<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended March 31, 1997 Commission File No. 0-12817
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PERFECTDATA CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3087593
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
110 West Easy Street
Simi Valley, California 93065
(Address of principal executive offices) (Zip Code)
(805) 581-4000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock NASDAQ
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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 reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
this Form 10-K. [ X ]
As of May 31, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $4,480,916.
As of May 31, 1997, the registrant had 3,093,700 shares of Common Stock
outstanding.
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<PAGE>
PART I
ITEM 1. BUSINESS
PerfectData Corporation (the Company) was incorporated in the state of
California on June 8, 1976. The Company was originally founded by an
experienced group of engineers and data processing professionals to design and
manufacture a proprietary line of Magnetic Media Maintenance equipment - Disk
Pack Cleaners and Inspectors. This line of equipment, which has since been
discontinued, was originally sold to Original Equipment Manufacturers (OEMs)
such as Burroughs (now Unisys), DEC (Digital Equipment Corporation), NCR
(National Cash Register) and 3M Corporation. Sales of these products by such
well known companies contributed to increased user awareness as to the need for
routine computer care and maintenance. It also brought credibility to the
Company as a key manufacturer in the industry.
With the evolution of the computer work environment from the sterile,
climate-controlled surroundings of a clean room to the mainstream office and
home environments, simple preventative maintenance has become a key element in
maintaining equipment efficiency and personal productivity. The Company's line
of CareWare Cleaning and Maintenance supplies are designed to address the needs
of the end users of computers and office automation equipment and by maintenance
organizations as part of preventative maintenance programs to reduce equipment
"down time" and service costs and to increase product life.
In November of 1990, the Company acquired the assets of Coverware Company,
a manufacturer of high quality computer and office equipment dust covers. On
June 20, 1991, the Company acquired the assets of Anchor Automation, Inc., a
modem manufacturer. During the first quarter of fiscal 1995 the Company
formally discontinued its modem and other telecommunications operations.
The Company first entered the ergonomic accessory market with the
introduction of its CopyHolder Systems and Accessories line
in fiscal year 1992. During fiscal years 1993 and 1995 the Company expanded its
ergonomic line with additional products.
During the third quarter of fiscal 1996, the Company acquired a majority
interest in Starnet Universe Internet, Inc., a web server and Internet provider.
Subsequent to fiscal year ending March 31, 1997, the Board of Directors of
PerfectData Corporation authorized the distribution of the majority of these
shares to PerfectData shareholders as a form of dividend.
<PAGE>
THE INDUSTRY
The computer accessories and supplies market has grown with the addition of
accessory products in channels other than those serviced by traditional office
product catalogs, which have catered mostly to medium and large sized
businesses.
The Company feels that the market potential for its products will continue
to grow and increase in size. Currently the largest growth area is the retail
SoHo (Small Office Home Office) segment of the market. This market is serviced
mainly by Office Superstores, mass merchants, Warehouse Clubs and by other
office/computer retail outlets. The Company is organized to service all
distribution channels.
PRODUCTS
The following is a brief description of the products currently manufactured
and marketed by the Company:
CLEANING AND MAINTENANCE PRODUCTS. The Company designs and markets a
line of consumable cleaning and preventative maintenance products for the Home,
Office and Computer environments. Many of the Company's products have strong
crossover appeal and applications for use outside of the office/computer
environment. The potential for developing new markets or channels of
distribution for these products exists.
One of the Company's principal products is the PerfectDuster EcoDuster line
of compressed gas dusters. This product is offered in a variety of formulations
to meet competitive pressures and buyer demand. All of these dusters are 100%
CFC free and contain no ozone depleting chemicals that could damage the ozone
layer in the earth's upper atmosphere.
Other products that comprise the cleaning and maintenance line are patented
disk drive cleaners, optical lens and tape back-up cleaners,
laser/copier/fax/inkjet cleaners, premoistened cleaning wipes and other cleaning
systems for specific office equipment.
ERGONOMIC PRODUCTS AND ACCESSORIES. The PerfectData CopyHolder System
is a proprietary product which relieves eye, back and neck strain while
increasing productivity by putting the document (copy) at the most comfortable
height and angle for the user. The product line includes six different models
and four unique accessories. All bases and accessories attach by means of a
"snap-on/off" system; no tools are required for assembly; users create the
system they need. The system includes the first affordable motorized line guide
accessory.
Other ergonomic products include an Adjustable Wrist Rest, Adjustable
FootRest and Foot Rest with Massage. Each of these allows the user to customize
their work station for maximum comfort, reduced risk of computer related injury
and increased productivity.
<PAGE>
NEW PRODUCTS. All new products recently introduced or under
development are in keeping with the desire to support and expand the Company's
core business of cleaning and maintenance products.
Recent product additions have expanded the Company's existing line of
compressed gas dusters and consumable cleaning products.
MARKETING
CUSTOMERS. Since May of 1982, the Company has been selling its products
primarily through retail distribution under the Company's "PerfectData"
trademark. The retail distribution channel is comprised of office product
catalogs, office product distributors and dealers, stationery and computer
retail stores and large Warehouse/Superstore type accounts.
Prior to May 1982, the Company sold substantially all of its products to
companies commonly referred to as "Original Equipment Manufacturers" (OEMs) for
resale under their own product packaging and through their own channels of
distribution. Only 3% of the Company's sales are to OEM customers.
The Company actively pursues foreign distribution of its products through
a network of International distributors and customers. Sales are almost
exclusively of "PerfectData" branded products. To support this channel of
distribution, "PerfectData" product packaging and instructions are
multi-lingual with most products available with a minimum of four languages.
For fiscal years ended March 31, 1997, 1996 and 1995, approximately 11%, 13%,
and 10% respectively of the Company's net sales were to International accounts.
While the Company sold products to more than 700 customers throughout the
world during fiscal 1997, approximately 78% of the Company's net sales were
accounted for by its 10 largest customers. Sales to PriceCostco accounted for
42% of total sales. Sales to this customer were made pursuant to specific
purchase orders and the customer is not obligated under any other agreement. No
other customer accounted for more than 10% of the Company's net sales. In June
1997, subsequent to fiscal year end, the Company learned that its bid for the
continuing business of PriceCostco had been rejected. The loss of this customer
could possibly have a significant adverse effect on future earnings of the
Company.
<PAGE>
SALES ORGANIZATION
DOMESTIC SALES. Sales of products under the trademark "PerfectData" are
made by independent manufacturers' representative groups, dealers and large
distributors. Sales of the Company's products to Original Equipment
Manufacturers under private label arrangements are handled by Company sales
personnel located in California and, on a selected basis, by certain assigned
independent manufacturers' representatives. Agreements between the Company and
manufacturers' representatives or distributors may be terminated on short notice
by either party.
INTERNATIONAL SALES. Prior to February 1988, virtually all sales to
accounts in Western Europe were under the supervision of the Company's
wholly-owned subsidiary, PerfectData International (PDI). Originally acquired
in March 1984, PDI was terminated as the Company's sales agent for Western
Europe in February 1988. The Company substantially completed the liquidation of
PDI during fiscal 1991.
Amaray Data International Limited, a wholly-owned subsidiary of Amaray
International Corporation was appointed as the Company's exclusive distributor
for the United Kingdom in February of 1988. In June 1989, Hunt Manufacturing,
Inc., a U.S. company, purchased the Computer Products Division of Amaray
International Corporation. The United Kingdom subsidiary then became Hunt Data
Products Europe, Ltd. The Company terminated its distribution agreement with
Hunt Data Products Europe Ltd. in April 1992. S.C.E., a newly formed stationery
and computer equipment products distributor staffed by experienced former
employees of the Hunt organization was appointed as the Company's sole European
distributor effective May 1, 1992.
In January 1990, Hunt Canada International became the exclusive distributor
of "PerfectData" branded products for all of Canada.
In addition to S.C.E. and Hunt Canada, approximately 20 International
Distributors sell the Company's products worldwide.
Agreements between the Company and its foreign distributors may be
terminated on short notice by either party.
CUSTOMER SERVICE AND SUPPORT. In order to enhance customer service,
training, field support and technical support, the Company has a toll free 800
phone number.
All products are sold with a "return to manufacturer" warranty for
replacement of damaged or defective goods only. All CareWare cleaning and
maintenance products are warranted for ninety days from date of purchase; all
CopyHolder Systems and Accessories are warranted for a one year period of time.
Dealers and Distributors are required to perform this replacement service on
behalf of the Company.
<PAGE>
All products returned for warranty replacement must receive a written return
authorization receipt from the Company prior to the return of any goods. Costs
incurred annually by the Company for product warranties have been insignificant.
BACKLOG
At March 31, 1997 the Company had orders, scheduled for delivery within a
ninety day period or less, aggregating approximately $82,000 as compared with a
backlog of approximately $52,000 at March 31, 1996. Purchase order release
lead-times depend upon the scheduling practice of the individual customer, and
the rate of booking new orders fluctuates from month-to-month; however, most
orders are placed for immediate shipment. Under certain conditions, customers
may cancel or delay orders without significant monetary penalties. Therefore,
the level of backlog at any one time is not necessarily indicative of the trends
in the Company's business.
COMPETITION
The Company believes that during fiscal year 1997, neither the Company nor
any of its competitors had a dominant position in the cleaning and maintenance
market. There are many competitors in this market. However, some of the
competitors are substantially larger in size and have greater financial
resources than the Company.
Currently the Company has a minor share of the ergonomic and accessory
market. Fellowes is currently the dominant force in this segment of the
industry.
The Company believes that the effectiveness, quality, service and the price
competitiveness of its products, along with its marketing efforts and programs,
new product introductions and responsiveness to accounts' needs, have been the
principal basis on which it competes in these industry segments.
The Company's ability to maintain or increase its market share and expand
its business will depend in large measure, on its ability to conceive, design,
develop and introduce new products to its existing product lines; to continue to
offer more products within the Company's established channels of distribution;
to enter new markets and/or open new channels of distribution with related
product offerings.
