SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-31631
PERMA-TUNE ELECTRONICS, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS 75-2510791
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111SOUTH BIRMINGHAM STREET, WYLIE, TEXAS 75098 (Address of
principal executive offices)
(972) 442-6774
(Issuer's telephone number)
Check whether the issuer (1) has 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 [
]
State the number of shares outstanding of each of the issuer's classes of
common equity. As of March 31, 2001 - 2,292,700 shares of Common Stock
Documents Incorporated by Reference: NONE
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PERMA-TUNE ELECTRONICS, INC.
FORM 10-QSB
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet as of March 31, 2001 3
Statements of Operations for the three months
ended March 31, 2001 and 2000 4
Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Part II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 2. Change in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERMA-TUNE ELECTRONICS, INC
Balance Sheet
(Unaudited)
March 31,
2001
-----------------
ASSETS
Current assets:
Cash $ 7,084
Accounts receivable, trade 15,505
Inventory 38,546
Deposits 160
-----------------
Total current assets 61,295
-----------------
Property, plant and equipment:
Molds and tooling 5,523
Leasehold improvements 3,127
Machinery and equipment 54,574
-----------------
63,224
Less accumulated depreciation 53,971
-----------------
9,253
-----------------
$ 70,548
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 19,600
Accounts payable, trade 46,624
Accrued liabilities 5,830
Note payable - stockholder 40,000
-----------------
Total current liabilities 112,054
-----------------
Note payable - stockholder -
-----------------
Stockholders' deficit:
Common stock - 10,000,000 shares of no par stock
authorized, 2,292,700, and 2,142,700 issued and
outstanding as of March 31, 2001 and 2000,
respectively 243,395
Additional paid-in capital 15,550
Accumulated deficit (300,451)
-----------------
Total stockholders' deficit (41,506)
-----------------
$ 70,548
=================
The accompanying notes are an integral part of the financial statements.
3
PERMA-TUNE ELECTRONICS, INC.
Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
-------------------------------
2001 2000
------------ ---------------
Net sales $ 53,319 $ 49,407
Cost of goods sold 25,831 20,064
------------ ---------------
Gross profit 27,488 29,343
------------ ---------------
Operating expenses:
General and administrative 50,396 22,324
Legal and professional 30,296 18,038
Research and development 1,559 276
Depreciation 841 1,075
------------ ---------------
83,092 41,713
------------ ---------------
Loss from operations (55,604) (12,370)
------------ ---------------
Other income (expense):
Interest expense (1,414) (1,425)
Consulting 5,001 -
------------ ---------------
3,587 (1,425)
------------ ---------------
Loss before federal income tax (52,017) (13,795)
Provision for federal income tax - -
------------ ---------------
Net loss $ (52,017) $ (13,795)
============ ===============
Loss per share:
Basic $ (0.023) $ (0.006)
============ ===============
Diluted $ (0.023) $ (0.006)
============ ===============
The accompanying notes are an integral part of the financial statements.
4
PERMA-TUNE ELECTRONICS, INC.
Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
--------------------------------
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss $ (52,017) $ (13,795)
-------------- --------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 841 1,075
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (11,956) 1,253
Increase (decrease) in inventory 11,461 (8,544)
Decrease in prepaid expenses 3,414 -
Increase in accounts payable 24,938 16,726
Increase (decrease) in accrued expenses 1 (11,443)
-------------- --------------
Total adjustments 28,699 (933)
-------------- --------------
Net cash used in operating activities (23,318) (14,728)
-------------- --------------
Cash flows used in investing activities:
Acquisition of property and equipment (244) (6,212)
-------------- --------------
Cash flows from financing activities:
Repayments of note payable - -
Proceeds from line of credit 21,800 13,500
Repayments of line of credit (2,200) -
Proceed from sale of stock - -
-------------- --------------
Net cash provided by financing activities 19,600 13,500
-------------- --------------
Decrease in cash (3,962) (7,440)
Cash, beginning of period 11,046 24,752
-------------- --------------
Cash, end of period $ 7,084 $ 17,312
============== ==============
Cash paid during the period for:
Interest $ 1,414 $ 1,425
============== ==============
The accompanying notes are an integral part of the financial statements.
