SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
From the transition period from ___________ to ____________.
Commission File Number 000-31631
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PERMA-TUNE ELECTRONICS, INC.
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(Exact name of small business issuer as specified in its charter)
Texas 75-2510791
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 SOUTH BIRMINGHAM STEET, WYLIE, TEXAS 75098
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(Address of principal executive offices)
(972) 442-6774
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(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:
Yes XX No: __
--
As of May 13, 2002 2,312,700 shares of Common Stock of the issuer were
outstanding.
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PERMA-TUNE ELECTRONICS, INC.
CONDENSED BALANCE SHEET
March 31, December 31,
2002 2001
---------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash $ 507 $ 811
Accounts receivable 19,954 16,367
Inventory 36,324 33,813
Other 529 160
---------------- -----------------
Total current assets 57,314 51,151
Property and equipment, net 5,645 6,486
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$ 62,959 $ 57,637
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit $ 22,800 $ 20,800
Accounts payable 47,517 39,055
Accrued expenses 5,745 5,744
Due to stockholder 40,000 40,000
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Total current liabilities 116,062 105,599
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Stockholders' equity (deficit):
Common stock, no par value, 10,000,000 shares
authorized: 2,312,700 shares issued and outstanding: 263,945 263,945
Accumulated deficit (317,048) (311,907)
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Total stockholders' equity (deficit) (53,103) (47,962)
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$ 62,959 $ 57,637
================ =================
See accompanying notes to interim condensed financial
statements.
PERMA-TUNE ELECTRONICS, INC.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended
March 31,
2002 2001
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Net sales $ 62,563 $ 53,319
Cost of goods sold 22,323 25,831
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Gross profit 40,240 27,488
Operating expenses:
General and administrative 36,737 50,396
Legal and professional 5,188 30,296
Research and development - 1,559
Depreciation 841 841
---------------- ---------------
42,766 83,092
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Loss from operations (2,526) (55,604)
Other income (expense):
Other - 5,001
Interest expense (2,615) (1,414)
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(2,615) 3,587
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Net loss $ (5,141) $ (52,017)
================ ===============
Basic and diluted loss per common share $(0.00) $(0.02)
================ ===============
Weighted average shares outstanding 2,312,700 2,217,700
================ ===============
See accompanying notes to interim condensed financial
statements.
PERMA-TUNE ELECTRONIC, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
-----------------------------------
2002 2001
-----------------------------------
Cash flows from operating activities:
Net loss $ (5,141) $ (52,017)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 841 841
Changes in operating assets and liabilities
Accounts receivable (3,587) (11,956)
Inventory (2,511) 11,461
Prepaid expenses (369) 3,414
Accounts payable and accrued expenses 8,463 24,939
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Net cash provided by (used in) operating activities (2,304) 28,699
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Cash flows from investing activities:
---------------- ---------------
Capital expenditures - (244)
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Cash flows from financing activities:
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Net change in line of credit 2,000 19,600
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Net increase (decrease) in cash and cash equivalents (304) (3,962)
Cash and cash equivalents at beginning of period 811 11,046
---------------- ---------------
Cash and cash equivalents at end of period $ 507 $ 7,084
================ ===============
Cash paid for:
Interest $ 2,615 $ 1,414
See accompanying notes to interim condensed financial
statements.
PERMA-TUNE ELECTRONICS, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
March 31, 2002
Note 1: Presentation
The condensed balance sheet of the Company as of March 31, 2002, the related
condensed statements of operations for the three months ended March 31, 2002 and
2001 and the statements of cash flows for the three months ended March 31, 2002
and 2001 included in the condensed financial statements have been prepared by
the Company without audit. In the opinion of management, the accompanying
condensed financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to summarize fairly the Company's financial
position and results of operations. The results of operations for the three
months ended March 31, 2002 are not necessarily indicative of the results of
operations for the full year or any other interim period. The information
included in this Form 10-QSB should be read in conjunction with Management's
Discussion and Analysis and Financial Statements and notes thereto included in
the Perma-Tune Electronics, Inc. December 31, 2001 Form 10-KSB.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This report contains forward looking statements within the meaning of Section
27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act
of 1934. These forward looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under
"Factors that may affect future results" in this Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
report. The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's financial statements and notes
thereto included elsewhere in this report.
