SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
111 SOUTH 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 September 30, 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 September 30, 2001 3
Statements of Operations for the three months
ended September 30, 2001 and 2000 and the nine
months ended September 30, 2001 and 2000 4
Statements of Cash Flows for the nine months
ended September 30, 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 25
Item 1. Legal Proceedings 25
Item 2. Change in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERMA-TUNE ELECTRONICS, INC
Balance Sheet
September 30,
2001
-------------
ASSETS (Unaudited)
Current assets:
Accounts receivable, trade $ 18,212
Inventory 53,705
Deposits 160
-------------
Total current assets 72,077
-------------
Property, plant and equipment:
Molds and tooling 5,523
Leasehold improvements 3,127
Machinery and equipment 54,574
-------------
63,224
Less accumulated depreciation (55,653)
-------------
7,571
-------------
$ 79,648
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 20,800
Overdraft payable 6,970
Accounts payable, trade 56,978
Notes payable - stockholder 40,000
Accrued liabilities 7,558
-------------
Total current liabilities 132,306
-------------
Stockholders' deficit:
Common stock - 10,000,000 shares of no par stock
authorized, 2,312,700 issued and outstanding 248,395
Additional paid-in capital 15,550
Accumulated deficit (316,603)
-------------
Total stockholders' deficit (52,658)
-------------
$ 79,648
=============
The accompanying notes are an integral part of the financial statements.
3
PERMA-TUNE ELECTRONICS, INC.
Statements of Operations
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 80,293 $ 75,262 $ 207,635 $ 198,509
Cost of goods sold 18,868 39,360 71,200 105,908
------------ ------------- ------------ ------------
Gross profit 61,425 35,902 136,435 92,601
------------ ------------- ------------ ------------
Operating expenses:
General and administrative 28,293 23,689 116,319 71,384
Legal and professional 17,965 10,689 78,001 33,002
Research and development 633 1,128 5,143 1,600
Depreciation 841 2,151 2,523 3,225
------------ ------------- ------------ ------------
47,732 37,657 201,986 109,211
------------ ------------- ------------ ------------
Income (loss) from operations 13,693 (1,755) (65,551) (16,610)
------------ ------------- ------------ ------------
Other income (expense):
Interest expense (2,314) (1,002) (7,627) (4,112)
Other 3 1,094 5,009 158
------------ ------------- ------------ ------------
(2,311) 92 (2,618) (3,954)
------------ ------------- ------------ ------------
Income (loss) before federal
income tax 11,382 (1,663) (68,169) (20,564)
Provision for federal income tax - - - -
------------ ------------- ------------ ------------
Net income (loss) $ 11,382 $ (1,663) $ (68,169) $ (20,564)
============ ============= ============ ============
Net income (loss) per share:
Basic $ .004 $ (.001) $ (.029) $ (.010)
============ ============= ============ ============
Diluted $ .004 $ (.001) $ (.029) $ (.010)
============ ============= ============ ============
The accompanying notes are an integral part of the financial statements.
4
PERMA-TUNE ELECTRONICS, INC.
Statements of Cash Flows
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
---------------- ----------------
2001 2000
---------------- ----------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (68,169) $ (20,564)
---------------- ----------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,523 3,225
Changes in operating assets and liabilities:
Increase in trade accounts receivable (14,663) (16,051)
Increase in inventory (3,698) (915)
Decrease in prepaid expenses 3,414 -
Increase (decrease) in accounts payable 35,292 (9,803)
Increase (decrease) in accrued expenses 1,729 (5,132)
---------------- ----------------
Total adjustments 24,597 (28,676)
---------------- ----------------
Net cash used in operating activities (43,572) (49,240)
---------------- ----------------
Cash flows used in investing activities:
Acquisition of property and equipment (244) (8,903)
---------------- ----------------
Cash flows from financing activities:
Overdraft payable 6,970 -
Repayments of long-term debt - (10,000)
Proceeds from line of credit 28,500 13,500
Repayments of line of credit (7,700) (15,500)
Proceeds from sale of stock 5,000 60,000
---------------- ----------------
Net cash provided by financing activities 32,770 48,000
---------------- ----------------
Decrease in cash (11,046) (10,143)
Cash, beginning of period 11,046 24,752
---------------- ----------------
Cash, end of period $ - $ 14,609
================ ================
Cash paid during the period for:
Interest $ 7,627 $ 4,112
================ ================
The accompanying notes are an integral part of the financial statements.
5
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
September 30, 2001
(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, Canada and Europe.
Trade accounts receivable
- -------------------------
The Company provides for uncollectible receivables using an allowance for
doubtful accounts. As of September 30, 2001, 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:
September 30,
2001
----------------
(Unaudited)
Raw materials $ 46,957
Work in process 3,310
Finished goods 3,438
----------------
$ 53,705
================
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
September 30, 2001
(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 nine months ended September 30, 2001 and 2000, was
$2,523 and $3,225, 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 nine months ended September 30, 2001, three customers accounted for 10%,
10%, and 20%, respectively, of net sales.