5
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
March 31, 2001 and 2000
(Unaudited)
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Perma-Tune Electronics, Inc. (the "Company") is a Texas corporation that was
incorporated in 1993. The Company is engaged in the manufacture and sale of high
performance automobile ignition systems for distribution throughout the United
States and Canada.
TRADE ACCOUNTS RECEIVABLE
The Company provides for uncollectible receivables using an allowance for
doubtful accounts. As of March 31, 2001 and 2000, the Company considers all
receivables fully collectible and, as such, no allowance is included in trade
accounts receivable.
INVENTORIES
Inventories are valued at the lower of cost or market with cost being determined
using the first-in, first-out method and consist of the following at March 31:
2001 2000
Raw materials $ 32,641 $ 43,068
Work in process 664 -
Finished goods 5,241 4,259
------------------- ------------------
$ 38,546 $ 47,327
=================== ==================
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated or
amortized over the estimated useful lives and methods as summarized below:
Asset Type Estimated Life Method
---------- -------------- ------
Molds and tooling 5 years Accelerated
Leasehold improvements 5 - 7 years Accelerated
Machinery and equipment Lease term Straight-line
6
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
March 31, 2001 and 2000
(Unaudited)
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
PROPERTY, PLANT AND EQUIPMENT - (continued)
Maintenance and repairs are expensed when incurred. Material expenditures which
increase the life of an asset are capitalized and depreciated over the estimated
remaining useful life of the asset. The cost of assets sold, or otherwise
disposed of, and the related accumulated depreciation are removed from the
accounts and any gains or losses are reflected in current operations.
Depreciation expense for the three months ended March 31, 2001 and 2000, was
$841 and $1,075, respectively.
FEDERAL INCOME TAXES
Deferred taxes are calculated on temporary differences resulting from different
financial and income tax reporting methods used to recognize income and
expenses. These differences result primarily from methods used to calculate
depreciation and the allowance for doubtful accounts.
ADDITIONAL PAID-IN CAPITAL
The major shareholder of the Company, Lonnie Lenarduzzi, contributed $15,550
cash to the Company in 1994.
CONCENTRATION OF RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
these accounts and believes it is not exposed to any significant risk on cash.
For the three months ended March 31, 2001, two customers accounted for 28%, and
18%, respectively, of net sales.
For the three months ended March 31, 2000, two customers accounted for 36%, and
15%, respectively, of net sales.
The breakdown of these net sales is as follows:
Net sales for the Net sales for the
three months ended three months ended
3/31/01 3/31/00
-------------------- -------------------
A $ - $ 17,568
B $ - $ 7,179
C $ 14,795 $ -
D $ 9,431 $ -
7
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
March 31, 2001 and 2000
(Unaudited)
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
NET LOSS PER SHARE
Basic and diluted (loss) per share is calculated on the weighted average number
of shares of common stock outstanding during the period. The weighted average
number of shares outstanding at March 31, 2001 and 2000 were 2,292,700 and
2,142,700, respectively.
REVENUE RECOGNITION AND PRODUCT WARRANTY
The Company sells its products to wholesale distributors on a no return policy
and revenue is recognized at the time the products are shipped. The product is
warrantied for defects for one year from the user's original purchase, and, at
management's option, the Company will either repair or replace units that prove
to be defective. As of December 31, 1999 and 1998, the Company has determined
that a warranty provision is not necessary given the extremely low number of
returned products during the Company's history.
The Digital Fire product includes software, the Digital Fire Operating System
(DFOS), which is incidental. Therefore, the costs of producing the software are
capitalized as inventory along with the Digital Fire product on a unit specific
basis and charged to cost of goods sold when revenue from the sale of those
units is recognized.
Additionally, the Company has developed an accessory software product termed
Digital Fire Programming Software (DFPS). The Company has not yet placed the
DFPS on the market. The DFPS will be delivered on-line and is used to customize
the Digital Fire product for specific applications. The Company will recognize
revenue at the time the software is delivered. The costs to develop the DFPS
have been expensed as research and development.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all highly
liquid financial instruments purchased with an original maturity of three months
or less to be cash equivalents. At March 31, 2001 and 2000, there were no cash
equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the financial statements at, and during the reporting periods. Actual
results could differ from these estimates.