OVERVIEW
Since its inception, the Company has focused on the production, research and
development of Porsche and Ferrari high performance ignition systems. The
Company's principal source of revenue has been from the Porsche repair parts
product line. In 1997 the Company began development of new product lines to
supply many repair and performance parts for a variety of cars and trucks. The
Company cannot estimate the size of its marketplace.
Production, profit margin and operational efficiency have all been improved in
the first quarter of 2002. However, the Company experienced continuing losses
due to the heavy burdens of legal and accounting expenses involved with
fulfilling the requirements of a fully reporting company. While the Company has
taken steps to contain these costs, it still carries a high debt load for
services related to these items accrued in the last 36 months. Bringing the bulk
of that work in-house, rather than outsourcing it has reduced administrative and
legal fees associated with the preparation of quarterly filings with the SEC.
The Company's decision to change audit firms in January, 2002 will further
reduce these fees for future filings.
Management believes it is beginning to see the benefits of taking advantage of
the infrastructure improvements it has made (implementation of fully integrated
manufacturing/data base accounting software, the dedication of an officer to
finance/SEC compliance and marketing planning, and outsourcing of certain
manufacturing functions).
Since the Company has not yet raised money from its outstanding warrants, we
have focused on expanding our existing product lines to provide operating
capital. The Company has concentrated its efforts on streamlining and increasing
the production of its existing product lines in order to eliminate backorders
for Porsche products, and on introducing a new line of spark plug wire sets for
Porsche cars.
NEW PRODUCTS / RECENT DEVELOPMENTS
The Company has completed R&D for a Plasma Injector designed for the Porsche
964, a late model Porsche. In the first quarter of 2002, the Company adapted the
964 Plasma Drive technology to the other late model Porsche cars, the models 944
and Carrara.
The Company is currently able to manufacture Plasma Injectors utilizing existing
manufacturing facilities without incurring additional expense. However, new
product development and the expansion of our manufacturing staff and facilities
have been halted pending funding.
In the first quarter of 2002, the Company created the following new products and
set up the infrastructure for manufacturing and finished goods in its computer
system: 911SC041, 911SC042, 911SC043, 911041, 911042, 911043, 911020, 911021,
911022, 944, 964 and 911CR.
In the second quarter of 2002, the Company intends to design and set up computer
infrastructure for approximately 65 kits that combine its ignition systems,
coils, repair harnesses, spark plug wire sets and spark plugs for specific cars.
Market feedback the Company has received has indicated that mechanics using the
Company's products desire a simple, one-kit solution to complex electrical
problems on the cars they repair. Wholesale distributors gave the Company
positive feedback on the packaging and pricing of these kits in preliminary
discussions. The Company is preparing information packs and sample kits
including CDs with downloadable photographs, technical information, installation
guides and troubleshooting assistance for its distributors, and expects to ship
them in May, 2002.
MARKETING STRATEGY
Until it is financially able to put a public relations firm on retainer, the
Company will continue its current marketing strategy of conducting sales
training missions to its wholesale distributors, continuing to improve and
expand its website (major revision expected to be posted in mid-May), and making
low-cost postcard mailings to alert distributors to new product offerings. The
Company now provides its warehouse distributors with compact disks containing
information on all of its product offerings in a format that distributors can
use to promote the Company's products in their advertising and catalogs.
The Company continues its expansion of its distribution network and now sells to
11 wholesale distributors who supply an unknown number of distributors and
retailers. The products of the Company are sold throughout the United States and
are now being sold in Germany and France.
The Company's short-term marketing strategy is to begin shipment of Porsche 964
Plasma Drives and several new configurations of spark plug wire sets.
Implementation of this strategy was begun in the first quarter of 2002. The
Company already has some of these products in inventory and is ready to produce
more. A distribution network for these parts has already been established. The
Company is working to expand distribution of these new offerings domestically by
adding new warehouse distributors to its network.
The interim marketing strategy is to develop the Honda and Toyota product line
in the third quarter of 2002, and then move on to the development of the market
for Perma-Tune products for domestic makes in 2003. The product lines require
that production tooling be made, for which funding is currently unavailable.
Most of the Company's distribution network already includes Asian car parts.