MATERIALS AND SUPPLIES
The nature of the raw materials used in the Company's products are various
chemicals, metals, plastics and paper goods. The Company assembles and/or
packages its cleaning/maintenance and ergonomic products in the United States
from materials and supplies purchased primarily from domestic vendors and
sub-contractors.
<PAGE>
Some of the assembled component parts are manufactured by vendors located in
Mexico and the Far East because it is more cost effective to obtain goods and
fabrication expertise at significantly reduced costs when compared with
purchasing the same goods domestically.
The Company believes that its established relationships with its vendors
and suppliers are in good order and that it has not experienced any significant
production delays or loss of revenue due to the lack of parts or material
shortages.
The Company, as a matter of standard business procedures regularly reviews
its vendor relationships and continually searches for new sources and ways to
produce its products both domestically and internationally with the improvement
of quality, delivery or lowered cost of goods as its goals.
PATENTS AND LICENSES
The Company believes strongly in enforcing its patent rights and has taken,
and will continue to take, appropriate action against anyone whom it believes is
marketing products which infringe upon its patents.
EMPLOYEES
At March 31, 1997 the Company employed 21 persons, of whom approximately 8
were engaged in assembly and testing, 5 in marketing and sales, and 8 in general
management and administration.
The Company believes that its relations with its employees are good. The
Company has never had a work stoppage and none of its employees are represented
by a labor union. The expansion of the Company's operations will be dependent,
in part, on its ability to attract and retain highly qualified employees.
DISCONTINUED OPERATIONS
The Company previously entered the Telecommunications industry during
fiscal 1992 through the purchase of assets of Anchor Automation, Inc., a modem
manufacturer. Subsequently the Company designed and developed a new family of
data and data/fax modems. Over the next two years the Company's sales of modems
declined and profit margins eroded dramatically. Competitors added more
advanced features to their products while lowering pricing, making it difficult
if not impossible for the Company to successfully market modems. It became
clear that the Telecommunications business belongs to the major corporations who
have all the financial resources and technology necessary to compete in the
increasingly volatile marketplace.
In its continuing effort to sustain sales growth, during the end of the
first quarter of fiscal 1994 the Company purchased certain inventory and fixed
<PAGE>
assets of SubSystems Company, a distributor of computer accessories associated
with the transmission of data. The Company immediately began selling the cables
and switch boxes through its existing telecommunication channels of
distribution. It quickly became apparent that the marketplace was highly
competitive. The Company found it could not compete domestically with off-shore
pricing from the Far East as well as Mexico.
In the first quarter of fiscal 1995 the Company made the decision to
discontinue operations of these products and stop the outflow of cash associated
with these operations and refocus as a lean and restructured company on its
continuing business lines, which include its core business, care and maintenance
products. During fiscal 1996, the Company completed liquidation of its
remaining inventory of these discontinued products.
ITEM 2. PROPERTIES
The Company relocated its Corporate offices and production facilities
during June 1993. The Company had previously leased a 13,000 square foot
building in Simi Valley, California, on a month-to-month basis. It had entered
into a long-term lease for a building to be constructed in Simi Valley for
the specific needs of the Company. The modern industrial building, comprising
approximately 24,500 square feet, was completed during June 1993. The lease is
for a term of ten years and includes an option to purchase.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit was filed against PerfectData in the Superior Court of Orange
County, California on May 11, 1995. The lawsuit involves product liability
resulting in a loss of life. On June 4, 1996, judgement was found in favor of
the Company with no liability. Plaintiff subsequently filed an appeal of the
jury verdict and the appeal is currently pending with the 4th District Court of
Appeal in Santa Ana, California. The Company has no exposure in the appeal
since the litigation is covered by a general liability policy issued by CNA
Insurance.
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.
<PAGE>
This employment contract was entered into in conjunction with the purchase, by
the Company, of a computer cable business from the individual. The award was
comprised of damages of $136,525 and attorneys' fees and other costs of $66,878.
The Company had accrued $16,152 in prior years to cover its anticipated
liability with respect to this lawsuit. The cable business was abandoned in
1994 and is reported as a discontinued operation. The additional $187,251 had
been accrued and expensed as part of discontinued operations during the fiscal
year ended March 31, 1996. 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 in
an attempt to distribute or otherwise sell their product, "Perfect Cleaner".
The product would compete directly with the Company's line of products known as
PerfectDuster, PerfectDuster Plus and PerfectDuster II Plus. 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 has been set for trial
December 1, 1997.
Subsequent to fiscal year ending March 31, 1997 the parties reached a
global settlement of both actions. The Company will pay 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 is 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 have agreed to have this
issue decided by a judge. There is currently no date set for this hearing.
The past CFO of PermaByte Magnetics, Inc. (PMI) filed a complaint in the
Superior Court of San Diego County, California, for unpaid wages and fraudulent
conveyance against PMI, the Company, the Company's chairman and a director of
the Company. The former CFO claims that PMI owes her approximately $30,000 for
unpaid vacation which had accrued prior to her termination. She also alleges
that the defendants, including the Company, improperly diverted PMI assets to
the Company. During a demurrer to the First Amended Complaint, the former CFO
failed to properly seek leave of court to file a second amended complaint.
Consequently, the court dismissed the entire action. In August 1996, the former
CFO filed a notice of appeal with the 4th appellate District Court of Appeal in
San Diego, California. The appeal is currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is traded in the over-the-counter market
and is quoted on NASDAQ under the symbol PERF. It is located in the NASDAQ
Small Cap listing. The following table sets forth the range of high and low bid
quotations per share of Common Stock of the Company for the indicated quarters
of the fiscal years ended March 31, 1997 and 1996, as reported by NASDAQ. All
quotations have been rounded to the nearest one-eighth. Such prices represent
inter-dealer quotations without adjustment for retail markup, markdown, or
commission and do not necessarily represent actual transactions.
The approximate number of shareholders at March 31, 1997 was 1,000
determined by security position listings. On July 18, 1996 the Company
distributed to its shareholders a dividend in the form of one share of stock in
Starnet Universe Internet,Inc., a privately held corporation, for each twenty
shares of PerfectData stock. On May 6, 1997, the Company announced that a
dividend will be distributed to its shareholders in the form of shares of stock
in Vision Aerospace, Inc., a privately held corporation.
BID PRICE
HIGH LOW
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1997
First Quarter 6 1/4 1 1/8
Second Quarter 3 1/2 1 5/8
Third Quarter 3 3/4 1 7/8
Fourth Quarter 4 1/2 1 7/8
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1996
First Quarter 1 3/8 1
Second Quarter 2 1/8 1 1/8
Third Quarter 1 3/4 1 1/8
Fourth Quarter 1 3/8 1 1/8
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The last bid price for the Company's Common Stock as of
June 20, 1997 was 2.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data which are
derived from and qualified in their entirety by the more detailed Financial
Statements included in Item 14 herein.
SELECTED STATEMENTS OF EARNINGS DATA
FISCAL YEAR ENDED MARCH 31,
1997 1996 1995 1994 1993
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(Dollars in thousands, except per share information)
Net Sales $5,761 $6,054 $7,214 $6,783 $7,806
Income from continuing
operations before
income taxes 25 144 171 51 1,038
Income tax benefit
(or provision) (290) (20) 359 (13) (444)
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Income (loss) from
continuing operations (265) 124 530 38 594
Income (loss) from
discontinued operations - - 18 (833) (262)
Gain (loss) on disposal
of discontinued
operations (69) (101) (179) - -
Extraordinary credit - - - - 182
Cumulative effect of
change in accounting
principle - - - 393 -
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Net Income/(Loss) $ (334) $ 23 $ 369 $ (402) $ 514
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Earnings (loss)
per share of
common stock:
Continuing operations (.09) .04 .16 .01 .17
Discontinued operations (.02) (.03) (.05) (.24) (.08)
Extraordinary credit - - - - .06
Cumulative effect of
change in accounting
principle - - - .11 -
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Net earnings $ (.11) $ .01 $ .11 $ (.12) $ .15
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Weighted average
shares
outstanding 3,089 3,107 3,422 3,488 3,403
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<PAGE>
SELECTED BALANCE SHEET DATA
AS OF MARCH 31,
1997 1996 1995 1994 1993
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(Dollars in thousands)
Working Capital $2,940 $2,900 $2,892 $3,423 $3,944
Total Assets 4,298 4,630 4,705 4,977 5,194
Net Shareholders'
Equity 3,500 3,792 3,889 4,048 4,402
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1997 net sales from continuing operations decreased to $5,761,000
from $6,054,000 in fiscal 1996 and $7,214,000 in fiscal 1995. Sales decreased
in fiscal 1997 due to lower selling prices, although unit sales increased over
fiscal 1996.
The United States Environmental Protection Agency announced a ban,
effective January 1, 1994 on Chlorodifluoromethane. This chemical was contained
in a compressed gas duster that represented approximately 16% of net sales in
fiscal 1995, and approximately 10% of net sales in fiscal 1996. This product
was offered in two different sizes. The Company promoted this product and
depleted its inventory of the most popular size in fiscal 1995, and the less
popular size in fiscal 1996. Approximately 47% of the decrease in fiscal 1996
sales was attributed to the close-out sale of this product held during fiscal
1995.
The Company developed and offered replacement products during fiscal 1994
that did not contain the banned chemical. The Company offered a choice of
chemical fills in various sizes. During fiscal 1995, the replacement products
were more readily accepted and sales increased. Sales of the replacement
products during fiscal 1995 represented approximately 47% of net sales and 56%
of net sales during fiscal 1996.
The decrease in fiscal 1996 net sales was also due to increased competition
in the marketplace and inadequate sales and marketing efforts by the Company.
The Company subsequently reorganized its sales structure as well as set up a new
Sales Coordination Department to interface with an expanded sales representative
network. During the first quarter of fiscal 1997, the Company appointed a new
Director of Sales and Marketing with extensive skills and experience in sales
and marketing management.
<PAGE>
Cost of sales from continuing operations as a percentage of net sales has
been approximately 66% for each of the last three fiscal years. Whereas the
Company has lowered selling prices, so too has the cost of the products been
reduced.