8
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
March 31, 2001 and 2000
(Unaudited)
Note 2 - INCOME TAXES
At March 31, 2001 and 2000, and for the three months then ended, the Company has
incurred net losses and, therefore, has no tax liability. The net deferred tax
asset generated by the loss carry-forward has been fully reserved. The
cumulative net operating loss carry-forward is approximately $300,000 at March
31, 2001 and will expire in the years 2011 through 2019.
The provision for federal income tax consists of the following for the three
months ended March 31:
2001 2000
-------------- ------------
Current (provision) benefit $ - $ -
Deferred (provision) benefit - -
-------------- ------------
$ - $ -
============== ============
Deferred income taxes consist of the following at March 31:
2001 2000
-------------- ------------
Current:
Deferred tax assets $ - $ -
Deferred tax asset valuation allowance - -
-------------- ------------
$ - $ -
============== ============
Non-current:
Deferred tax assets $ 45,705 $ 32,480
Deferred tax asset valuation allowance (45,705) (32,480)
Deferred tax liabilities - -
-------------- ------------
$ - $ -
============== ============
Note 3 - RELATED PARTY TRANSACTIONS
The Company has a $40,000 loan from a stockholder that is collateralized by a
second lien on inventory. The loan accrues interest at 10% with interest
payments to be made quarterly and is due December 31, 2001.
9
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
March 31, 2001 and 2000
(Unaudited)
Note 3 - RELATED PARTY TRANSACTIONS - (Continued)
The Company has a license agreement with its President whereby it has acquired
all rights to patents, trademarks, technical information and trade secrets
through November 30, 2021 by payment of a yearly license fee of $1,000.
Note 4 - COMMITMENTS
On June 1, 2000, the Company entered into an agreement to extend its current
lease of office and production facilities under an operating lease through May
2005. Lease expense was $4,350 and $3,750 for each of the three months ending
March 31, 2001 and 2000, respectively.
Minimum future lease rentals are as follows:
December 31, Amount
------------ ------
2001 18,300
2002 18,600
2003 18,600
2004 18,600
2005 7,750
Note 5 - WARRANTS
On December 8, 1997, the Company issued an offering circular for 125,000 units
priced at $2 per unit. Each unit purchased 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. The warrants were to expire on December
31, 1999. However, the expiration date has been extended to December 31, 2001.
For the three months ended March 31, 2001, no additional warrants have been
issued or exercised and at March 31, 2001, 348,000 warrants remained
outstanding.
Note 6 - LINE OF CREDIT
On January 12, 2001 the Company entered into a $15,000 line of credit with a
bank that is collateralized by the Company's accounts receivable, inventory and
equipment. The line was renegotiated to $25,000 during the quarter ended March
31, 2001. The line requires monthly payments of accrued interest accrued at
11.50% and matures on February 12, 2002.
10
Note 7 - CONTINUED OPERATIONS
As shown in the financial statements, the Company incurred an operating loss of
approximately $52,000 for the three months ended March 31, 2001 and has an
accumulated deficit of approximately $300,000. Accordingly, there is substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability of assets or amounts of liabilities should the Company be unable
to continue as a going concern. The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. Management is
committed to reducing expenses, and continues to attempt to raise capital
through the issuance of common stock through.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
- -------
The following discussion and analysis should be read in conjunction
with the Company's financial statements and related footnotes for the year ended
December 31, 2000 included in its Annual Report on Form 10-KSB. The discussion
of results, causes and trends should not be construed to imply any conclusion
that such results or trends will necessarily continue in the future.
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 further
improved in the first quarter of 2001. 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. At the
direction of the SEC, legal and accounting fees previously classified as
"Prepaid Offering Expenses" were reclassified as "General & Administrative
Expenses." During this period, we have been limited in our ability to raise
capital from an offering of our stock and exercise of our warrants. because the
Company's stock is listed on the Pink Sheets, which is not an automated
quotation system and is characterized by an extremely low volume of activity.
