<PAGE>
FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------
For Quarter Ended December 31, 1997 Commission File Number 0-12817
PERFECTDATA CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3087593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 West Easy Street
Simi Valley, California 93065-1689
(Address of principal executive offices)
(Zip Code)
(805) 581-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of January 31, 1998, there were 3,163,606 shares of common stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
PERFECTDATA CORPORATION
-----------------------
INDEX
-----
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Balance Sheets - December 31, 1997 and
March 31, 1997 2
Statements of Earnings - quarters
ended December 31, 1997 and 1996
and nine months ended December 31, 1997
and 1996 3
Statements of Shareholders' Equity -
nine months ended December 31, 1997 4
Statements of Cash Flows - nine months
ended December 31, 1997 and 1996 5
Notes to Financial Statements 6 - 7
Management's discussion and analysis of
financial condition and results of
operations 8 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
PERFECTDATA CORPORATION
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except number of shares)
Dec. 31, March 31
1997 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents, including
short-term certificates of deposit of
$363 at December and $160 at March $ 1,154 $ 891
Accounts receivable, less allowance
for doubtful receivables of
$13 at December and $9 at March 279 707
Inventories 753 1,183
Prepaid expenses and other current assets 144 77
Marketable securities, short-term 574 399
Current assets of discontinued operations - 115
Deposit on litigation award - 305
Deferred income tax benefit 65 61
-------- --------
Total current assets 2,969 3,738
Property, plant and equipment, net 128 155
Deferred Income Tax benefit 294 369
Investment in affiliate 5 5
Other assets, net 31 31
-------- --------
$ 3,427 $ 4,298
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 129 $ 324
Accrued expenses 95 153
Accrued salaries, wages and vacation 50 56
Current liabilities of discontinued
operations - 265
-------- --------
Total current liabilities 274 798
-------- --------
Shareholders' equity:
Preferred stock. Authorized 2,000,000
shares; none issued - -
Common stock, no par value. Authorized
10,000,000 shares; issued and
outstanding 3,163,606 shares at
December and 3,093,700 shares at March 8,117 8,051
Accumulated deficit (4,936) (4,546)
Allowance for gain (loss) on
marketable securities (28) (5)
-------- --------
Net shareholders' equity 3,153 3,500
-------- --------
$ 3,427 $ 4,298
-------- --------
-------- --------
</TABLE>
See accompanying notes to financial statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
PerfectData Corporation
STATEMENTS OF EARNINGS
(Unaudited)
- -------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 525 $ 1,387 $ 2,717 $ 4,297
Costs and Expenses:
Cost of sales 309 938 1,749 2,868
Selling, general and
administrative 333 476 1,184 1,480
------- ------ ------- -------
Total costs and expenses 642 1,414 2,933 4,348
Income (loss) from operations (117) (27) (216) (51)
------- ------ ------- -------
Other income and (expense):
Interest income, net 8 6 24 20
Other, net 17 17 55 48
------- ------ ------- -------
Total other income and (expense) 25 23 79 68
------- ------ ------- -------
Income (loss) from continuing
operations before income taxes (92) (4) (137) 17
Income tax (provision) benefit (24) 1 (72) -
------- ------ ------- -------
Income (loss) from continuing
operations (116) (3) (209) 17
Gain (loss) on disposal of
discontinued operations (118) (12) (181) (31)
------- ------ ------- -------
Net income (loss) $ (234) $ (15) $ (390) $ (14)
------- ------ ------- -------
------- ------ ------- -------
Net income (loss) per common share:
Income (loss) from continuing
operations $ (.04) $ - $ (.07) $ .01
Gain (loss) on disposal of
discontinued operations (.04) - (.06) (.01)
------- ------ ------- -------
$ (.08) $ - $ (.13) $ -
------- ------ ------- -------
------- ------ ------- -------
Weighted average shares outstanding 3,143 3,088 3,110 3,088
</TABLE>
See accompanying notes to financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
PerfectData Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
- ----------------------------------------------------------------------------------
(In thousands)
Period from March 31, 1997 through December 31, 1997
- ----------------------------------------------------------------------------------
Allowance Net
for gain/ share-
Common Stock Accumulated (loss) on holders'
