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 June 30, 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
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(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 X No: __
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As of August 14, 2002, 2,322,700 shares of Common Stock of the issuer were
outstanding.
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PERMA-TUNE ELECTRONICS, INC.
CONDENSED BALANCE SHEET
June 30, December 31,
2002 2001
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(Unaudited)
ASSETS
Current assets:
Cash $ 19,798 $ 811
Accounts receivable 13,553 16,367
Inventory 36,368 33,813
Other 529 160
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Total current assets 70,248 51,151
Property and equipment, net 4,804 6,486
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$ 75,052 $ 57,637
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit $ 22,800 $ 20,800
Accounts payable 66,102 39,055
Accrued expenses 5,806 5,744
Due to stockholders 40,000 40,000
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Total current liabilities 134,708 105,599
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Notes payable - stockholders 20,000 -
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 (343,601) (311,907)
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Total stockholders' equity (deficit) (79,656) (47,962)
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$ 75,052 $ 57,637
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See accompanying notes to interim condensed financial
statements.
PERMA-TUNE ELECTRONICS, INC.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
------------------ --------------- ----------------- ------------------
Net sales $ 64,538 $ 74,023 $ 127,101 $ 127,342
Cost of goods sold 28,499 26,501 50,822 52,331
------------------ --------------- ----------------- ------------------
Gross profit 36,039 47,522 76,279 75,011
Operating expenses:
General and administrative 29,212 37,631 65,949 88,027
Legal and professional 31,074 29,746 36,262 60,036
Research and development - 2,951 - 4,510
Depreciation 841 841 1,682 1,682
------------------ --------------- ----------------- ------------------
61,127 71,163 103,893 154,255
------------------ --------------- ----------------- ------------------
Loss from operations (25,088) (23,641) (27,614) (79,244)
Other income (expense):
Other - 5 - 5,006
Interest expense (1,465) (3,899) (4,080) (5,313)
------------------ --------------- ----------------- ------------------
(1,465) (3,587) (4,080) (307)
------------------ --------------- ----------------- ------------------
----------------- ------------------
------------------ --------------- ----------------- ------------------
Net loss $ (26,553) $ (27,535) $ (31,694) $ (79,551)
================== =============== ================= ==================
Basic and diluted loss per
common share $(0.01) $(0.01) $(0.01) $(0.03)
================== =============== ================= ==================
Weighted average shares
outstanding 2,312,700 2,292,700 2,312,700 2,292,700
================== =============== ================= ==================
See accompanying notes to interim condensed financial
statements.
PERMA-TUNE ELECTRONIC, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
-----------------------------------
2002 2001
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Cash flows from operating activities:
Net loss $ (31,694) $ (79,551)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,682 1,682
Changes in operating assets and liabilities
Accounts receivable 2,446 (16,168)
Inventory (2,556) 17,785
Prepaid expenses - 3,414
Accounts payable and accrued expenses 27,109 39,402
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Net cash provided by (used in) operating
activities (3,013) (33,436)
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Cash flows from investing activities:
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Capital expenditures - (244)
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Cash flows from financing activities:
Proceeds from the sale of stock - 5,000
Proceeds from stockholder advances 20,000
Net change in line of credit 2,000 20,000
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Net cash provided by financing activities 22,000 25,000
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Net increase (decrease) in cash and cash equivalents 18,987 (8,380)
Cash and cash equivalents at beginning of period 811 11,046
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Cash and cash equivalents at end of period $ 19,798 $ 2,666
============= ===============
Cash paid for:
Interest $ 3,615 $ 5,313
See accompanying notes to interim condensed financial
statements.
PERMA-TUNE ELECTRONICS, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
June 30, 2002
Note 1: Presentation
The condensed balance sheet of the Company as of June 30, 2002, the related
condensed statements of operations for the three and six months ended June 30,
2002 and 2001 and the statements of cash flows for the six months ended June 30,
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 and
six months ended June 30, 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.
The Company has introduced new products, has updated its web page and has
reduced its operating losses. The Company has reduced legal and accounting
costs, but still carries a high debt load for services related to these items
accrued in the last 39 months.
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, and on introducing a new product line for late model Porsche cars.
NEW PRODUCTS / RECENT DEVELOPMENTS
In the second quarter of 2002, the Company adapted the Plasma Injector
technology for the Porsche 993 to increase its product offerings for late model
Porsche cars. The first experimental Plasma Drive for the 993 was tested on a
Porsche 908 at Texas Motor Speedway during the Memorial Day Porsche Club of
America race. The 908 used in the testing has the same twin-plug engine design
as the street-legal 993, but the model 908 was built by Porsche for racing only.
Because it has the same basic engine design and a well-documented track record
against which to compare the Plasma Drive's performance, the Company believes
that the 908 is an ideal platform for testing.
The test indicated that the Plasma Drive ignition system improves the combustion
efficiency of a high-compression twin-plug engine. The increase in performance
demonstrated by this test has encouraged the Company to plan more scientific
testing using a gas analyzer to quantify and document the improvement in
combustion efficiency. The Company intends to conduct the testing with a
production model 993 Plasma Drive on a late model Porsche 993. The first
production model 993 Plasma Drive ignition system is under development and is
scheduled for testing in the third quarter of 2002.
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. In the second quarter of 2002, the Company designed and set up
computer infrastructure for 87 new kits that combine its ignition systems,
coils, repair harnesses, spark plug wire sets and spark plugs. These kits cover
all air-cooled Porsche cars up to the 1992 model year. The Company intends to
create kits for 1993 and newer model year cars in the third quarter of 2002.