There is interest in the Perma-Tune Toyota repair parts because there is
currently no aftermarket supply available. The Company knows of no aftermarket
manufacturing companies making replacement ignition modules for these
automobiles.
All Perma-Tune ignition systems designed for street vehicles, except for the
recently introduced products for the Porsche 944, 964 and Carrara, are certified
by California Air Resources Board Executive Order D-210. There was no testing
required to obtain this certification because, in compliance with CARB
regulations, the Company was able to state that its products do not alter the
ignition timing of the engine. Therefore, if the vehicle meets EPA standards
with its original ignition system, it will meet EPA standards with a Perma-Tune
ignition system installed on it. The Company anticipates that its newer products
will be certified as well, since they also do not alter the ignition timing of
the engine.
MANUFACTURING OVERVIEW
Management has prepared for rapid growth. The Company's manufacturing technique
is flexible because of its modular design and it can respond easily to customer
demand. Modules can be mass-produced and then assembled to meet changing
purchase orders. Production can be increased and new products introduced
readily. Currently the Company is operating at a small percentage of its
manufacturing capacity.
COMPARISON OF OPERATING RESULTS
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
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In the first quarter of 2002, the Company experienced a 17% sales growth as
gross sales increased from $53,319 in the first quarter of 2001 to $62,563 in
the first quarter of 2002. A total of 298 units were sold in the first quarter
of 2002 at an average price of $183. A total of 251 units were sold in the first
quarter of 2001 at an average price of $185.
Gross profit in the first quarter of 2002 was $40,240 compared to $27,488 in the
first quarter of 2001. As a percentage of sales, gross profit increased in the
first quarter of 2002 to 64.3% from 51.5% in the first quarter of 2001. The
Company has begun sub-contracting some labor-intensive operations to increase
its gross profit margin and to allow for rapid growth. The Company believes it
can further improve its profit margin, as it has lined up additional
sub-contractors to use in this expense-reducing effort, and will begin
outsourcing additional segments of production once capital funding allows us to
take advantage of the economies of scale these opportunities offer the Company.
The higher the quantity of parts we can subcontract to outside vendors, the
better price per piece the Company will be able to negotiate with each vendor,
lowering our cost of goods sold and raising our profit margin. Circuitry which
is currently hand-made in-house, can be outsourced for robotic manufacture with
an expected increase in accuracy and reliability, but the Company will need to
have the ability to make a large quantity purchase commitment and cover up-front
set-up costs to implement these plans. In all cases, the Company will retain
control over production of the Perma-Tune product line and its trade secrets by
manufacturing the key components itself.
General and Administrative (G & A) expenses were $36,737 and $50,396 in the
first quarters of 2002 and 2001, respectively. As a percentage of sales, G & A
expenses decreased to 58.7% from 94.5%. The figures for both 2002 and 2001 are
unusually high by percentage. The major components of this atypical result are
extra salaries and wages (with related payroll taxes) for Company personnel to
carry out research and development work, and the internal costs associated with
being a fully reporting company. These expenses have been reigned in by changing
to a more cost-effective accounting firm, as well as having in-house personnel
author and edit SEC filings for review by the Company's attorney.
Interest expenses increased from $1,414 in the first quarter of 2001 to $2,615
in the first quarter of 2002. This increase reflects interest associated with
agreements with the Company's previous accountants to allow the Company to pay
its outstanding balances as revenue became available from the collection of
normal accounts receivable. Third-party debt levels have been reduced in the
first quarter of 2002. The Company has paid off outstanding balances with its
attorneys, and in addition to making substantial headway in paying off its
remaining balance for accounting services, the Company made the decision to
change accounting firms in January 2002 in order to substantially reduce future
expenditures on financial reviews and audits. This change in audit firms was
reported via a Form 8-K in January, 2002.
Research and development expenses were $1,559 in the first quarter of 2001 and
$0 in the first quarter of 2002. This decrease in R&D expenditures was due to
the deliberate curtailment of expenditures to increase the Company's
profitability.
Since the Company incurred net losses for both the first quarter 2001 and 2002,
there was no income tax liability for either quarter. The Company has a net
operating loss carry-forward available in the amount of $317,048 to be offset
against future income through years ended December 31, 2011 through 2021. The
majority of this net operating loss carry-forward, $286,250, has occurred in the
last five years. This was the direct result of increased R&D expenses for
developing new products as well as the costs associated with the public offering
that will fund the mass production of all product lines.