Selling, General and Administrative Expenses from continuing operations for
fiscal 1997, 1996, and 1995 were $2,030,000, $2,032,00 and $2,307,000
respectively. The decrease in fiscal 1996 is primarily due to the decrease in
sales volume. Included in Selling, General and Administrative Expenses are
prepaid freight on qualifying orders, commission paid to independent sales
representatives, and co-op advertising allowances to qualifying customers, which
are variable expenses that fluctuate with sales. Although sales declined in
fiscal 1997 due to lower pricing, these variable expenses did not fluctuate with
the sales since the Company offered qualifying customers more aggressive co-op
advertising programs.
Other income for fiscal 1997, 1996 and 1995 was primarily interest income
of $28,000, $40,000 and $28,000 respectively; royalty income of $10,000, $11,000
and $20,000 respectively; and dividend and option income of $47,000, $30,000 and
$16,000 respectively.
During the first quarter of fiscal 1995, the Company made the decision to
discontinue its operations in the telecommunications industry which consisted of
modems, cables and switch boxes. The substantial losses from this operation
were a result of declining sales, dramatically eroding profit margins and major
competitors who have all the financial resources and technology necessary to
compete in the increasingly volatile marketplace. The Company immediately
stopped the outflow of cash associated with these operations. By March 31,
1996, the inventory had been liquidated. The loss from discontinued operations
is directly related to a judgement against the Company in favor of a former
employee for breach of an employment contract. The employee had been employed
to work exclusively in the Company's cable segment which had been discontinued.
The Company appealed the judgement 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. The loss on
discontinued operations for fiscal 1997 is primarily due to legal fees relative
to the appeal.
In June 1997, subsequent to fiscal year end, the Company learned that its
bid for the continuing business of PriceCostco had been rejected. During fiscal
1997, PriceCostco accounted for 42% of the company's total sales. The loss of
this customer could possibly have a significant adverse effect on future
earnings of the Company. Due to this, the possibility exists that the Company
may not realize the benefits of its net operating loss carryforwards before they
expire. Consequently, the tax benefit that's not expected to be utilized has
been reserved, resulting in the substantial loss from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
The cash position at March 31, 1997 is $891,000 including certificates of
deposit of $160,000. The Company continues to maintain a line of credit for
$1,000,000, which it has not yet used.
<PAGE>
As previously discussed, the Company appealed the judgement awarded a
former employee relating to an employment contract. The Company had posted an
appeal bond which it secured by a Certificate of Deposit for $305,000, which is
not included in Cash and Equivalents.
In June 1997, the Company re-bid to continue to supply PriceCostco through
July 1998 at a slight loss in order to maintain visibility. However, the
Company lost that bid to a competitor. Due to the loss of the PriceCostco
account subsequent to year end, the Company will implement severe cost-cutting
measures to counteract the effects of the reduced volume of business.
Management has already renegotiated certain purchase contracts to reduce its
cost of materials and taken steps to restructure key departments to yield
additional savings. To grow sales and earnings, management strategy is twofold:
strong sales and marketing programs to gain new accounts, and new product
development together with additional support and promotion to increase the
volume of business with existing accounts.
At March 31, 1997 the Company had net operating loss and general business
tax credit carry forwards for income tax purposes of approximately $2,610,000
and $174,109 respectively, available to reduce future potential Federal income
taxes.
In April 1993 the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Previously, the Company used the APB 11 approach that gave no recognition to
future events other than the recovery of assets and settlement of liabilities at
their carrying amounts. Under SFAS 109 the Company recognizes to a greater
degree the future tax benefits of expenses, primarily comprised of tax NOL
carryforwards and inventory reserves, which have been recognized in the
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
to the financial statements and supplementary data listed in Item 14 of Part IV
of this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Joseph Mazin 50 President, Chief Executive
Officer, Director and
Chairman of the Board
Bruce D. Stuart 49 Vice President
and Director
Tracie Savage 34 Director
Gerald W. Chamales 45 Director
Irene J. Marino 53 Vice President Finance,
Chief Financial Officer
and Corporate Secretary
Mr. Joseph Mazin was appointed in June 1993 to be a Director of the Company
by the unanimous consent of the Board. Mr. Mazin was appointed Chairman,
President and Chief Executive Officer of the Company in October 1993. He is the
Chairman of the Board, President and Chief Executive Officer of Flamemaster
Corporation, a publicly traded specialty chemicals manufacturer. He is also
Chairman of the Board of Altius Corporation, a former manufacturer of industrial
steel products. Mr. Mazin has held such positions for more than five years. He
is also the Chairman and Chief Executive Officer of Starnet Universe Internet,
Inc., an Internet commerce company that was incorporated in December 1995.
Mr. Bruce D. Stuart was appointed in June 1993 to be a Director of the
Company by the unanimous consent of the Board. Mr. Stuart was appointed Vice
President and Special Counsel in October 1993. In August 1994 he was elected
Chairman of the Board and Chief Executive Officer of PermaByte Magnetics, Inc.,
where he has served as President since April 1994 and as a Director since
September 1993. He is a practicing attorney and general counsel for both
Flamemaster Corporation and Altius Corporation. He also serves as Corporate
Secretary for both Corporations. Mr. Stuart has held such positions for more
than five years. He is also the President and Corporate Secretary of Starnet
Universe Internet, Inc., an Internet commerce company that was incorporated in
December 1995.
<PAGE>
Ms. Tracie Savage was appointed in July 1995 to be a Director of the
Company by the unanimous consent of the Board. She joined NBC-TV Los Angeles, a
Television Subsidiary of National Broadcasting Company, Inc. in March 1994. Ms.
Savage is the co-anchor of NBC 4's "Today in LA: Weekend" and also serves as a
general assignment reporter for the "Channel 4 News". From 1991 to 1994 she was
a general assignment reporter for the independent Los Angeles station, KCAL.
Ms. Savage has been in broadcast journalism for ten years and has been the
recipient of numerous awards and honors in her field.
Mr. Gerald W. Chamales was appointed in July 1995 to be a Director of the
Company by the unanimous consent of the Board. He is the President and Chief
Executive Officer of Omni Computer Products and President and Chief Executive
Officer of Quantum Manufacturing Corporation. In 1982, Mr. Chamales founded
Omni Computer Products, a manufacturer and marketer of consumable computer
supplies and also founded Quantum Manufacturing, a light manufacturer and
recycler of printer supplies which are sold through Omni's distribution
channels. Mr. Chamales is a General Partner for Sun Valley Ventures, a private
investment firm which he founded in 1993.
Ms. Irene J. Marino originally joined the Company in March 1982 and
rejoined the Company in September 1987 after a leave of approximately four
months. Ms. Marino was promoted to Manager of Finance and Administration in
March 1983 and to Controller and Assistant Secretary in March 1986. Upon
rejoining the Company in September 1987, Ms. Marino assumed the positions of
Controller, Chief Financial Officer and Secretary of the Company. She was
appointed Vice President of Finance in August 1989, and has more than 30 years
experience in finance, accounting and administration. Ms. Marino is also the
V.P. Finance of Starnet Universe Internet Inc., an Internet commerce company
that was incorporated in December 1995.
Directors of the Company are elected annually. The present term of office
of each director will expire at the next annual meeting of shareholders of the
Company or at such time as his successor is duly elected and qualifies.
Officers serve at the discretion of the Board of Directors of the Company.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning the
compensation earned for services rendered in all capacities to the Company
during each of the last three fiscal years by the Company's Chief Executive
Officer. No other executive officer of the Company earned in excess of
$100,000:
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS
------
RESTRICTED
NAME AND STOCK OPTIONS
PRINCIPAL POSITION YEAR SALARY($) (1) BONUS($) AWARDS($) SARS(#)
- ------------------ ---- ------------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Joseph Mazin 1997 $63,365 $ - $49,875 (2) 90,000 (3)
President, Chief 1996 65,135 - 24,938 90,000
Executive Officer and 1995 51,593 - 24,938 90,000
Chairman of the Board
</TABLE>
(1) There are no employment agreements or contracts between the
Company and Joseph Mazin.
(2) Joseph Mazin holds a total of 21,000 shares of Restricted
Common Stock from Stock Awards with an aggregate market value
of $49,875 at March 31, 1997.
(3) These options were granted during fiscal 1994.
The exercise price was adjusted during fiscal 1995.
EMPLOYEE STOCK OPTION PLAN
In 1979 the Company adopted its Employee Stock Option Plan and amended it
in 1981 (the "1979 Plan"). The 1979 Plan, which expired December 31, 1988,
provided for the grant of incentive stock options to officers and other key
employees of the Company. The 1979 Plan covers an aggregate of 290,660 shares
of Common Stock. During the year ended March 31, 1996, options to purchase
1,000 shares of Common Stock expired. There was no activity under the Plan
during the year ended March 31, 1997. A total of 99,166 shares of Common Stock
have been issued upon the exercise of options granted under the 1979 Plan. No
options remain outstanding.
1985 EMPLOYEE STOCK OPTION PLAN
In January 1985, the Board of Directors of the Company established the
Company's 1985 Employee Stock Option Plan (the "1985 Plan"). In November 1985,
the shareholders of the Company approved the Plan. During the current year, the
Board of Directors voted to extend the term of the plan by twelve months thereby
making the new expiration date December 31, 1996. The 1985 Plan, provided for
the grant of both non-qualified stock options and incentive stock options to
officers and other key employees of the Company and for the grant of
non-qualified stock options to non-employee Directors of the Company. The 1985
Plan covers an aggregate of 500,000 shares of Common Stock. During the fiscal
year ended March 31, 1997 14,500 options were granted to key employees of the
Company. During the fiscal year ended March 31, 1997, 27,500 options were
exercised. At March 31, 1997, options covering a total of 199,500 shares of
Common Stock were outstanding at an average exercise price of $1.037 per share.
Options covering a total of 263,750 shares of the Company's Common Stock have
been
<PAGE>
cancelled through March 31, 1997. A total of 216,250 shares of Common Stock
have been issued upon the exercise of options granted under the 1985 Plan. The
1985 Plan is administered by the Board of Directors of the Company. The
exercise price of options granted must not be less than 100% of the fair market
price of the Common Stock of the Company on the date of grant. The rate at
which options granted under the 1985 Plan will be exercisable shall be
determined by the Board of Directors at the time of the grant of the option,
provided that the option may become exercisable in full no faster than annually
over a two-year period and no slower than annually over a five-year period.