The Company's ability to raise equity capital will be impeded until it is listed
on the NASDAQ Over the Counter Bulletin Board. Exercise of warrants is not
attractive to shareholders at this time because the current stock price is lower
than their warrant price of $2.00 per share.
Management believes it is well positioned to take 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, outsourcing of certain
manufacturing functions) when significant capital becomes available.
Since the Company has not yet applied to be listed on the NASD OTC BB and raised
money from its outstanding warrants, we have focused on 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 to begin shipping
Mercedes products. As of the end of the first quarter of 2001, all backorders
have been eliminated and reserves of finished product are in stock. The Company
expects to ship future orders directly from stock to increase customer
satisfaction and permit quicker collection of accounts receivable.
The Company is pursuing its plans to be listed on the OTC BB.
12
NEW PRODUCTS
The Company plans to make the following inventions the basis of new product
lines.
The New Perma-Tune
- ------------------
The Rev. F Perma-Tune is the result of technology the company developed to
replace the original Perma-Tune design. The product can be expanded to Mercedes,
Honda and Toyota cars and trucks. The new Perma-Tune product is both a repair
part and a performance/fuel economy enhancement for Ferrari, Porsche, Mercedes,
Honda and Toyota vehicles. The Company intends to continue trade secret
protection of the Perma-Tune product line. The Company may file a patent
application, copyright and or trade secret protection on some aspects of
Perma-Tune products for use on General Motors and Ford vehicles.
The Digital Fire
- ----------------
Digital Fire is the Company's newest product line designed for racecars only. It
competes with the makers of sophisticated engine control systems. The Company
has delayed the introduction of the Digital Fire product line until it can raise
additional capital. During this delay, the Company has continued development of
the product line with the recent addition of Palm Pilot interface software.
Management believes that the Digital Fire Palm Pilot software creates an
affordable and sophisticated engine control system that may have mass-market
appeal. This is because the customer can adapt the software for his or her own
personal needs. The Company must complete production tooling at a cost of
approximately $60,000 and complete and amass an inventory of 100 units before
marketing the Digital Fire. Marketing expenses are estimated at $80,000.
The Company has designed the Digital Fire product line that generates revenue in
the manufacturing of hardware and software. The Digital Fire involves two kinds
of software akin to the desktop computer. The Digital Fire Operating System
(DFOS) is like Windows to a desktop computer and the Palm Pilot software is like
a word processor. For the Digital Fire, DFOS is the software that determines if
the unit is a four cylinder, six cylinder or eight cylinder product. This
software configures the Digital Fire for what kind of car it will be used on but
not what to do. The ability to change the "to do" instructions are intended to
fine tune the engine for maximum performance given any different set of
variables at the race track. During the last step of manufacture for each unit,
a special chip containing the DFOS is inserted that determines which type of
Digital Fire the unit will be. Simply programming new DFOS can create new
features and products. This software is not retrievable from any unit and it is
proprietary. It cannot be altered once the unit is completely assembled. The
Digital Fire Programming Software (DFPS) is the software that allows the user to
program the Digital Fire. This software can be continuously upgraded and
13
customized like Word or any other user interface. This software resides in a
Palm Pilot personal organizer. It is very inexpensive, easy to use, and is
connected to the Internet via the desktop computer or the new Connected Palm
Pilot. The Company intends to continue developing new DFPS designed for
distribution through the Internet or compact disk. The open architecture design
of the Digital Fire may allow the Company to reduce DFPS development costs by
acquiring software developed by freelance programmers
New Product Research and Development: the Plasma Injector
- ---------------------------------------------------------
In 1997, Laurence Livermore National Laboratory ("LLNL") approached the Company
with a request to develop a new kind of ignition system with certain technical
specifications. The eventual intended use for this ignitor was not revealed to
the Company by LLNL. At the time LLNL approached the Company, we had no prior
experience in the field of plasma injection technology development. To the best
of our knowledge, we were not competing with any other company on this project.
The Company, at its expense, conducted the research necessary to develop special
ignitors to satisfy LLNL's requirements. Prototype units were delivered to LLNL
in 1998. The Company retains the rights to the intellectual property created in
the manufacture of these ignitors for LLNL, although patent protection has not
been applied for.