As of March 31, 2002, the Company's accumulated losses were $317,048.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended March 31, 2002 the Company has not generated positive cash
flow from its own operations due to the preliminary nature of such operations,
ongoing investment in research and development, and expenditures to build the
appropriate infrastructure to support its expected growth. Consequently, the
Company has been dependent on private placements of its equity securities and
debt financing to fund its cash requirements, as well as revenues provided by
the normal operations of Perma-Tune.
On March 20, 2002 the Company entered into a $25,000 line of credit with The
American National Bank of Texas in Wylie that is collateralized by the Company's
accounts receivable, inventory and equipment, with an initial interest rate of
7.75%. Interest is variable, based on the Prime Rate plus 3%. Accrued interest
is payable monthly, and the maturity date is March 20, 2003. For the period
ended March 31, 2002, the principal balance owed on this line of credit was
$22,800, with an interest rate of 7.75%.
On December 8, 1997, the Company issued an offering circular for 125,000 units
priced at $2.00 per unit. Each unit entitled the investor to one share of common
stock and three stock purchase warrants. Each warrant entitled the holder to
purchase one share of stock for $2.00. The warrants expire on December 31, 2003.
At December 31, 2001, there are 348,000 warrants outstanding.
Proceeds from the exercise of warrants are planned to fund production tooling
and start up costs of the Honda and Toyota products lines. The Company plans to
manufacture the required tooling estimated at $35,000 in materials and 560 man
hours. There may be other costs associated with attaining the California Air
Resources Board certification for the Honda, Toyota and Porsche 964 product
lines.
As of March 31, 2002 the Company's cash reserves totaled $507 and total
current assets were $57,314. The Company is continuing production and sales
efforts as well as further research and development and has yet to break even in
terms of both cash flow and profitability. For the remainder of 2002 and into
2003, the Company has no long-term commitments but expects to incur additional
costs for research and development. It also expects to expand its sales and
marketing effort. These efforts could significantly increase demand for the
Company's products beyond the Company's current production capacity. While the
Company believes it can increase its production capacity to meet sales demand,
significant additional capital could be required to meet expansion requirements.
Inventory at March 31, 2002 was $36,324. Inventory at March 31, 2001 was
$33,813.
The Company presently has an outstanding loan payable on demand to Terry Taylor,
a stockholder. Principal balance as of March 31, 2002 is $40,000. The loan bears
interest at a rate of 10%. Interest is payable quarterly. The loan is secured by
inventory.
The Company's working capital ratio was 0.5 in the first quarter of 2002,
compared with 0.5 in the first quarter of 2001, remaining stable. The Company
will retire accounts payable from income generated by normal operations. It has
agreements with its former accounting firm to pay them as funding becomes
available.
The Company's inventory turnover ratios were .67 and .61 for first quarter 2001
and 2002, respectively, remaining stable.
The Company's accounts receivable ratios were 26 days and 29 days for the first
quarters of 2001 and 2002, respectively. The Company continues to manage its
accounts receivable very effectively, collecting monies due within the terms
offered to its customers.
The Company is taking steps to raise equity capital. There can be no assurance
that any new capital would be available to the Company or that adequate funds
for the Company's operations, whether from the Company's revenues, financial
markets, or other arrangements will be available when needed or on terms
satisfactory to the Company. The Company has no commitments from officers,
directors or affiliates to provide funding. The failure of the Company to obtain
adequate additional financing may require the Company to delay, curtail or scale
back some or all of its research and development programs, sales and marketing
efforts, and manufacturing operations. Any additional financing may involve
dilution to the Company's then-existing shareholders.
Without additional capital funding, the Company believes it can operate at its
current level of liquidity for twenty-four to thirty-six months. However, it
hopes to obtain short-term funding until operations are ramped up, creating the
profitability that will improve its liquidity position.
OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
On January 17, 2002, the Company filed a report on Form 8-K relating to
a change in auditors from Travis Wolff and Company, LLC to Malone & Bailey,
PLLC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PERMA-TUNE ELECTRONICS, INC.
Date: May 13, 2002
By: /s/ Linda Decker
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Linda Decker
Chief Financial Officer