<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, 1998 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, 1999, there were 3,155,506 shares of common stock outstanding.
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PERFECTDATA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Balance Sheets - December 31, 1998 and
March 31, 1998 2
Statements of Earnings - quarters ended December 31,
1998 and 1997 and nine months ended December 31, 1998
and 1997 3
Statements of Shareholders' Equity -
nine months ended December 31, 1998 4
Statements of Cash Flows - nine months
ended December 31, 1998 and 1997 5
Notes to Financial Statements 6 - 8
Management's discussion and analysis of
financial condition and results of
operations 9 - 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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PERFECTDATA CORPORATION
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except number of shares)
<TABLE>
<CAPTION>
Dec. 31, March 31,
1998 1998
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents, including
short-term certificates of deposit of
$219 at December and $365 at March $ 967 $ 1,328
Accounts receivable, less allowance
for doubtful receivables of
$5 at December and $12 at March 209 289
Inventories 578 571
Prepaid expenses and other current assets 216 87
Marketable securities, short-term 355 448
Deferred income tax benefit 80 58
-------- ---------
Total current assets 2,405 2,781
Property, plant and equipment, net 92 118
Deferred Income Tax benefit 76 123
Other assets, net 31 31
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$ 2,604 $ 3,053
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 37 $ 111
Accrued expenses 91 94
Accrued salaries, wages and vacation 44 54
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Total current liabilities 172 259
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Shareholders' equity:
Preferred stock. Authorized 2,000,000
shares; none issued - -
Common stock, no par value. Authorized
10,000,000 shares; issued and
outstanding 3,155,506 shares at
December and 3,163,606 shares at March 8,111 8,117
Accumulated deficit (5,620) (5,345)
Allowance for gain (loss) on
marketable securities (59) 22
-------- ---------
Net shareholders' equity 2,432 2,794
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$ 2,604 $ 3,053
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</TABLE>
See accompanying notes to financial statements.
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PerfectData Corporation
STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
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Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales $ 396 $ 525 $1,271 $2,717
Costs and Expenses:
Cost of sales 245 309 779 1,749
Selling, general and administrative 266 333 834 1,184
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Total costs and expenses 511 642 1,613 2,933
Income (loss) from operations (115) (117) (342) (216)
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Other income and (expense):
Interest income, net 5 8 19 24
Other, net 14 17 73 55
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Total other income and (expense) 19 25 92 79
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Income (loss) from continuing
operations before income taxes (96) (92) (250) (137)
Income tax (provision) benefit (6) (24) (25) (72)
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Income (loss) from continuing
operations (102) (116) (275) (209)
Gain (loss) on disposal of
discontinued operations - (118) - (181)
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Net income (loss) $ (102) $ (234) $ (275) $ (390)
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-----------------------------------------------------------
Net income (loss) per common share:
Income (loss) from continuing
operations $ (.03) $ (.04) $ (.09) $ (.07)
Gain (loss) on disposal of
discontinued operations - (.04) - (.06)
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$ (.03) $ (.08) $ (.09) $ (.13)
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Weighted average shares outstanding 3,156 3,143 3,160 3,110
</TABLE>
See accompanying notes to financial statements.
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PerfectData Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Period from March 31, 1998 through December 31, 1998
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Common Stock Allowance Net
--------------------------- Accumulated for gain/(loss) shareholders
Shares Amount deficit on mkt. sec. equity
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<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1998 3,164 $8,117 $(5,345) $ 22 $2,794
Stock repurchased
and retired (8) (6) - - (6)
Net unrealized gain/
(loss) on marketable
securities - - - (81) (81)
Net earnings (loss) - - (275) - (275)
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Balance at
December 31, 1998 3,156 $8,111 $(5,620) $(59) $2,432
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</TABLE>
See accompanying notes to financial statements.