Options which have been granted under the 1985 Plan are exercisable annually
with respect to 25% of the total number of shares covered by the option.
Options may not be exercised after the expiration of ten years from the date of
grant, are non-transferable, other than by will or inheritance, and may be
exercised only while an optionee is employed by the Company, except that an
option may provide that it will be wholly or partially exercisable (a) within
three months after an optionee's termination of employment for any reason other
than cause, (b) within one year after an optionee's termination of employment,
if such employment is terminated by reason of the optionee's death or permanent
disability or if the optionee dies or becomes permanently disabled within three
months after the termination of the optionee's employment, and (c) within thirty
days after the termination of an optionee's employment for cause. The
termination of a non-employee Director's employment is deemed to occur on the
termination of his status as a Director of the Company.
1983 STOCK BONUS AND PURCHASE PLAN
In May 1983, the Company adopted an Employee Stock Bonus and Purchase Plan
(the "Bonus Plan") and amended it in 1987 and 1989. The Bonus Plan, which
expired May 17, 1993, provided for the issuance of a maximum of 745,330 shares
of Common Stock of the Company to certain officers or other key employees of the
Company. The Bonus Plan is administered by the Board of Directors of the
Company which determines to whom shares shall be issued, the number of shares
which may be issued to any participant, whether shares shall be issued as a
stock bonus without consideration (other than services), or alternatively, the
price for which shares shall be purchased by the participant and the manner and
time of payment of such price, the length of time during which shares may be
issued to the participant (which may not be more than five years from the date
the agreement providing for the issuance is executed), whether the participant
must continue to serve as an officer or key employee for a specified period of
time following execution of such agreement to avoid forfeiture of some or all of
such shares to the Company or a right in the Company to repurchase such shares,
and such other terms and conditions as the Board of Directors may specify which
are not inconsistent with the provisions of the Bonus Plan.
<PAGE>
The Company had entered into stock bonus agreements to issue through 1992
under the Bonus Plan up to an aggregate of 126,269 shares of Common Stock (net
of shares covered by agreements cancelled through March 31, 1993) as stock
bonuses to certain key employees. At March 31, 1993, all 126,269 shares had
been issued.
The Company had also entered into stock purchase agreements to issue under
the Bonus Plan up to an aggregate of 101,000 shares of Common Stock (net of
shares covered by agreements cancelled or expired through March 31, 1995), at an
average price of $.5687 per share. At March 31, 1995, all 101,000 shares had
been issued.
OPTION GRANTS, EXERCISES AND HOLDINGS
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
No stock options or stock appreciation rights (Scars) were granted to the
Company's Chief Executive Officer named in the Summary Compensation Table during
the fiscal year ended March 31, 1997.
The following table provides certain summary information concerning the
exercise of options during the 1997 fiscal year and unexercisable options held
as of the end of the 1997 fiscal year by the Chief Executive Officer named in
the Summary Compensation Table:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
VALUE
NUMBER OF UN-
OF UN- EXERCISED
EXERCISED IN-THE-
SHARES OPTIONS MONEY
ACQUIRED HELD OPTIONS
ON VALUE AT FISCAL AT
NAME EXERCISE REALIZED YEAR END FY-END(2)
(#) ($) (#)
Joseph Mazin - $ - 90,000 (1) $129,375
(1) As of March 31, 1997, 73,750 options were exercisable.
(2) Such value is based upon the market value of the Company's Common Stock as
of March 31, 1997, less the exercise price payable per share under such
options.
<PAGE>
DIRECTOR COMPENSATION
No director receives cash compensation from the Company for services
provided as a director. Non-employee directors may be granted non-qualified
stock options as provided for under the Company's 1985 Employee Stock Option
Plan ("1985 Plan"). During the fiscal year ended March 31, 1997, no new options
were granted to non-employee directors of the Company.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May 31, 1997, certain information
with respect to all shareholders known by the Company to be beneficial owners of
more than 5% of its outstanding common stock, all directors, and all officers
and directors of the Company as a group:
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES (1) INTEREST(2)
- ------------------- ---------- -----------
Flamemaster Corporation 647,697 20.9
11120 Sherman Way
Sun Valley, CA 91252
Leland P. Polak and 291,000 9.4
Mark E. Polak
11494 Burbank Blvd.
North Hollywood, CA 91601
William R. Woodward 213,349 6.9
Successor & Special Trustee
Richard M. Drysdale Trust
116 26th Street
Santa Monica, CA 90402
Joseph Mazin 890,447 (3)(4)(5) 26.4
110 West Easy Street (6)
Simi Valley, CA 93065
Bruce D. Stuart 92,470 (7)(8) 1.1
8501 Wilshire Blvd.
Beverly Hills, CA 90211
Tracie Savage 10,100 (9) (11)
3000 W. Alameda Avenue
Burbank, CA 91523
Gerald W. Chamales 10,725 (10) (11)
2301 E. Del Amo Blvd.
Carson, CA 90220
All officers and directors 1,010,742 (3)(4)(5) 27.6
as a group (5 persons) (6)(7)(8)
(9)(10)(12)
- ------------------------------------
- ---------------------
<PAGE>
(1) All shares are owned directly by the owner named in the table except as
otherwise indicated in a footnote below.
(2) Percentages are based on the number of shares of Common Stock outstanding
on May 31, 1997. There were 3,093,700 shares of Common Stock outstanding
on May 31, 1997.
(3) Includes 647,697 shares owned by Flamemaster Corporation for which
Mr. Mazin has voting power as President, Chairman and CEO of Flamemaster
Corporation.
(4) Includes 23,000 shares owned by Altius Investment Corporation for which
Mr. Mazin has voting power as Chairman of the Board of Altius Investment
Corporation.
(5) Includes 25,000 shares which are covered by a stock option which was
granted June 28, 1993, and which is exercisable at any time on or before
June 28, 2003. Percentage of interest excludes these shares.
(6) Includes 48,750 shares which are covered by a stock option which was
granted November 24, 1993, and which is exercisable at any time on or
before November 24, 2003. Percentage of interest excludes these shares.
(7) Includes 25,000 shares which are covered by a stock option which was
granted June 28, 1993, and which is exercisable at any time on or before
June 28, 2003. Percentage of interest excludes these shares.
(8) Includes 33,750 shares which are covered by a stock option which was
granted November 24, 1993, and which is exercisable at any time on or
before November 24, 2003. Percentage of interest excludes these shares.
(9) Includes 10,000 shares which are covered by a stock option which was
granted July 20, 1995, and which is exercisable at any time on or before
July 20, 2005. Percentage of interest excludes these shares.
(10) Includes 10,000 shares which are covered by a stock option which was
granted July 20, 1995, and which is exercisable at any time on or
before July 20, 2005. Percentage of interest excludes these shares.
(11) Represents less than one percent.
(12) Includes an aggregate of 5,000 shares which were not actually
outstanding as of May 31, 1997, but which are covered by options held
by an Officer of the Company which, to the extent of such number of
shares, are exercisable within sixty days of such date and assumes
exercise of such options as to all of such number of shares.
Percentage of interest excludes these options.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Mazin, President and Chief Executive Officer of the Registrant, is also
President and Chief Executive Officer of Flamemaster Corporation, a publicly
traded specialty chemicals manufacturer. Flamemaster Corporation has acted, in
the normal course of its business, as a manufacturer of certain products for the
Company. For the fiscal year, sales of products to the Company approximated
$12,322.
Mr. Chamales, a Director of the Registrant, is also President and Chief
Executive Officer of Omni Computer Products, a manufacturer and marketer of
consumable computer supplies. Omni Computer Products, in the normal course of
its business, is a customer and has purchased certain products from the Company.
For the fiscal year, purchases of products from the Company approximated
$19,912.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) DOCUMENTS FILED WITH REPORT
(1) FINANCIAL STATEMENTS
The financial statements listed on the accompanying
Index to Financial Statements and Schedules are filed as part of
this report.
(2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules listed on the accompanying
Index to Financial Statements and Schedules are filed as part of
this report.
(3) EXHIBITS
The exhibits listed on the accompanying Index to Exhibits
are filed as part of this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended March 31, 1997.
<PAGE>
PERFECTDATA CORPORATION
SEC FORM 10-K
ITEMS 8, 14(a) AND 14(d)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS
- --------------------
Independent Auditors' Report - March 31, 1997
Balance Sheets - March 31, 1997 and 1996
Statements of Earnings -
Years Ended March 31, 1997, 1996 and 1995
Statements of Shareholders' Equity -
Years Ended March 31, 1997, 1996 and 1995
Statements of Cash Flows -
Years Ended March 31, 1997, 1996 and 1995
Notes to Financial Statements
SCHEDULES
- ---------
Valuation and Qualifying Accounts Schedule VIII
All other schedules are omitted as the required information is not
applicable or the information is presented in the Financial Statements or Notes
thereto.