In 1999, the U.S. Navy Surface Weapons Center approached the Company with a
requirement for a device with technical specifications similar to those
requested by LLNL. In response to this request, the Company developed the Plasma
Injector. To the best of our knowledge, we were not competing with any other
company on this project. To date, seven Plasma Injectors have been manufactured;
one was sold to the U.S. Navy, and six have been used by the Company in various
research projects aimed at developing commercial automotive, space and
industrial applications for the technology.
Plasma Injectors can be used to ignite liquid fuel rockets, turbine engines, to
ignite boilers used in the petrochemical industry, and for commercial automotive
applications. To date, at least one scientific application of the Plasma
Injector has been established with the sale of a prototype unit to Bechtel
Nevada. In June 2000, Bechtel incorporated the Plasma Injector into equipment
they use for a research program with the U.S. Department of Energy. Although the
Company is not under long-term contracts with LLNL, the U.S. Navy Surface
Weapons Research Center or Bechtel, we will continue to work with these
organizations, and there are no restrictions on the Company's use of technology
developed in conjunction with any of these projects.
In February 2000, the Company began a dialog with the Plasma Science and
Technology Center at the Massachusetts Institute of Technology to incorporate
the Plasma Injector into MIT's Plasmatron. The Plasmatron is an experimental
device that reduces auto emissions by removing the danger of using clean burning
but volatile hydrogen to power vehicles. It works by splitting hydrogen atoms
from conventional petroleum just fast enough for the engine to consume it,
thereby eliminating the need to store hydrogen fuel onboard the vehicle. As of
March 2001, that dialog has not progressed.
14
Management intends to conduct more Plasma Injector research in combination with
its Digital Fire during the next two years. The Company has already completed
the interface circuitry between the Plasma Injector and the Digital Fire. In
order to investigate the potential market for commercial applications, the
Company will need to make other engine designers and engineers, as well as
scientists, aware of the Plasma Injector technology.
This can be done via advertising in trade publications and via Internet web
sites for an estimated cost of approximately $20,000. In addition, for
automotive applications, testing and customization will be performed to tailor
Plasma Injector systems for individual vehicles for an estimated cost of
approximately $5,000. A White Paper describing the technology and its
pollution-reducing benefits has been written, and has been provided to Texas
legislators and certain scientists engaged in the development of alternative,
clean fuels.
The Plasma Injector-to-Digital Fire interface circuitry Research and Development
program is complete, but new product development has been halted on the Honda,
Toyota, GM and Digital Fire product lines pending funding. The Company is
working on finding new commercial applications for the Plasma Injector product
line. Bechtel Nevada has purchased a Plasma Injector and has successfully used
it in their scientific experiments. It is not known at this time if there will
be subsequent sales of the product for this purpose. The dialogue with MIT
concerning the Plasma Injector has not progressed. The Company has written a
white paper about its Plasma Injector technology, which will be circulated in
the Texas legislature by the Company's public relations firm.
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.
MARKETING STRATEGY
Management has retained a public relations firm, Shapiro & Company, for
assistance in the planning and implementation of new product marketing strategy.
They have already created a marketing plan and Mercedes brochures. The Company
will continue to foster word of mouth advertising and will continue to conduct
sales training missions to the Company's wholesale distributors.
The Company sells to six wholesale distributors who supply an unknown number of
distributors and retailers. The products of the Company are sold throughout the
United States. All sales to warehouse distributors are final. There are no
rights of return. The Company warrants that its products will be free from
defects in materials and workmanship for one year from the time of purchase by
15
the end user. Should the Company determine that there are defects within the one
year period, management has a choice to repair or replace the defective unit. In
the first quarter of 2000, the Company repaired zero units and replaced 2 units;
in the first quarter of 2001, the Company repaired zero units and replaced 1
unit. Costs related to handling repairs and replacements have been insignificant
and immaterial historically. Adoption of SAB-101 will not affect our financial
statements because of the Company's no right of return (i.e., all sales are
final) policy.