Shares Amount deficit mkt. sec. equity
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1997 3,094 $8,051 $(4,546) $ (5) $3,500
Stock issued upon
exercise of stock
options 70 66 - - 66
Net unrealized gain/
(loss) on marketable
securities - - - (23) (23)
Net earnings (loss) - - (390) - (390)
- ----------------------------------------------------------------------------------
Balance at
December 31, 1997 3,164 $8,117 $(4,936) $ (28) $3,153
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
PERFECTDATA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Month Period Ended
December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (390) $ (14)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
(Gain) loss on disposal of
discontinued operations 181 31
Depreciation and amortization 29 87
Deferred income tax (benefit) provision 71 (1)
Decrease in litigation deposit 305 -
(Increase) decrease in accounts
receivable 428 199
(Increase) decrease in inventories 430 236
(Increase) decrease in prepaid
expenses and other current assets (67) (36)
(Increase) decrease in other assets - -
Increase (decrease) in accounts
payable (195) (236)
Increase (decrease) in accrued
expenses (58) (10)
Increase (decrease) in accrued
salaries, wages and vacation (6) (16)
-------- --------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 728 240
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment $ (2) $ (11)
(Increase) decrease in investment
securities, net (198) (13)
-------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (200) (24)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 66 29
Repurchase of common stock - (2)
-------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 66 27
-------- --------
NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS 594 243
CASH PROVIDED (USED) IN
DISCONTINUED OPERATIONS (331) (31)
-------- --------
Increase (decrease) in cash and
cash equivalents 263 212
Cash and cash equivalents at
beginning of period 891 711
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,154 $ 923
-------- --------
</TABLE>
See accompanying notes to financial statements.
- 5 -
<PAGE>
PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of the Company, the unaudited financial statements contained
in this report have been prepared on a basis consistent with the financial
statements contained in the Company's Annual Report on Form 10-K for the
year ended March 31, 1997. All adjustments included in the financial
statements are of a normal recurring nature and are necessary to present
fairly the Company's financial position as of December 31, 1997 and the
results of its operations and cash flows for the nine months ended December
31, 1997 and 1996.
2. Marketable securities classified as current assets at December 31, 1997,
include the following (dollars in thousands):
<TABLE>
<CAPTION>
Fair Value Cost
---------- -----
<S> <C> <C>
Government Securities $ 192 $ 191
Corporate debt securities 10 10
Marketable equity securities 372 401
------ ------
$ 574 $ 602
------ ------
------ ------
</TABLE>
3. Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at
December 31, 1997 and March 31, 1997 consist of the following:
<TABLE>
<CAPTION>
(In thousands)
Dec. 31, 1997 March 31, 1997
------------- --------------
<S> <C> <C>
Raw materials $ 244 $ 384
Work in process 84 132
Finished products 425 667
------- -------
$ 753 $1,183
------ ------
------ ------
</TABLE>
4. Property, plant and equipment consist of (dollars in thousands):
<TABLE>
<CAPTION>
Dec. 31, 1997 March 31, 1997
------------- ------------
<S> <C> <C>
Machinery and equipment $ 481 $ 479
Furniture and fixtures 151 151
Tooling 592 711
Leasehold improvements 155 155
-------- --------
1,379 1,496
Less accumulated
depreciation (1,251) (1,341)
-------- --------
$ 128 $ 155
-------- --------
-------- --------
</TABLE>
- 6 -
<PAGE>
5. The components of the income tax (benefit) provision were (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Current:
Federal $ -
State 1
--------
1
Deferred:
Net (increase) decrease in
deferred tax asset 22
(Increase) decrease in benefit of
NOL carryforwards (116)
Increase (decrease) in valuation allowance 166
--------
$ 73
--------
--------
</TABLE>
At December 31, 1997, the Company had net operating loss (NOL)
carryforwards of approximately $2,910,000 for federal income tax purposes
expiring in varying amounts through 2012. The NOL carryforwards, which are
available to offset future profits of the Company and are subject to
limitations should a "change in ownership" as defined in the Internal
Revenue Code occur, will begin to expire in 2001 if not utilized.