<PAGE>
June 18, 1997
Board of Directors and Shareholders
PERFECTDATA CORPORATION
Simi Valley, California
We have audited the balance sheets of Perfectdata Corporation as of March 31,
1997 and 1996, and the related statements of earnings, shareholders' equity and
cash flows for the years ended March 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of PerfectData Corporation, as of March 31,
1997 and 1996, and the results of their operations and their cash flows for the
years ended March 31, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
Beckman & Associates
<PAGE>
PERFECTDATA CORPORATION
Balance Sheets
(Dollars in thousands, except number of shares)
MARCH 31,
------------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents, including
short-term certificates of deposit of
$160 in both 1997 and 1996 (Note 2) $ 891 $ 672
Accounts receivable, less allowance for
doubtful receivables of $9 and $11 in 1997
and 1996, respectively (Note 2) 707 903
Inventories (Note 4) 1,183 1,245
Prepaid expenses and other current assets 77 85
Marketable securities, short-term (Note 3) 399 323
Current assets of discontinued operations (Note 15) 115 88
Deposit on litigation award (Note 12) 305 305
Deferred income tax benefit (Note 8) 61 117
---------- ----------
Total current assets 3,738 3,738
Property, plant and equipment, net (Note 5) 155 248
Deferred income tax benefit (Note 8) 369 603
Investment in affiliate (Note 6) 5 22
Other assets, net 31 19
---------- ----------
$ 4,298 $ 4,630
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 324 $ 374
Accrued expenses 153 193
Accrued salaries, wages and vacation 56 68
Current liabilities of discontinued
operations (Note 15) 265 203
---------- ----------
Total current liabilities 798 838
---------- ----------
Commitments and contingencies (Note 12)
Shareholders' equity (Notes 9 and 10):
Preferred stock. Authorized 2,000,000
shares; none issued
Common stock, no par value. Authorized
10,000,000 shares; issued and outstanding
3,094,000 and 3,069,000 shares in 1997
and 1996, respectively 8,051 8,026
Accumulated deficit (4,546) (4,212)
Allowance for loss on marketable securities (5) (22)
---------- ----------
Net shareholders' equity 3,500 3,792
---------- ----------
$ 4,298 $ 4,630
---------- ----------
---------- ----------
See accompanying notes to financial statements.
<PAGE>
PERFECTDATA CORPORATION
Statements of Operations
(Dollars in thousands, except per share information)
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net sales $ 5,761 $ 6,054 $ 7,214
-------- -------- --------
Costs and expenses
Cost of goods sold 3,787 3,966 4,785
Selling, general and
administrative expenses 2,030 2,032 2,307
-------- -------- --------
Total cost and expenses 5,817 5,998 7,092
-------- -------- --------
Income from operations (56) 56 122
-------- -------- --------
Other income and (expense)
Equity in earnings of affiliate (15) - (30)
Interest income, net 28 40 28
Other, net 68 48 51
-------- -------- --------
Total other income and (expense) 81 88 49
-------- -------- --------
Income from continuing
operations before income taxes 25 144 171
Income tax benefit (or provision) (Note 7) (290) (20) 359
-------- -------- --------
Income from continuing operations (265) 124 530
Income from discontinued operations (Note 14) - - 18
Loss on disposal of discontinued operations (69) (101) (179)
-------- -------- --------
Net income (loss) $ (334) $ 23 $ 369
-------- -------- --------
-------- -------- --------
Net income (loss) per common share:
Income (loss) from continuing operations $ (.09) $ .04 $ .16
Income (loss) from discontinued operations - - -
Loss on disposal of discontinued operations (.02) (.03) (.05)
-------- -------- --------
$ (.11) $ .01 $ .11
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PERFECTDATA CORPORATION
Statements of Shareholders' Equity (Notes to 8 and 9)
(in thousands)
<TABLE>
<CAPTION>
Allow-
ance for Net
Accumu- gain / share-
Common Stock lated (loss) on holders'
Shares Amount deficit mkt. sec. equity
------------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994 3,554 $8,652 $(4,604) $ - $ 4,048
Stock issued under bonus plan 50 28 - - 28
Stock issued upon exercise
of stock options 50 31 - - 31
Stock repurchased and retired (498) (573) - - (573)
Net unrealized gain/loss on
marketable securities - - - (14) (14)
Net earnings - - 369 - 369
------ ------ ------ ------ ------
Balance at March 31, 1995 3,156 8,138 (4,235) (14) 3,889
Stock repurchased and retired (87) (112) - - (112)
Net unrealized gain/loss on
marketable securities - - - (8) (8)
Net earnings - - 23 - 23
------ ------ ------ ------ ------
Balance at March 31, 1996 3,069 8,026 (4,212) (22) 3,792
Stock issued upon exercise
of stock options 28 29 - - 29
Stock repurchased and retired (3) (4) - - (4)
Net unrealized gain/loss on
marketable securities - - - 17 17
Net loss - - (334) - (334)
------ ------ ------ ------ ------
Balance at March 31, 1997 3,094 $8,051 $(4,546) $ (5) $ 3,500
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PERFECTDATA CORPORATION
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (334) $ 24 $ 369
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
(Income) loss from discontinued operations - - (18)
(Gain) loss on disposal of discontinued operations 111 101 (98)
Depreciation and amortization 95 126 132
Provision for doubtful receivables (2) (19) (5)
Loss on investment in affiliated company - - 30
Unrealized gain (loss) on marketable securities 17 (8) (8)
Deferred income tax (benefit) provision 290 20 (360)
Increase in litigation deposit - (305) -
(Increase) decrease in accounts receivable 198 162 91
(Increase) decrease in inventories 62 10 709
(Increase) decrease in prepaid expenses and
other current assets 8 29 28
(Increase) decrease in other assets (13) 12 10
Increase (decrease) in accounts payable (49) (85) (63)
Increase (decrease) in accrued expenses (39) (69) (44)
Decrease in accrued salaries, wages and vacation (13) (2) (15)
-------- -------- --------
Net cash provided (used) by operating activities 331 (4) 758
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (2) (24) (119)
Increase in investment in affiliated company 17 (22) (30)
(Increase) decrease in investment securities, net (76) (83) (164)
-------- -------- --------
Net cash used in investing activities (61) (129) (313)
-------- -------- --------
Cash flows from financing activities:
Common stock issued under bonus plan - - 28
Exercise of stock options 29 - 31
Repurchase of common stock (4) (112) (573)
-------- -------- --------
Net cash provided (used) by financing activities 25 (112) (514)
-------- -------- --------
Net cash provided (used) by continuing operations 295 (245) (69)
Cash provided (used) by discontinued operations (76) (12) 434
-------- -------- --------
Increase (decrease) in cash and cash equivalents 219 (257) 365
Cash and cash equivalents at beginning of year 672 929 564
-------- -------- --------
Cash and cash equivalents at end of year $ 891 $ 672 $ 929
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information -
cash paid during the year for income tax $ - $ - $ 1
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
Years ended March 31, 1997, 1996, and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PerfectData Corporation (the Company) designs, assembles and sells computer and
office equipment care and maintenance products.
CASH EQUIVALENTS
The Company considers all highly liquid, non-pledged certificates of deposit
with an original maturity of three months or less to be cash equivalents.
Certificates of deposit pledged as collateral, or otherwise restricted, are not
classified as cash equivalents.
INVESTMENT IN DEBT AND EQUITY SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), "Accounting for Certain Investments in Debt and Equity Securities,"
effective April 1, 1994. There was no cumulative effect as a result of
adopting SFAS 115 in fiscal 1995.
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with the Company's investment in equity securities. Securities available
for sale are carried at fair value, with the unrealized gains and losses
reported in a separate component of shareholders' equity, net of income taxes,
until realized. At March 31, 1995, the Company had no investments that
qualified as trading or held to maturity.
The amortized cost of zero-coupon debt securities classified as available for
sale is adjusted for accretion of discounts to maturity. Such amortization and
interest are included in interest income. Realized gains and losses are
included in other income or expense. The cost of securities sold is based on
specific identification method.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is computed using the
straight-line method based on estimated useful lives ranging as follows:
Machinery and equipment 3 to 5 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Life of lease
Tooling 1 to 5 years
Included in other assets is excess of cost over underlying equity in assets
purchased which is being amortized on a straight-line basis over a five-year
period.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
POST-RETIREMENT BENEFITS
The Financial Accounting Standards Board has issued Statement 106, "Employer's
Accounting for Post-Retirement Benefits other than Pensions," a pronouncement on
accounting for post-retirement health care which is effective for fiscal years
beginning after December 31, 1992. The Company has never offered
post-retirement benefits to employees.
NET EARNINGS PER COMMON SHARE
Net earnings per common 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. The weighted average number of shares outstanding during
fiscal 1997 was 3,089,103.
INCOME TAXES
Provisions (benefits) for federal and state income taxes are calculated on
reported financial statement (income) loss based on current tax law and also
include in the current period, the cumulative effect of any changes in tax rates
from those used previously in determining deferred tax assets and liabilities.
Such provisions (benefits) differ from the amounts currently payable because
certain items of income and expense, known as temporary differences, are
recognized in different tax periods for financial reporting purposes than for
income tax purposes.
NOTE 2 - CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash, cash equivalents and trade
receivables.
As of March 31, 1997 the Company had approximately $652,000 of cash and cash
equivalents in one bank which exposes the Company to concentration of credit
risk. Of this amount, $305,000 has been classified as "Deposit on Litigation
Award." The cash deposited at this bank is federally insured up to $100,000.
The Company sells its principal products to a number of customers in the retail
industry. As of March 31, 1997, approximately 39% and 19% of recorded trade
receivables were from one mass discount merchant and one foreign distributor,
respectively. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial conditions but does not generally
require collateral. New customers requiring large credit accounts are required
to provide letters of credit.
NOTE 3 - MARKETABLE SECURITIES:
Marketable securities classified as current assets at March 31, 1997, include
the following (dollars in thousands):
FAIR VALUE COST
---------- -------
U.S. Treasury obligations $ 54 $ 53
Corporate debt securities 10 10
Marketable equity securities 335 340
-------- -------
$ 399 $ 403
-------- -------
-------- -------
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
The contractual maturities of debt securities available for sale at March 31,
1997, follows:
FAIR VALUE COST
---------- -------
Due after one year through five years $ 54 $ 53
Due after five years through ten years 10 10
---------- -------
$ 64 $ 63
---------- -------
---------- -------
Net unrealized holding losses at March 31, 1997 and 1996, were approximately
$4,600 and $22,000, respectively. Realized gains from the sale of securities
were $15,200 and realized losses from the sale of securities were $3,550.