The short-term strategy is to begin shipment of the Mercedes products in fall of
2001. 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. In speaking with its major distributors (Worldpac, Interamerican
Motor Corp., Performance Products and SSF Imported Auto Parts, Inc.) regarding
the Mercedes product line, the Company has learned that they are interested in
carrying the line, and that they have customers who are ready to buy it as soon
as they have received product samples and price lists from the Company. The
Company does not have written commitments for these potential sales.
The interim marketing strategy is to develop the Honda and Toyota product line
in the last quarter of 2001, and then move on to the development of the market
for Perma-Tune products for domestic makes in 2002. 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. In 1999 the Company began negotiations with Toyota Racing
Development (TRD) for distribution of the Perma-Tune product line through TRD
catalogs and TRD retail shops located inside Toyota new car dealerships. The
Company has demonstrated its applicable technology to TRD. TRD engineering has
approved the basic design. Pending contract negotiations for start up and
tooling costs and execution of non-disclosure agreements, the Company has agreed
to manufacture product for distribution under the TRD name. Since TRD has yet to
sign non-disclosure agreements with the Company, requires that the Company fund
the tooling required for manufacturing, and such funding is not available at
this time, the project has not progressed.
All Perma-Tune ignition systems designed for street vehicles 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.
16
2005 PLAN
Management intends to expand its market globally. The Company plans to combine
the Digital Fire and Plasma Injector technology into a new product line to allow
car manufacturers to meet new, stricter EPA air pollution standards.
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.
RESULTS OF OPERATIONS
In the first quarter of 2001, the Company experienced 7.8% sales growth as gross
sales increased from $49,407 in the first quarter of 2000 to $53,319 for the
current period. A total of 251 units were sold in the first quarter of 2001 at
an average price of $185. A total of 284 units were sold in the first quarter of
2000 at an average price of $174. This change in average price per unit sold was
due primarily to a drop in the number of overall sales of the older Perma-Tune
product lines offset by the sale of more profitable new products. During the
2000 first quarter period, the company was shipping against back orders to fill
orders for its current product line. In 2001 first quarter period, the company
was shipping its current product line from stock and shipped new product. The
new product models shipped were the MB010, RV010, PR020, PL020, HN050, DF045 and
UFX79.
Gross profit in the first quarter of 2000 was $29,343 compared to $27,488 in the
first quarter of 2001. As a percentage of sales, gross profit decreased in the
first quarter of 2001 to 51.6% from 59.4% in the first quarter of 2000. This was
due to less sub contracting of labor intensive operations in first quarter of
2001 than in 2000 due to financial restrictions.
General and Administrative (G & A) expenses were $50,396 and $ 22,324 in the
first quarters of 2001 and 2000, respectively. As a percentage of sales, G & A
expenses increased to 94.5% from 45.2%. This increase was due to Internet fees
and site development costs ($4230.50) and an increase in legal and accounting
fees. Legal and accounting fees increased during this period due to fees
associated with the auditing of the Company's financials for the year ended
December 31, 2000, and for fees associated with services related to completing
SEC filings. Other income increased due to the receipt of consulting fees
associated with Mr. Lenarduzzi's research and development work with US MagneGas.
17
Interest expenses decreased slightly from $1,425 in the first quarter of 2000 to
$1,414 in the first quarter of 2001. Third-party debt levels remained consistent
for 2001 year to date.
Research and development expenses were $276 in the first quarter of 2000 and
$1,559 in the first quarter of 2001.
Since the Company incurred net losses for both first quarter 2000 and 2001,
there was no income tax liability for either quarter. As of March 31, 2001, the
Company's approximate accumulated losses were $302,000 to be offset against
future income thru year end Dec. 32, 2012. The majority of this net operating
loss carry forward, $272,000, has occurred in the last four 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the quarter ended March 31, 2001, 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 January 12, 2001 the Company entered into a $15,000 line of credit with The
American National Bank of Texas in Wylie that is collateralized by the Company's
accounts receivable, inventory and equipment. The line was renegotiated to
$25,000 on March 12, 2001, with an initial interest rate of 11.5%. Accrued
interest is payable monthly, and the maturity date is March 12, 2002.
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, 2001.
At March 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 and Toyota product lines. In the
year ended December 31, 2000, the Company sold 150,000 shares in a private
placement for net proceeds of $60,000. No additional private placements were
made in the first quarter of 2001.