Additionally, the Company has general business tax credit carryforwards of
$174,109 which will begin to expire in 1998.
SFAS 109 requires that the tax benefit of such NOLs be recorded using
current tax rates as an asset to the extent management assesses the
utilization of such NOLs to be more likely than not. Management has
determined that future taxable income of the Company will more likely than
not be sufficient to realize the recorded deferred tax asset of $1,039,000
net of a valuation allowance of $843,000.
Realization of the future tax benefits of the NOL carryforwards is
dependent on a Company's ability to generate taxable income within the
carryforward period. In assessing the likelihood of utilization of
existing NOL carryforwards, management considered the historical results of
continuing operations, the current economic environment in which the
Company operates, and the projected results of the Company's cost-cutting
measures as well as sales projections. Management did not consider any
non-routine transactions in assessing the likelihood of realization of the
recorded deferred tax asset.
6. During the quarter ended December 31, 1997, the Company issued 70,000
shares of Common Stock under the 1985 Employee Stock Option Plan for
consideration of $65,625.
7. Net earnings (loss) per share is based on the weighted average number of
shares outstanding during each of the respective periods. Common stock
equivalents are excluded from the calculation of weighted average shares
outstanding as their effect is immaterial or antidilutive.
- 7 -
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales from continuing operations for the third fiscal quarter ended December
31, 1997 were $525,000 compared to $1,387,000 in the year-earlier period. Net
sales for the nine months ended December 31, 1997 were $2,717,000 compared to
$4,297,000 in the year-earlier period.
As previously disclosed in the Company's Form 10-K for the fiscal year ended
March 31, 1997, during June the Company learned that its bid for the continuing
business of PriceCostco had been rejected. The Company realized the loss of
this business during the second fiscal quarter ended September 30, 1997 and as a
result sales declined dramatically from the year-earlier periods. During the
year-earlier quarter ended December 31, 1996, sales to PriceCostco represented
45% of the Company's total sales.
The loss from continuing operations for the three months and nine months ended
December 31, 1997 is directly related to the loss of this major customer. The
Company continues developing programs to acquire new business as well as
increase business with existing customers. Cost-cutting measures had been
implemented immediately upon notification of the loss of this major customer.
The Company continues negotiating joint distribution agreements to market some
of its product lines into new markets. Additionally, the Company continues to
look for business combinations through acquisitions or mergers. During November
1997, the Company announced the signing of a letter of intent to merge with
Dynatech Integrated Systems Corporation of Columbia, Maryland. Dynatech is a
system integration firm that specializes in enterprise client/server product,
services and solutions. The merger should allow PerfectData to benefit from
Dynatech's relationship with large corporate clients and Governmental agencies.
The agreement calls for Dynatech to acquire approximately 10% of the outstanding
shares of PerfectData at $5.00 cash per share and for PerfectData to issue
approximately 51% of the combined companies' outstanding shares to Dynatech
shareholders. Post merger, and after the tender for 10% of the outstanding
shares of PerfectData, the existing shareholders of PerfectData will own 49% of
the outstanding shares of the combined companies.
Dynatech's annual revenues are approximately $10 million. The Company's
marketing efforts will focus on expanding product offerings to clients by
combining the services and solutions of both entities.
- 8 -
<PAGE>
It is the intention of both sides to the merger that PerfectData will be the
surviving entity. Both sides continue to move forward toward closing the
transaction; however, a definitive merger agreement must be approved by the
Board of Directors and submitted to shareholders either in the form of a written
consent or a shareholders meeting before the merger will be completed.
As discussed above, the Company adopted strong cost-cutting measures and intends
to pursue aggressive programs to place its products into national chains. In
the next several months the Company will re-bid for the PriceCostco business.