NOTE 4 - INVENTORIES:
Inventories, consisting of materials, labor and other costs, are stated at the
lower of cost (determined by the first-in, first-out method) or market and are
summarized as follows (dollars in thousands):
MARCH 31,
---------------------
1997 1996
------ ------
Raw materials $ 384 $ 462
Work in process 132 148
Finished products 667 635
----- -----
$1,183 $1,245
----- -----
----- -----
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of (dollars in thousands):
MARCH 31,
---------------------
1997 1996
------ ------
Machinery and equipment $ 479 $ 479
Furniture and fixtures 151 149
Tooling 711 711
Leasehold improvements 155 155
------ ------
1,496 1,494
Less accumulated depreciation (1,341) (1,246)
------ ------
$ 155 $ 248
------ ------
------ ------
Depreciation expenses for the years ended March 31, 1997, 1996 and 1995 were
$95,000, $125,000 and $129,000, respectively.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
NOTE 6 - INVESTMENT IN AFFILIATE:
The Company owned 58% and 64% of Starnet Universe Internet, Inc., at March 31,
1997 and 1996, respectively. Prior to March 31, 1997, this investment had been
consolidated with the Company. Subsequent to March 31, 1997, the Company's Board
of Directors resolved to dispose of substantially all of the Company's
investment in Starnet. As such, this investment has been deemed to be temporary
and is not consolidated for fiscal 1997. Additionally, fiscal 1996 has been
restated to conform with the presentation of 1997. This investment is now
accounted for using the Equity Method of accounting.
Under the Equity Method of accounting, the Company has recognized a loss from
Starnet of $14,742 in 1997 and income of $183 in 1996. Presented below is
selected financial data of Starnet.
Current assets $6,956
Non-current assets 9,574
Current liabilities 7,495
Shareholders' equity 9,035
Sales 18,207
Net loss 25,491
NOTE 7 - NOTE PAYABLE:
The Company has a $1,000,000 line of credit agreement with a bank. This line of
credit is secured by accounts receivable, inventory, equipment and general
intangibles. The agreement subjects the company to certain covenants related to
liquidity, capital expenditures and commitments, net worth and the reacquisition
of stock. Interest on outstanding borrowings is payable monthly at prime plus
1.25%. The rate at March 31, 1997, was 9.75%. The agreement expires August 31,
1997. No borrowings were outstanding at March 31, 1997 or 1996.
NOTE 8 - INCOME TAXES:
The components of the income tax (benefit) provision attributable to continuing
operations were (dollars in thousands):
MARCH 31,
-----------------------------
1997 1996 1995
-------- -------- --------
Current:
Federal $ - $ - $ -
State 1 1 1
-------- -------- --------
1 1 1
Deferred:
Net increase (decrease) in deferred tax asset (43) 20 (21)
(Increase) decrease in benefit of NOL
carryforwards 96 135 (197)
Increase (decrease) in valuation allowance 236 (136) (142)
-------- -------- --------
$ 290 $ 20 $(359)
-------- -------- --------
-------- -------- --------
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
At March 31, 1997, the Company had net operating loss (NOL) carryforwards of
approximately $2,610,000 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.
In April 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Previously,
the Company used the APB 11 approach that gave no recognition to future events
other than the recovery of assets and settlement of liabilities at their
carrying amounts. Under SFAS 109 the Company recognizes to a greater degree the
future tax benefits of expenses which have been recognized in the financial
statements.
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 $923,000 net of a valuation allowance of
$677,000.
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 over the
last three years and the current economic environment in which the Company
operates. Management did not consider any non-routine transactions in assessing
the likelihood of realization of the recorded deferred tax asset.
The following reconciles the federal statutory income tax rate to the effective
rate of the provision for income taxes.
MARCH 31,
-----------------------------
1997 1996 1995
------- -------- ---------
Federal statutory rate 34.0% 34.0% 34.0%
Increases (reductions) in taxes due to:
State income taxes (net of federal benefit) 4.0% 6.1% (-%)
Valuation allowance adjustment 1,122.0% (24.1%) 245.5%
Other, net - 2.2% 1.6%
-------- -------- --------
1,160.0% 13.8% (209.9%)
-------- -------- --------
-------- -------- --------
NOTE 9 - SHAREHOLDERS' EQUITY:
The articles of incorporation authorize a class of preferred stock issuable in
classes and series with such designations, voting rights, redemption provisions,
dividend rates, liquidation and conversion rights and other preferences and
limitations as may be determined by the Board of Directors. No preferred stock
was outstanding at March 31, 1997 or 1996.
During the year ended March 31, 1997, the Company reacquired approximately 2,800
shares of its common stock.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
NOTE 10 - STOCK OPTION AND BONUS PLANS:
During May 1983, the Company adopted an employee stock bonus and purchase plan,
providing for the issuance of a maximum of 145,330 shares of common stock of the
Company to certain officers and key employees of the Company. During fiscal
1990, the Board of Directors adopted a resolution to increase the maximum shares
to be issued under the plan to 745,330 shares of common stock. The plan is
administered by the Board of Directors which has the authority to set the terms
of each stock bonus or purchase agreement; however, the term of each cannot
exceed five years. No shares were issued under this plan during the year ended
March 31, 1997.
Activity of the two components under the plan is summarized as follows:
BONUS PURCHASE
PLAN PLAN
---------- -----------
Outstanding at March 31, 1994 - 50,000
Agreements exercised - (50,000)
Agreements canceled - -
---------- -----------
Outstanding at March 31, 1995 - -
Agreements exercised - -
Agreements canceled - -
---------- -----------
Outstanding at March 31, 1996 - -
Agreements exercised - -
Agreements canceled - -
---------- -----------
Outstanding at March 31, 1997 - -
---------- -----------
---------- -----------
As of March 31, 1997, no options pursuant to the agreements under the purchase
plan are outstanding. This plan expired on May 17, 1993.
The Company's 1979 stock option plan, as amended, authorized the granting of
incentive stock options to officers and key employees of the Company for the
purchase of up to 290,660 shares of the Company's common stock. Under the plan,
which expired December 31, 1988, options were granted at prices equal to or
greater than the fair market value of such shares at date of grant and, subject
to various limitations, are exercisable over terms not to exceed ten years.
During the year ended March 31, 1996, options to purchase 1,000 shares of common
stock expired. There was no activity under the plan during the years ended
March 31, 1996 or 1995. As of March 31, 1997, no options remain outstanding.
During November 1985, the Company adopted the 1985 stock option plan to grant
incentive and nonqualified stock options to officers and key employees of the
Company for the purchase of up to 500,000 shares of the Company's common stock.
During the current year, the board of directors voted to extend the term of the
plan by 12 months thereby making the new expiration date December 31, 1996.
Under the plan, options were granted at prices equal to or greater than fair
market value at date of grant. The shares, subject to various limitations, are
exercisable over terms not to exceed ten years. During the year ended March 31,
1997, 14,500 options were granted to the new director of sales and marketing as
well as to other key employees who currently had no stock options. A total of
27,500 options were exercised as of March 31, 1997.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
Activity under the plan is summarized as follows:
OPTION
PRICE
NUMBER OF PER SHARE
SHARES (AVERAGE) AGGREGATE
--------- --------- ----------
Option outstanding at March 31, 1994 290,000 .902 261,662
Options granted - - -
Options exercised (50,000) .625 (31,250)
Options canceled or expired (37,500) 1.029 (38,587)
--------- --------- ----------
Options outstanding at March 31, 1995 202,500 .947 191,825
Options granted 20,000 1.1875 23,750
Options exercised - - -
Options canceled or expired (10,000) .938 (9,380)
Options outstanding at March 31, 1996 212,500 .970 206,195
Options granted 14,500 2.0625 29,906
Options exercised (27,500) 1.0625 (29,219)
Options cancelled or expired - - -
--------- --------- ----------
Options outstanding at March 31, 1997 199,500 1.0370 206,882
--------- --------- ----------
--------- --------- ----------
The option price per share for options issued during fiscal year ended March 31,
1994 has been restated to reflect a decrease in exercise price from $1.094 to
$.938, during the fiscal year ended March 31, 1995.
NOTE 11 - MAJOR CUSTOMER AND EXPORT SALES:
During the year ended March 31, 1997 one customer accounted for more than 10% of
sales. This customer, a large consumer discount house, accounted for 41.7% of
sales.
In June of 1997, the Company learned that the consumer discount house will not
renew its purchase agreement for the next year. The possible effects of this
loss are disclosed in Note 16.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
In addition, the Company had export sales to unaffiliated customers as follows
(dollars in thousands):
YEAR ENDED MARCH 31,
----------------------------
1997 1996 1995
------ ------ ------
Europe $ 209 $ 331 $ 397
Canada 326 407 264
Australia 32 36 24
Africa 36 15 29
Far East 26 19 27
Other geographic areas 20 1 11
------ ------ ------
$ 649 $ 809 $ 752
------ ------ ------
------ ------ ------
Operations by geographic area are summarized as follow (dollars in thousands):
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
------ ------ ------
Net Sales:
Domestic customers $5,112 $5,245 $6,462
International 649 809 752
------ ------ ------
Total $5,761 $6,054 $7,214
------ ------ ------
------ ------ ------
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
The Company leases facilities under noncancelable operating leases that expire
through 2003. Rental expense was $117,000, $124,000, and $107,000 for the years
ended March 31, 1997, 1996, and 1995, respectively.
Minimum annual rental commitments under operating leases are summarized as
follows (in thousands)
1998 $134
1999 135
2000 144
2001 146
2002 156
Thereafter 185
----
$900
----
----
A lawsuit was filed against PerfectData in the Superior Court of Orange County,
California on May 11, 1995. The lawsuit involves product liability resulting in
a loss of life. On June 4, 1996, judgement was found in favor of the Company
with no liability. The plaintiff has appealed this ruling and has demanded
$20,000 in exchange for dropping their appeal. PerfectData has little, if any,
exposure in this matter as they are covered by a general liability policy issued
by CNA Insurance with liability limits of $6,000,000. All court costs are being
borne by CNA Insurance.
In a separate matter, during the fiscal year ended March 31, 1995, the Company,
along with Flamemaster Corporation and Permabyte Magnetics, Inc. lost an
arbitration award to the former president of Permabyte. The Company accrued
$30,000 as its share of that award as of March 31, 1995. The award of $30,000
was paid during fiscal 1996 and the Company has no intention of appealing.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
As the result of a different lawsuit, in November 1995, a former employee won
an award against the Company for $209,403. The lawsuit related to the
termination, in October 1993, of an employment contract entered into between
the company and the individual during July 1993. This employment contract
was entered into in conjunction with the purchase, by the Company, of a
computer cable business from the individual. The award was comprised of
damages of $136,525 and attorneys' fees and other costs of $66,878. The
Company had accrued $16,152 in prior years to cover its anticipated liability
with respect to this lawsuit. The cable business was abandoned in 1994 and
is reported as a discontinued operation. An additional $187,251 had been
accrued and expensed as part of discontinued operations during the fiscal
year ended March 31, 1996 bringing the total accrual to $203,403 as of
March 31, 1996.
