 at the end of the second
fiscal quarter.
As discussed, during May 1997 the Company reached a settlement with a former
employee. As part of the settlement, the Company paid the former employee
$185,000. These funds were paid from the litigation deposit the Company made
when it appealed the judgment. The bond and litigation deposit were reduced to
$75,000, as both parties agreed upon, pending the resolution of the attorney's
fees owed the former employee's counsel. The now agreed upon post judgment
attorney's fees of $82,500 will be paid from the $75,000 litigation deposit,
with the difference being paid from operating funds of the Company.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In November 1995, in the Superior Court of Ventura County, California, a former
employee won an award against the Company for $203,403. The lawsuit related to
the termination, in October 1993, of an employment contract entered into between
the Company and the individual during July 1993. The Company appealed this
award and posted an appeal bond with the Court. On March 31, 1997 the Appeals
Court issued its opinion affirming the judgement against the Company. The
judgement became final on April 30, 1997.
In December 1995, in the United States District Court, Northern District of
California, the Company filed a complaint against the same former employee and
his company alleging that they copied PerfectData's trademark and trade dress.
On December 21, 1995, the Court granted the Company's motions for a restraining
order and preliminary injunction which enjoin the defendants from the
manufacture and distribution of the product in question. This case had been set
for trial December 1, 1997.
During May 1997, the parties reached a global settlement of both actions. The
Company paid the former employee the sum of $185,000 in exchange for its right
to seek further appeal. Defendants in the trademark infringement action have
agreed to assign and transfer any and all right, title and interest in the
trademark, trade name, and trade dress of their canned air product "Perfect
Cleaner" and any and all goodwill of the Perfect Cleaner business to the
Company. The former employee and his company have further agreed not to sell a
canned air product in the United States or Canada for three years. Unresolved
was the amount of attorney's fees owed to the former employee's counsel for
services rendered during the Company's appeal of the original judgement against
the Company. The parties agreed to have the issue decided by a judge. On July
21, 1997, a hearing was held in the Superior Court of Ventura County,
California. On October 17, 1997 the judge ruled in favor of the former employee
and awarded post judgment attorney fees in the amount of $96,268.32. At the
time of the filing of this Form 10-Q, the parties agreed to settle the issue of
the post-judgment attorney's fees for the sum of $82,500.00.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Inapplicable.
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the quarter for which this
report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFECTDATA CORPORATION
Date: November 10, 1997 Joseph Mazin
----------------- ----------------------------
Joseph Mazin
President,
Chief Executive Officer and
Chairman of the Board
Date: November 10, 1997 Irene J. Marino
----------------- ----------------------------
Irene J. Marino
Corporate Secretary,
V.P. Finance and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,132
<SECURITIES> 443
<RECEIVABLES> 365
<ALLOWANCES> 10
<INVENTORY> 846
<CURRENT-ASSETS> 3,025
<PP&E> 1,379
<DEPRECIATION> (1,241)
<TOTAL-ASSETS> 3,596
<CURRENT-LIABILITIES> 283
<BONDS> 0
0
0
<COMMON> 8,051
<OTHER-SE> (4,738)
<TOTAL-LIABILITY-AND-EQUITY> 3,596
<SALES> 2,192
<TOTAL-REVENUES> 2,192
<CGS> 1,440
<TOTAL-COSTS> 1,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (45)
<INCOME-TAX> 48
<INCOME-CONTINUING> (93)
<DISCONTINUED> (63)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (156)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