18
As of March 31, 2001, the Company's cash reserves totaled $7,084 and total
current assets were $61,295. 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 2001, 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, 2001 was $38,546. Inventory at March 31, 2000 was
$47,327. The inventory turnover ratios were .7 and .4 for the periods ending
March 31, 2001 and 2000, respectively. This decrease was due to decline in
production activity to concentrate on the public offering. Accounts receivable
ratios were 26 days and 20 days for the periods ending March 31, 2001 and 2000,
respectively. Working capital ratios were .55 and 1.46 for the periods ending
March 31, 2001 and 2000, respectively. This change was due to a large increase
in accounts payable for legal and accounting services resulting from the
Company's preparation and filing of SEC forms. The Company has agreements with
its accountants and attorneys to pay these balances as funding becomes available
via accounts receivable generated from the normal operations of the Company.
The Company presently has an outstanding loan payable on demand to Terry Taylor,
a stockholder. Principal balance as of March 31, 2001 is $40,000. The loan bears
an interest rate of 10%. Interest is payable quarterly. The loan is secured by
inventory.
The Company is taking steps to raise equity capital. The Company's ability to
raise additional capital will be impeded until it is listed on the NASD Over the
Counter Bulletin Board. 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 twelve to twenty-four months. However, it hopes
to obtain short-term funding until operations are ramped up, creating the
profitability that will improve its liquidity position.
19
RECENT DEVELOPMENTS
- -------------------
In the first quarter of 2001, the Company began taking advantage of the
infrastructure improvements made during 2000 (implementation of fully integrated
manufacturing/accounting software, availability of a dedicated officer for
finance, marketing and SEC compliance tasks and outsourcing of certain
manufacturing functions).
The Company is compiling a database of potential new wholesale distributors and
end users to promote its existing product line sales through low-cost, direct
mail marketing and e-mail. The new Company web site has been posted on the
Internet and is being continually fine-tuned and updated.
The Company has continued building finished product for the shelf of its
existing product line, is shipping all orders from stock, and has improved
accounts receivable turn-around time.
The Mercedes Benz Kit 1 is now in stock. The Company has selected Kingsborne to
subcontract the manufacturing of the supplemental Mercedes products for Kits 2
and 3. Initial reaction of the Company's wholesale distributors to the Mercedes
product release in December of 2000 has been conservative due to the product's
cost. Wholesale prices for the Perma-Tune Mercedes Benz Kits are: $380 for Kit
#1, $310 for Kit #2 and $643 for Kit #3. While these prices are comparable to
other new replacement parts kits offered by our wholesalers, their concern is
that customers are currently purchasing rebuilt replacement parts at prices
lower than that of new replacement parts.
Wholesalers indicate that if enough of their customers inquire about the
product, they will stock the products. The Company's research indicates that
there are no aftermarket products that compete with the Company's offerings
available, and that consumers will buy the Company's Mercedes Kits if they are
readily available to them. After speaking with the Company's major distributors
(Worldpac, IMC, Performance Products and SSF), the Company has learned that
these distributors are interested in carrying the product line, and that they
are aware of customers of theirs who will buy the products. The distributors are
awaiting receipt of production samples of the spark plug wire harness component
of the kits (they have already received prototype samples of the wire sets) and
price lists before they proceed to stock the product line. The Company does not
have written commitments from these distributors to purchase the products. Since
funding for large-scale advertising and marketing is not available at this time,
the Company is promoting the products via its website and direct mailings of
postcards.
The Company therefore has decided to take a grass roots approach to marketing
the Mercedes product line to create demand for the product. We have mailed new
product brochures to all of our existing wholesale distributors as well as every
Mercedes repair shop in our area to pique interest, and we are beginning to
receive interested inquiries in response. Interest has been further generated by
postings on the Mercedes lists-server of the Internet inviting interested people
to visit our website, and our ad in the local Mercedes Benz Club newsletter.
20
The Company has continued to search for more commercial applications for its
Plasma Injector technology. The United States Mine Safety and Health
Administration has expressed interest in Perma-Tune technology for use in their
experiments to increase the safety of mining workers.