In January 1996, the Company filed a notice of appeal and on March 31, 1997 the
appeals court issued its opinion affirming the judgement against the Company.
This judgement became final on April 30, 1997. At the time of its appeal, the
Company posted a Certificate of Deposit in the amount of $305,000 to cover any
amount it would have to pay. This amount appears in the Company's balance sheet
as a deposit on litigation award.
In December 1995 the Company filed a complaint against the same former employee
and his company alleging that they copied PerfectData's trademark and trade
dress in an attempt to distribute or otherwise sell their product, "Perfect
Cleaner". The product would compete directly with the Company's line of
products known as PerfectDuster, PerfectDuster Plus and PerfectDuster II Plus.
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 has been set
for trial December 1, 1997.
The parties have now reached a global settlement of both actions. The essential
term of this settlement is that the Company will pay 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 is the amount of attorneys' fees owed to the former employee's
counsel in his case against the Company. It is the contention of his counsel
that they are entitled to an award of attorneys' fees for services rendered
during the Company's appeal of the original judgement against the Company. The
parties have agreed to have this issue decided by a judge. There is currently
no date set for this hearing.
In fiscal 1997, the Company has accrued an additional $62,000 of loss to cover
these actions, bringing the total to $265,000 since the first suit was filed.
This amount is comprised of the $185,000 to be paid to the former employee and
$80,000 to cover the Company's and the former employee's legal costs. This
additional $62,000 has been charged to discontinued operations for the year
ended March 31, 1997.
In an unrelated case, the past CFO of Permabyte Magnetics, Inc. (PMI) has
brought an action for unpaid wages and fraudulent conveyance against PMI, the
Company, the Company's chairman and a director of the Company. The former CFO
claims that PMI owes her approximately $30,000 for unpaid vacation which had
accrued prior to her termination. She also alleges that the defendants,
including the Company, improperly diverted PMI assets to the Company.
During a demurrer to the First Amendment Complaint, the former CFO failed to
properly seek leave of court to file a second amended complaint. Consequently,
the court dismissed the entire action. In August 1996, the former CFO filed a
notice of appeal. All briefing requirements have been completed and the parties
are awaiting the setting of a hearing date.
The Company feels the former CFO's case is without merit and intends to
vigorously defend itself in this action. No provision has been made for any
possible loss associated with this action.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarterly financial data from continuing operations for the eight quarters ended
March 31, 1997 is summarized as follows (dollars in thousands, except per share
amounts):
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
-------- ------------- ------------ ---------
Net sales $ 1,430 1,471 1,382 1,478
Gross profit 516 461 449 548
Net earnings 20 4 (3) (286)
Earnings per share .01 0 0 (.10)
Weighted average
shares outstanding 3,074 3,084 3,088 3,093
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
June 30, September 30, December 31, March 31,
1995 1995 1995 1996
-------- ------------- ------------ ---------
Net sales $ 1,507 1,495 1,408 1,644
Gross profit 514 512 497 565
Net earnings 15 27 18 74
Earnings per share - .01 .01 .02
Weighted average
shares outstanding 3,137 3,121 3,096 3,074
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
NOTE 14 - INVESTMENT IN PERMABYTE MAGNETICS, INC:
The Company had a 43% interest in Permabyte Magnetics, Inc. (PMI). The
investment had been recorded in the financial statements using the equity method
of accounting. In May 1994, the Board of Directors passed a resolution calling
for the disposal of the Company's interest in PMI. Since no buyer has been
found, the assets of PMI have been written off, and are being liquidated.
The investment has been written off in prior years as a result of recurring
losses in excess of the cost of the investment. The company has no liabilities
related to its investment in PMI, nor does PMI have any significant assets. As
of March 31, 1997, the Company's investment has been disposed of. No
significant impact on the company is anticipated from the disposal of this
investment.
NOTE 15 - DISCONTINUED OPERATION:
In May 1994, the Company adopted a formal plan to discontinue all products in
the telecommunications industry line which consisted of modems, cables and
switch boxes. As part of such plan, the Company discontinued production in
May 1994 with the intent of either selling or abandoning the remaining assets
and corresponding operations during fiscal 1995. As a result, the Company
recorded a fourth quarter charge of $333,000, net of income tax benefit, to
write down the product line assets to their estimated net realizable values.
Such fiscal 1994 losses are included in the Company's net operating loss
carryforwards, disclosed in Note 8.
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years ended March 31, 1997, 1996, and 1995
During fiscal 1995, most assets of the discontinued operations were disposed of,
and the balance, with the exception of deferred tax assets, were disposed of
during fiscal 1996.
Revenues for the discontinued telecommunications product line were approximately
$0, $1,000, and $143,000 for the years ending March 31, 1997, 1996 and 1995,
respectively. The assets and liabilities of the discontinued operations have
been reclassified on the balance sheet from their historic classification to
separately identify them as net assets or liabilities of discontinued operations
and consist of the following:
MARCH 31,
---------------------
1997 1996
------ ------
CURRENT:
Accounts receivable $ - $ -
Deferred tax assets - current 115 88
Accrued expenses (265) (203)
------ ------
$ (150) $ (115)
------ ------
------ ------
As discussed in Note 12, during fiscal 1996, the Company lost a lawsuit to a
former employee who was employed in connection with the discontinued cable
operations. As a result of this unanticipated court decision, the Company
recorded a loss of approximately $186,000, offset by a deferred tax asset of
$88,000 to discontinued operations for fiscal 1996. For fiscal year 1997, the
Company has recorded an additional $62,000 of possible loss which has been
offset by an increased deferred tax asset of $27,000.
NOTE 16 - SUBSEQUENT EVENT (LOSS OF MAJOR CUSTOMER):
In June 1997, the Company learned that its bid for the continuing business of
its major customer had been rejected. This customer accounted for 41.7% of the
Company's sales in fiscal 1997. This loss of revenues could have a significant
adverse effect on the future earnings of the Company. Sales to this customer
will cease, effective August 1, 1997. Presented below is proforma financial
information for the past three years with the sales to the major customer and
determinable, controllable costs, for those three years eliminated:
March 31,
(Dollars in thousands)
--------------------------------------------
1997 1996 1995
------- ------- -------
Net sales $ 3,358 $ 3,513 $ 5,117
Cost of goods sold (2,034) (2,329) (3,080)
Selling, general and
administrative expense (1,683) (1,839) (2,131)
------- ------- -------
Income from operations $ (359) $ (355) $ (94)
------- ------- -------
------- ------- -------
Net income (Loss) $ (632) $ (388) $ 153
------- ------- -------
------- ------- -------
<PAGE>
PERFECTDATA CORPORATION
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
Years ended March 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
ADDITIONS
---------------------
CHARGED
BALANCE CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS AT END OF
PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
------ -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 11,000 $ - $ - $ 2,000 $ 9,000
Allowance for inventory reserves 155,000 - - 115,000 40,000
Allowance for net unrealized
losses on marketable equity
securities-current $ 22,000 $ - $ - $ 17,000 $ 5,000
--------- --------- --------- --------- ---------
TOTAL $ 188,000 $ - $ - $ 134,000 $ 54,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Year ended March 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 30,000 $ 4,000 $ - $ 23,000 $ 11,000
Allowance for inventory reserves 135,000 20,000 - - 155,000
Allowance for net unrealized
losses on marketable equity
securities-current $ 14,000 $ - $ 8,000 $ - $ 22,000
--------- --------- --------- --------- ---------
TOTAL $ 179,000 $ 24,000 $ 8,000 $ 23,000 $ 188,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Year ended March 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 36,000 $ 14,000 $ - $ 20,000 $ 30,000
Allowance for inventory reserves 215,000 - - 80,000 135,000
Allowance for net realized
losses on marketable equity
securities-current $ 8,000 $ - $ 6,000 $ - $ 14,000
--------- --------- --------- --------- ---------
TOTAL $ 259,000 $ 14,000 $ 6,000 $ 100,000 $ 179,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
By: Joseph Mazin
---------------------------
Joseph Mazin, President
Date: June 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 24, 1996.