As previously discussed in the Company's Form 10-K for the fiscal year ended
March 31, 1997, the Company reached a settlement with a former employee during
May 1997 to settle two legal actions. Unresolved was the amount of attorney's
fees owed to the former employee's counsel. On October 17, 1997 the judge ruled
in favor of the former employee and awarded post judgment attorney fees in the
amount of $96,268.00. During November 1997, the parties settled the post
judgment attorney's fees for the sum of $82,500.00. The loss from discontinued
operations for the three months and nine months ended December 31, 1997 directly
relates to legal fees incurred by the Company relative to the settlement,
additional reserves to cover the $82,500.00 settlement, and elimination of
deferred tax assets which are not expected to be recognized in the future.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company continues to maintain a strong financial position. Cash and
marketable securities at December 31, 1997 were $1,728,000, including
Certificates of Deposit of $363,000, compared to $1,290,000, including
Certificates of Deposit of $160,000, at year ending March 31, 1997. The Company
has a current ratio of better than 10 to 1 at the end of the third fiscal
quarter.
As discussed, during May 1997 the Company reached a settlement with a former
employee. As part of the settlement, the Company paid the former employee
$185,000. These funds were paid from the litigation deposit the Company made
when it appealed the judgment. The bond and litigation deposit were reduced to
$75,000, as both parties agreed upon, pending the resolution of the attorney's
fees owed the former employee's counsel. During December 1997, the agreed upon
post judgment attorney's fees of $82,500 were paid from the $75,000 litigation
deposit, with the balance paid from operating funds of the Company.
- 9 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In November 1995, in the Superior Court of Ventura County, California, a
former employee won an award against the Company for $203,403. The lawsuit
related to the termination, in October 1993, of an employment contract
entered into between the Company and the individual during July 1993. The
Company appealed this award and posted an appeal bond with the Court. On
March 31, 1997 the Appeals Court issued its opinion affirming the judgement
against the Company. The judgement became final on April 30, 1997.
In December 1995, in the United States District Court, Northern District of
California, the Company filed a complaint against the same former employee
and his company alleging that they copied PerfectData's trademark and trade
dress. On December 21, 1995, the Court granted the Company's motions for a
restraining order and preliminary injunction which enjoin the defendants from
the manufacture and distribution of the product in question. This case had
been set for trial December 1, 1997.
During May 1997, the parties reached a global settlement of both actions.
The Company paid the former employee the sum of $185,000 in exchange for its
right to seek further appeal. Defendants in the trademark infringement
action have agreed to assign and transfer any and all right, title and
interest in the trademark, trade name, and trade dress of their canned air
product "Perfect Cleaner" and any and all goodwill of the Perfect Cleaner
business to the Company. The former employee and his company have further
agreed not to sell a canned air product in the United States or Canada for
three years. Unresolved was the amount of attorney's fees owed to the former
employee's counsel for services rendered during the Company's appeal of the
original judgement against the Company. The parties agreed to have the
issue decided by a judge. On July 21, 1997, a hearing was held in the
Superior Court of Ventura County, California. On October 17, 1997 the judge
ruled in favor of the former employee and awarded post-judgment attorney fees
in the amount of $96,268.32. During November 1997, the parties settled the
post-judgment attorney's fees for the sum of $82,500, which the Company paid
the former employee and his attorneys in December, 1997.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Inapplicable
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the quarter for which
this report is filed.
- 10 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFECTDATA CORPORATION
Date: FEBRUARY 10, 1998 JOSEPH MAZIN
---------------------------
Joseph Mazin
President,
Chief Executive Officer and
Chairman of the Board
Date: FEBRUARY 10, 1998 IRENE J. MARINO
---------------------------
Irene J. Marino
Corporate Secretary,
V.P. Finance and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,154
<SECURITIES> 574
<RECEIVABLES> 292
<ALLOWANCES> 13
<INVENTORY> 753
<CURRENT-ASSETS> 2,969
<PP&E> 1,379
<DEPRECIATION> (1,251)
<TOTAL-ASSETS> 3,427
<CURRENT-LIABILITIES> 274
<BONDS> 0
0
0
<COMMON> 8,117
<OTHER-SE> (4,964)
<TOTAL-LIABILITY-AND-EQUITY> 3,427
<SALES> 2,717
<TOTAL-REVENUES> 2,717
<CGS> 1,749
<TOTAL-COSTS> 1,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (137)
<INCOME-TAX> 72
<INCOME-CONTINUING> (209)
<DISCONTINUED> (181)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (390)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