The Company sent information packs and sample kits including compact disks with
downloadable photographs, technical information, installation guides and
troubleshooting assistance for its distributors in the second quarter of 2002.
The Company's website (www.perma-tune.com) has been updated to include many of
these new products. We plan to expand the website to include all of our new
products in the third quarter of 2002, creating an online catalog.
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 (a major revision was 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
12 wholesale distributors who supply an unknown number of distributors and
retailers. In June, 2002, the Company filled its first order for FVD Worldwide,
a large, international mail-order distributor. The products of the Company are
sold throughout the United States and are now being sold in Germany, France,
Australia, Belgium, Canada, Netherlands, Italy, Israel, Finland, Japan,
Malaysia, Norway, England, Spain, Sweden, Hong Kong, Taiwan and the United Arab
Emirates.
The Company's short-term marketing strategy is to begin shipment of late-model
Porsche Plasma Injection systems that include the Plasma Drive, spark plug wires
and electrodes (spark plugs). Implementation of this strategy has continued in
the second 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. The
Company may create new products for American V-8 engines based on its Plasma
Injection technology for the models of the V-8 that may not require that
production tooling be made. 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, 993 and Carrera, 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 June 30, 2002 Compared to the Quarter Ended June 30, 2001
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In the second quarter of 2002, the Company experienced a 12.8% sales decrease as
gross sales decreased from $74,023 in the second quarter of 2001 to $64,538 in
the second quarter of 2002.
Gross profit in the second quarter of 2002 was $36,039 compared to $47,522 in
the second quarter of 2001. As a percentage of sales, gross profit decreased in
the second quarter of 2002 to 56% from 64% in the second 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 it 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 $29,212 and $37,631 in the
second quarters of 2002 and 2001, respectively. As a percentage of sales, G & A
expenses decreased to 45% from 51%. 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.
Research and development expenses were $2,951 in the second quarter of 2001 and
$0 in the second quarter of 2002. This decrease in R&D expenditures was due to
the deliberate curtailment of expenditures to increase the Company's
profitability.
Interest expenses decreased from $3,899 in the second quarter of 2001 to $1,465
in the second quarter of 2002. This decrease reflects progress the Company is
making in satisfying its interest-bearing debt.
Since the Company incurred net losses for both the first quarter 2001 and 2002,
there was no income tax liability for either quarter.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
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In the first six months of 2002, the Company experienced a minimal sales
decrease as gross sales decreased from $127,342 in the first six months of 2001
to $127,101 in the first six months of 2002.
Gross profit in the first six months of 2002 was $76,279 compared to $75,011 in
the first six months of 2001. As a percentage of sales, gross profit increased
in the first six months of 2002 to 60% from 59% in the first six months of 2001.
General and Administrative (G & A) expenses were $65,949 and $88,027 in the
first six months of 2002 and 2001, respectively. As a percentage of sales, G & A
expenses decreased to 52% from 69%. 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.
Research and development expenses were $4,510 in the first six months of 2001
and $0 in the first six months of 2002. This decrease in R&D expenditures was
due to the deliberate curtailment of expenditures to increase the Company's
profitability.
Interest expenses decreased from $5,313 in the first six months of 2001 to
$4,080 in the first six months of 2002. This decrease reflects progress the
Company is making in satisfying its interest-bearing debt.
Since the Company incurred net losses for both the first six months of 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 $340,919 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 June 30, 2002, the Company's accumulated losses were $343,601.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended June 30, 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 June 30, 2002, the principal balance owed on this line of credit was
$22,800, with an interest rate of 7.75%.
On June 28, 2002 the Company entered into a $20,000 loan with Lonnie Lenarduzzi
and Linda Decker, President and CFO, respectively, of the Company. The loan is
unsecured, and has an initial interest rate of 10%. The maturity date is June
28, 2004. For the period ended June 30, 2002, the principal balance owed on this
loan was $20,000, with an interest rate of 10%.
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 June 30, 2002, 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 and 993
product lines.
As of June 30, 2002 the Company's cash reserves totaled $19,798 and total
current assets were $70,248. 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 June 30, 2002 was $36,368. Inventory at June 30, 2001 was $33,813.
The Company presently has an outstanding loan payable on demand to Terry Taylor,
a stockholder. Principal balance as of June 30, 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 improved to 0.52 in the second quarter of
2002, compared with 0.48 at December 31, 2001. 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 2.8 and 3.1 for second quarter 2002
and 2001, respectively.
The Company's accounts receivable ratios were 20 days and 28 days for the second
quarters of 2002 and 2001, 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.
The Company is seeking to acquire complimentary businesses to further its
prospects for profitability. However, the Company's Board of Directors will
consider businesses in other industries if it believes that shareholder value
will be enhanced by such transaction.
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.
SUBSEQUENT EVENTS
On July 24, 2002, the Company held its annual meeting of stockholders. The
Company's majority stockholders (1) elected the following individuals to serve
as directors of the Company: Lonnie Lenarduzzi, Linda Decker, Larrie Lenarduzzi,
Wayne Robertson, and Harold "Red" Smith; (2) approved the amendment of the
Articles of Incorporation to increase the number of authorized shares of common
stock to 50,000,000 shares; and (3) ratified the appointment of Malone & Bailey,
PLLC, as the Company's independent auditors for fiscal year 2002.
OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.4 Articles of Amendment to Articles of Incorporation
10.1 Promissory note between Perma-Tune and Lenarduzzi/Decker
99.1 Certification of Chief Executive Officer and Chief Financial Officer
b) Reports on Form 8-K
None.
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: August 14, 2002
By: /s/ Linda Decker
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Linda Decker
Chief Financial Officer