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PERFECTDATA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Month Period
December 31,
-------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (275) $ (390)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
(Gain) loss on disposal of
discontinued operations - 181
Depreciation and amortization 29 29
Deferred income tax (benefit) provision 25 71
Decrease in litigation deposit - 305
(Increase) decrease in accounts
receivable 80 428
(Increase) decrease in inventories (7) 430
(Increase) decrease in prepaid
expenses and other current assets (129) (67)
(Increase) decrease in other assets - -
Increase (decrease) in accounts
payable (74) (195)
Increase (decrease) in accrued
expenses (3) (58)
Increase (decrease) in accrued
salaries, wages and vacation (10) (6)
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NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (364) 728
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment $ (3) $ (2)
(Increase) decrease in investment
securities, net 12 (198)
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NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 9 (200)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options - 66
Repurchase of common stock (6) -
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NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (6) 66
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NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS (361) 594
CASH PROVIDED (USED) IN
DISCONTINUED OPERATIONS
- (331)
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Increase (decrease) in cash and
cash equivalents (361) 263
Cash and cash equivalents at
beginning of period 1,328 891
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 967 $1,154
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</TABLE>
See accompanying notes to financial statements.
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PERFECTDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the
Company's filings with the Securities and Exchange Commission and in its
reports to stockholders. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying information that is forward-looking, including, without
limitation, statements regarding the Company's future financial performance,
the effect of government regulations, national and local economic conditions,
the competitive environment in which the Company operates, results or success
of discussions with other entities on mergers, acquisitions, or alliance
possibilities and expansion of product offering. Actual results may differ
materially from those described in the forward-looking statement. The Company
cautions that the foregoing list of important factors is not exclusive. The
Company does not undertake to update any forward-looking statement that may
be made from time to time by or on behalf of the Company either oral or
written.
2. 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, 1998. 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, 1998 and the
results of its operations and cash flows for the nine months ended December 31,
1998 and 1997.
3. Marketable securities classified as current assets at December 31, 1998,
include the following (dollars in thousands):
<TABLE>
<CAPTION>
Fair Value Cost
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<S> <C> <C>
Other Government Obligations $ 26 $ 26
Marketable equity securities 329 388
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$355 $414
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</TABLE>
4. Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at December 31, 1998 and March 31,
1998 consist of the following:
<TABLE>
<CAPTION>
(In thousands)
December 31, 1998 March 31, 1998
----------------- --------------
<S> <C> <C>
Raw materials $241 $238
Work in process 69 68
Finished products 268 265
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$578 $571
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</TABLE>
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5. Property, plant and equipment consist of (dollars in thousands):
<TABLE>
<CAPTION>
Dec. 31, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Machinery and equipment $ 452 $ 467
Furniture and fixtures 140 149
Tooling 387 444
Leasehold improvements 155 155
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1,134 1,215
Less accumulated
depreciation (1,042) (1,097)
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$ 92 $ 118
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</TABLE>
6. The components of the income tax (benefit) provision were (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Current:
Federal $ -
State 1
-----
1
Deferred:
Net (increase) decrease in
deferred tax asset 24
(Increase) decrease in benefit of
NOL carryforwards (149)
Increase (decrease) in valuation allowance 149
-----
$ 25
-----
-----
</TABLE>
At December 31, 1998, the Company had net operating loss (NOL) carryforwards
of approximately $3,293,000 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 likely not be sufficient to realize the
recorded deferred tax asset of $1,204,000. As such, the Company has recorded
a valuation allowance of $1,204,000.
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
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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.
7. During the quarter ended September 30, 1998, the Company repurchased an
aggregate of 8,100 shares of the Company's Common Stock on the open market
for an aggregate value of $6,275.
8. Net earnings (loss) per share is based on the weighted average number of
shares outstanding during each of the respective periods. Common stock
equivalents are excluded from the calculation of weighted average shares
outstanding as their effect is immaterial or antidilutive.
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<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales from continuing operations for the third fiscal quarter ended
December 31, 1998 were $396,000 compared to $525,000 in the year-earlier
period. Net sales for the nine months ended December 31, 1998 were $1,271,000
compared to $2,717,000 in the year-earlier period. The dramatic decline in
sales is primarily due to the loss of the Company's major customer,
PriceCostco. The last sales made to this customer were shipped in the
year-earlier period.
The loss from continuing operations for the three and nine months ended
December 31, 1998 is directly related to the loss of this major customer.
Subsequent to the loss of this customer, there were severe cost cutting
measures taken to reduce costs and expenses. Management commenced seeking out
a sub-tenant to either sub-let a portion of the facility the Company occupies
or the entire facility, enabling the Company to relocate to smaller quarters
and reduce its operating costs. To date, the Company has not yet found a
sub-tenant, but continues looking. There has been a reduction in staff as
well as a very tight control of all expenditures. Management continues
further to negotiate with its suppliers to obtain the best possible pricing
and reduce its cost of materials. During the quarter ended September 30,
1998, the Company reorganized its sales and marketing departments and
appointed a new director to seek ways to further broaden its product lines
and expand distribution.