The U.S. Navy Surface Weapons Center has reported successful results from
experiments using the Plasma Injector but has released no information on the
possibility of more sales to them or regarding commercial applications of their
technology using the Plasma Injector.
The White Paper circulated by the Company has resulted in a new application of
the Plasma Injector for use with alternative fuels. Dr. Ruggero Santilli of US
MagneGas has read the Perma-Tune White Paper and believes that the theory set
forth in the paper is consistent with his research in plasma theory. US MagneGas
manufactures equipment that creates a clean burning fuel from crude oil or
liquid petroleum wastes using their own plasma arc technology (a term employed
by US MagneGas to describe the patented process by which their equipment creates
a plasma state in the production of MagneGas). Dr. Santilli theorized that since
MagneGas was created in a plasma field, a plasma field may be needed to burn
MagneGas in an automobile engine.
Plasma is commonly referred to as "the fourth state of matter", after
solid, liquid and gas. Plasma is a high temperature, ionized gas composed of
electrons and positive ions in such relative numbers that the gaseous medium is
essentially neutral. The plasma field is produced by a Perma-Tune Plasma
Injector by subjecting the fuel-air mixture to a sudden blast of high-Voltage
energy (32,000 Volts with a rise time of 2 nanoseconds) which strips valence
electrons from the fuel-air molecules.
Subsequently, US MagneGas flew Lonnie Lenarduzzi to their laboratory in Largo,
Florida to conduct experimentation using MagneGas to power a bi-fuel automobile.
Mr. Lenarduzzi installed a Digital Fire and four Plasma Injectors on a Honda
automobile, achieving remarkable success. Better performance was achieved in the
experiment with Perma-Tune Plasma Drives than had ever before been achieved
using MagneGas in an automobile with any other ignition system. The exhaust gas
from the test vehicle running on MagneGas was analyzed and found to contain no
carbon monoxide, elevated oxygen levels and even less hydrocarbons than were
measured in the surrounding atmosphere before the test. These tests were
performed using a digital read-out, four-gas analyzer. This piece of equipment
does not have the capability to produce hard-copy reports.
Installation of a Digital Fire and Plasma Injectors on older vehicles consists
of mounting a crankshaft encoder on the engine and installing one Digital Fire
to control the Plasma Injectors (one per cylinder). For new vehicles, if
desired, the existing controller can be used instead of a Digital Fire to
control the Plasma Injectors (again, one per cylinder). If the vehicle is to be
powered by MagneGas, it would have to be fitted with a gas storage cylinder and
fuel delivery system identical to those used on natural-gas powered vehicles
currently in use today.
21
The test results showing elevated oxygen levels and less hydrocarbons are a
result of two factors. 1) Perma-Tune's Plasma Injector technology more
completely burns the fuel-air mixture in the vehicle due to the ionization
achieved via a plasma field (described above) and the initiation of combustion
with an explosion rather than the spark which is used in conventional ignition
systems. 2) Chemical reactions produced by burning MagneGas, details of which
are the intellectual property of US MagneGas, to which the Company does not have
access.
The experiment demonstrated that existing vehicles can be modified to operate on
both gasoline and MagneGas with the addition of the Plasma Injector and Digital
Fire to achieve improved performance.
The Company sold eight Plasma Injectors and two Digital Fire systems to US
MagneGas, one set for the Honda and another set to use in experiments on a
four-cylinder generator. Revenues from the Company's work with US MagneGas as of
3/31/01 total $16,289.66. Both companies have agreed to continue working
together to fully develop commercial application for these technologies. US
MagneGas is studying the possibility of other uses for the Plasma Injector in
gas ionization processing equipment that they manufacture.
US MagneGas has reviewed this disclosure and has agreed that it is correct.
In April 2001, the Company filed an amended Registration Statement on Form 10SB
and responded to comments from the Securities and Exchange Commission's staff.
Forward looking statements
- --------------------------
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty. Although we believe
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements contained in the report will
prove to be accurate.
22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERMA-TUNE ELECTRONICS, INC.
By: /s/ Linda Decker
-------------------------
Linda Decker
Chief Financial Officer
Amendment No. 1
Date: July 6, 2001
24