Signature Title
--------- -----
Joseph Mazin President, Chief Executive
- -------------------------
Joseph Mazin Officer, Director and Chairman
of the Board (Principal
Executive Officer)
Irene J. Marino V.P. Finance, Chief Financial
- ------------------------- Officer and Corporate Secretary (Principal
Irene J. Marino Financial and Accounting Officer)
Bruce D. Stuart Vice President and Director
- -------------------------
Bruce D. Stuart
Gerald W. Chamales Director
- -------------------------
Gerald W. Chamales
Tracie Savage Director
- -------------------------
Tracie Savage
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1 Articles of Incorporation as
amended to date(7)
3.2 Bylaws as amended to date(13)
9 Stockholders Agreement dated
November 3, 1980(1)
10.3 Stock Purchase Agreement
between the Company and Wood
River Capital Corporation
dated October 28, 1980(1)
10.4 Stock Option Agreement with
Wood River Capital Corporation
dated November 3, 1980(1)
10.7 1985 Employee Stock Option
Plan(2)
10.8 Form of Incentive Stock Option
Agreement(2)
10.9 Form of Non-Qualified Stock
Option Agreement(2)
10.12 Employee Stock Option Plan(1)
10.13 Amendment No.1 to Employee
Stock Option Plan(1)
10.14 Form of Non-Qualified Stock
Option Agreement with
Repurchase Provisions(1)
10.15 Form of Amendment No.1 to
Non-Qualified Stock Option
Agreement with Repurchase
Provisions(1)
10.16 Form of Incentive Stock Option
Agreement with Repurchase
Provisions(1)
10.17 Form of Stock Purchase
Agreement dated March 23, 1983(1)
<PAGE>
10.25 Lease Agreement dated February 7,
1985 between Pension Funds
Securities Limited, as lessor,
IDA International Data Automation
Limited, as lessee, and the
Company, as surety (Wokingham,
England facility)(2)
10.26 Surety Agreement dated February 7,
1985 between Pension Funds
Securities Limited, as landlord,
IDA International Data Automation
Limited, as tenant, and the
Company, as surety(2)
10.38 1985 Employee Stock Purchase Plan(3)
10.39 Form of Representative Agreement
between the Company and its
Representatives(4)
10.40 Form of Standard Exclusive Distributor
Agreement between the Company and its
Distributors(4)
10.42 Agreement between the Company and
International Data Automation, dated
February 23, 1987, as amended to
date(8)
10.43 License Agreement dated August 14,
1987 between Polaroid Corporation and
the Company(5)
10.44 Security Agreement dated August 14,
1987 between Polaroid Corporation and
the Company(5)
10.45 Settlement Agreement dated August 14,
1987 between Polaroid Corporation and
the Company(5)
10.46 Standard Industrial Lease dated
September 25, 1987 between
Gurgen Minaskanian, as lessor, and the
Company, as lessee(5)
10.47 Agency Agreement dated February 23,
1988 between Amaray Data International
Limited and the Company(5)
10.48 License to Assign Sublease (Wokingham,
England, facility) between Pension Fund
Securities Limited, as landlord,
PerfectData International Limited,
as tenant, the Company, as Surety, and
Integrated Computer Systems and
Cybernetics Limited, as subtenant(6)
<PAGE>
10.49 Loan and Security Agreement with respect
to line of credit in the amount of
$500,000 with Mitsui Manufacturers
Bank(6)
10.52 Loan and Security Agreement with respect to renewal of
line of credit in the amount of $500,000 with Mitsui
Manufacturers Bank(8)
10.53 Agreement between the Company,
Robert B. Miller and Coverware Company
dated November 15, 1990(8)
10.54 Warrant to Purchase Common Stock
dated May 15, 1991 issued to
Richard J. Coyle(9)
10.55 Bills of Sale with respect to purchase of assets of
Anchor Automation Inc.(9)
10.56 Standard Industrial Lease dated
August 26, 1991, between Wayne Mertes, Mamie Mertes,
Mike Butler and Sarah Butler, as lessor, and the
Company, as lessee(9)
10.57 Loan and Security Agreement with respect to renewal of
line of credit in the amount of $500,000 with Mitsui
Manufacturers Bank(9)
10.58 Exclusive Distribution Agreement between the Company
and Acoustics and Felts Pty Ltd.(10)
10.59 Loan and Security Agreement with respect to increased
renewal of line of credit in the amount of $1 million
with Manufacturers Bank(10)
10.60 License Agreement between the Company and Arthur D.
Little Enterprises, Inc.(11)
10.61 Agreement between the Company and Tony Gigiliotti dba
SubSystems, dated June 15, 1993(11)
<PAGE>
10.62 Loan and Security Agreement with respect to renewal of
line of credit in the amount of $1 million with
Manufacturers Bank(11)
10.63 Stock Purchase Agreement by and among Flamemaster
Corporation, the Company, Bruce D. Stuart and Joseph
Mazin, Robert Murashige and PermaByte Magnetics,
Inc.(12)
10.64 Loan and Security Agreement with respect to renewal of
line of credit in the amount of $1 million with
Manufacturers Bank(12)
10.65 Loan and Security Agreement with respect to renewal of
line of credit in the amount of $1 million with
Manufacturers Bank(13)
10.66 Loan and Security Agreement with respect to renewal of
line of credit in the amount of $1 million with
Manufacturers Bank(14)
- -------------------
(1) Incorporated by reference to the same numbered exhibit to Registration
Statement on Form S-1, as amended (File No.2-83836), filed May 18, 1983
and declared effective July 12, 1983.
(2) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1985.
(3) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1986.
(4) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1987.
(5) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1988.
(6) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1989.
(7) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1990.
<PAGE>
(8) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1991.
(9) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1992.
(10) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1993.
(11) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1994.
(12) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1995.
(13) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 1996.
(14) Filed herewith.
<PAGE>
[LETTERHEAD]
April 1, 1997
Joseph Mazin, President & CEO
PERFECTDATA CORPORATION
110 West Easy Street
Simi Valley, California 93065-1689
Re: Modification of Financing Arrangements
--------------------------------------
Dear Mr. Mazin:
Reference is made to that certain Loan Agreement dated as of November 2,
1995, entered into between PERFECTDATA CORPORATION ("Borrower") and
MANUFACTURERS BANK ("Bank"), together with any and all amendments,
modifications, riders and attachments thereto (collectively, the "Loan
Agreement"), governing certain financial accommodations which Bank has
extended to Borrower. All capitalized terms used in this letter shall have
the meanings given to them in the Loan Agreement, unless specifically defined
herein.
Bank has reviewed the financing arrangements provided to Borrower under the
Loan Agreement and all other related loan documents, and is willing to modify
the Loan Agreement, subject to the following terms and conditions:
1. Section 6.2(a) is modified by deleting the word "monthly", and replacing
it with the word "quarterly".
Except as expressly amended above, the Loan Documents shall remain unchanged
and in full force and effect.
Kindly cause Borrower to indicate their acceptance of this Agreement by
signing the enclosed copy where indicated and returning it to us. This offer
shall expire at 5:00 p.m. on April 18, 1997, unless prior to that time we
have received such copy duly executed.
Very truly yours,
MANUFACTURERS BANK,
Cris Castellini
Assistant Vice President
AGREED AND ACCEPTED:
Dated: April 9, 1997 PERFECTDATA CORPORATION,
-------------------- a California corporation
By: /s/ Joseph Mazin
-----------------------------------
Joseph Mazin
Title: President & CEO
--------------------------------
By: /s/ Irene J. Marino
-----------------------------------
Irene J. Marino
Title: V.P. Finance & Corp. Secretary
--------------------------------
Page 1 of 1
Exhibit 10.66
<PAGE>
[LETTERHEAD]
October 24, 1996
Mr. Joseph Mazin
PERFECTDATA CORPORATION
110 West Easy Street
Simi Valley, California 93065-1689
Re: Modification of Financing Arrangements
--------------------------------------
Dear Mr. Mazin:
Reference is made to (i) that certain Loan Agreement dated as of November 2,
1995, entered into between PERFECTDATA CORPORATION ("Borrower") and
MANUFACTURERS BANK ("Bank"), together with any and all alterations,
amendments, changes, extensions, modifications, riders, and supplements
thereto (collectively, the "Loan Agreement"), (ii) that certain promissory
note in the original principal amount of One Million Dollars ($1,000,000.00)
dated August 2, 1992 and executed by Borrower in favor of Bank (the "Note"),
and (iii) any and all documents executed in connection with the Loan
Agreement (which documents, together with the Loan Agreement and the Note,
are collectively referred to as the "Loan Documents"), pursuant to which Bank
has extended certain financial accommodations to Borrower. Any and all
capitalized terms used herein shall have the meanings ascribed to them in the
Loan Agreement, unless specifically defined below.
At your request we have reviewed the financing arrangements which we have
provided to Borrower under the Loan Documents and are willing to modify the
Loan Agreement and the Note as set forth below:
1. Section 6.2(a) of the Loan Agreement is deleted and replaced with the
following:
6.2(a) FINANCIAL PROJECTIONS FOR BORROWER. Deliver to Bank not less than
ninety (90) days before the end of each of Borrower's fiscal years, monthly
financial projections for Borrower including balance sheets, income
statements, cash flow projections and letter of credit usage projections,
for the next succeeding fiscal year, prepared by Borrower.
2. Section 6.3(f) is added to the Loan Agreement as follows:
6.3(f) LIQUIDITY. (i) At all times maintain Net Liquid Assets in an amount
not less than Three Hundred Thousand Dollars ($300,000.00) and (ii) deliver
to Bank, within thirty (30) days after the end of each calendar quarter,
written evidence of compliance with this covenant satisfactory to Bank. As
used in this Section, "Net Liquid Assets" means cash, bank deposits,
marketable securities, mutual funds, municipal bonds and municipal bond
funds, wherever located or maintained, net of the aggregate amount of all
indebtedness secured by any lien or encumbrance of any nature whatsoever
affecting any of such assets.
3. Note is modified by extending its maturity date and the last date for
obtaining advances thereunder from October 31, 1996, to August 31, 1997.
Availability of credit remains subject to any other conditions contained in
the Note.
Except as expressly amended above, the Loan Documents shall remain unchanged
and in full force and effect. Kindly cause Borrower to indicate their
acceptance of this Agreement by signing the enclosed copy where indicated and
returning it to us. This offer shall expire at 5:00 p.m. on October 31,
1996, unless prior to that time we have received such copy duly executed.
Very truly yours,
MANUFACTURERS BANK,
/s/ Karen Stein
Karen Stein
Vice President
AGREED AND ACCEPTED:
Dated: Oct 25, 1996 PERFECTDATA CORPORATION,
-------------------- a California corporation
By: /s/ Joseph Mazin
-----------------------------------
Joseph Mazin
Title: President & CEO
--------------------------------
By: /s/ Irene J. Marino
-----------------------------------
Irene J. Marino
Title: V.P. Finance & Corp. Secretary
--------------------------------
Page 1 of 1
Exhibit 10.66
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 891
<SECURITIES> 399
<RECEIVABLES> 716
<ALLOWANCES> (9)
<INVENTORY> 1,183
<CURRENT-ASSETS> 3,738
<PP&E> 1,495
<DEPRECIATION> (1,340)
<TOTAL-ASSETS> 4,298
<CURRENT-LIABILITIES> 798
<BONDS> 0
0
0
<COMMON> 8,051
<OTHER-SE> (4,551)
<TOTAL-LIABILITY-AND-EQUITY> 4,298
<SALES> 5,761
<TOTAL-REVENUES> 5,761
<CGS> 3,787
<TOTAL-COSTS> 3,787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25
<INCOME-TAX> 290
<INCOME-CONTINUING> (265)
<DISCONTINUED> (69)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (334)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