On December 8, 1998, the Company announced the signing of an agreement in
principal to merge with Pego Systems, Inc. of Long Beach, California. Pego
Systems, Inc. is an engineering and manufacturing Company and distributor of
industrial process equipment for a wide range of industries. The merger is
subject to the signing of a definitive agreement and shareholder and
regulatory approvals.
If the merger is approved, PerfectData will acquire 100% of Pego Systems for
3,750,000 shares of PerfectData's common stock. The merger would provide
additional savings through consolidation of facilities and personnel.
The agreement calls for the Hartcourt Companies, Inc. to acquire up to 5% of
the outstanding shares of PerfectData in a combination of open market and
tender offer.
LIQUIDITY AND CAPITAL RESOURCES
The cash position at December 31, 1998 is $967,000 including certificates of
deposit of $219,000. Working capital at December 31, 1998 is $2,233,000. The
Company has a current ratio of 14 to 1 at the end of the third quarter.
Management believes that the Company's liquidity and working capital
requirements are adequate for the foreseeable future.
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YEAR 2000 UPDATE
In 1998, the Company established and began to implement a program to address
the Year 2000 issue. The Year 2000 program included the implementation of
previously planned systems as well as specific Year 2000 programs. All
programs are on track for completion before the year 2000 with various
applications being upgraded or replaced as needed. The Company does not
expect the Year 2000 program to have a material impact on its results of
operations, liquidity, or financial condition. Additionally, the Year 2000
program has not deferred any other company projects that will have a material
impact on its results of operations, liquidity, or financial condition.
IT SYSTEMS
In 1998, with the development of the Year 2000 program the Company began
undertaking changes to bring compliant systems and accompanying methodology
on board.
The IT systems have been inventoried and the necessary Year 2000 upgrades,
replacements and retrofits identified. These projects are presently in
various stages of analysis, development and implementation. The Year 2000
program is currently scheduled to be completed by the fourth quarter of 1999.
NON-IT SYSTEMS
Non-IT Systems may contain date sensitive embedded technology requiring the
Year 2000 upgrades. Examples of this technology include security equipment
such as access and alarm systems, as well as facilities equipment such as
heating and air conditioning units.
The Company is a product manufacturer; therefore the "embedded chip" issue
relates to production line components as well as to the equipment used by the
Company. Production line components and facilities and equipment are being
inventoried and assessments are in progress.
COSTS
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's results of
operations, liquidity and financial condition. The estimated total cost of
the Year 2000 effort is expected to be under $20,000. This estimate does not
include the cost of the Company's previously planned business systems
upgrades, which have not been accelerated due to the Year 2000 problem.
RISKS AND CONTINGENCY PLANNING
The Company has identified and assessed the areas that may result in an
interruption in, or failure of, certain normal business operations or
activities. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company
is unable to
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determine at this time whether the consequences of the Year 2000 failures
will have a material impact on the Company's results of operations, liquidity
or financial condition. The Year 2000 program is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem. The
Company believes that through its Year 2000 program, the possibility of
significant interruptions of normal business operations should be reduced.
Readers are cautioned that forward looking statements contained in the Year
2000 Update should be read in conjunction with the Company's disclosures
under the heading "Forward Looking Statements".
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PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<S> <C>
(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.
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFECTDATA CORPORATION
Date: February 8, 1999 Joseph Mazin
---------------- ---------------------------
Joseph Mazin
President,
Chief Executive Officer and
Chairman of the Board
Date: February 8, 1999 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-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 967
<SECURITIES> 355
<RECEIVABLES> 214
<ALLOWANCES> 5
<INVENTORY> 578
<CURRENT-ASSETS> 2,405
<PP&E> 1,134
<DEPRECIATION> (1,042)
<TOTAL-ASSETS> 2,604
<CURRENT-LIABILITIES> 172
<BONDS> 0
0
0
<COMMON> 8,111
<OTHER-SE> (5,679)
<TOTAL-LIABILITY-AND-EQUITY> 2,604
<SALES> 1,271
<TOTAL-REVENUES> 1,271
<CGS> 779
<TOTAL-COSTS> 779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (250)
<INCOME-TAX> 25
<INCOME-CONTINUING> (275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (275)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> 0
</TABLE>