For the nine months ended September 30, 2000, four customers accounted for 12%,
10%, 35% and 14%, respectively, of net sales.
7
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
September 30, 2001
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Concentration of risk - continued
- ---------------------------------
The breakdown of these net sales is as follows:
Net sales for Net sales for
nine months ended nine months ended
Customer September 30, 2001 September 30, 2000
-------- ------------------ ------------------
A $ 21,390 $ 24,708
B $ 21,705 $ 19,421
C $ 40,785 $ 70,372
D $ - $ 26,914
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 September 30, 2001 and 2000 were 2,300,759 and
2,241,788, respectively.
Revenue recognition and product warranty
- ----------------------------------------
Revenue is recognized at the time the products are shipped. The product is
warrantied for one year from original purchase, and, at management's option, the
Company will either repair or replace units that prove to be defective. As of
September 30, 2001, the Company has determined that a warranty provision is not
necessary given the lack 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.
8
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
September 30, 2001
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 September 30, 2001, there were no cash
equivalents.
Use of estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
NOTE 2 - INCOME TAXES
At September 30, 2001 and 2000, and for the years 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 $316,000 at
September 30, 2001 and will expire in the years 2011 through 2019.
The provision for federal income tax consists of the following for the nine
months ended September 30:
2001 2000
-------------- ------------
Current (provision) benefit $ - $ -
Deferred (provision) benefit - -
-------------- ------------
$ - $ -
============== ============
Deferred income taxes consist of the following at September 30, 2001:
Current:
Deferred tax assets $ -
Deferred tax asset valuation allowance -
--------------
$ -
==============
9
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
September 30, 2001
(Unaudited)
NOTE 2 - INCOME TAXES - (Continued)
Non-current:
Deferred tax assets $ 45,705
Deferred tax asset valuation allowance (45,705)
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.
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 $15,200 and $11,250 for each of the nine months ending
September 30, 2001 and 2000, respectively.
Minimum future lease rentals are as follows:
Year ended
September 30, Amount
------------ ------
2002 18,600
2003 18,600
2004 18,600
2005 12,400
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
10
PERMA-TUNE ELECTRONICS, INC.
Notes to Financial Statements
September 30, 2001
(Unaudited)
NOTE 5 - WARRANTS - (Continued)
For the nine months ended September 30, 2001, no additional warrants have been
issued or exercised and at September 30, 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 at the bank's
prime rate (6.00%) plus 3.0% and matures on February 12, 2002. As of September
30, 2001, the outstanding balance was $20,800.
NOTE 7 - INTERIM FINANCIAL STATEMENTS AND RELATED INFORMATION
The balance sheet at September 30, 2001, the income statements for the nine
months ended September 30, 2001 and 2000, and the information included herein to
the notes for those periods, have not been audited. It is management's opinion
that all necessary and recurring adjustments have been made in order that the
above referenced financial statements are not misleading.
NOTE 8 - CONTINUED OPERATIONS
As shown in the financial statements, the Company incurred an operating loss of
approximately $68,000 for the nine months ended September 30, 2001 and has an
accumulated deficit of approximately $316,000. 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 registration with the Securities
Exchange Commission (SEC).
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.
Production, profit margin and operational efficiency again improved in the third
quarter of 2001. While the Company has taken steps to contain the cost of legal
and accounting expenses associated with fulfilling the requirements of a fully
reporting company, it still carries a high debt load for services related to
these items accrued in the last 24 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.
On August 14, 2001, the Company changed its trading symbol from PTUE to PTUN in
anticipation of being listed on the NASDAQ OTC-BB. On August 30, 2001, the
Company was cleared to trade on the NASDAQ Over the Counter Bulletin Board.
However, due to the September 11, 2001 attacks on the World Trade Center, the
Company has made the decision that spending on publicity and advertising of the
change to the NASDAQ OTC-BB would be less than effective at this time. The
Company's share prices have remained relatively stable in the $.90 to $1.25
range. 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. In the
third quarter of 2001, cost reductions continued to be realized as a result of
using the Company's integrated software, and as a result of the dedication of an
officer to finance and SEC compliance. This software enables Company personnel
to calculate and track many of the complex measurement ratios that it previously
required professional assistance to manage.
12
Since the Company has not yet 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 the third quarter, The Company began
shipping to two new European distributors of its products: one in France, and
one in Germany. Another German distributor placed a large order in the third
quarter, requesting shipment in the fourth quarter of 2001.
The Company has increased its efforts to bring additional market makers on board
to assist in boosting the trading volume of its stock.
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 to generate revenue both
in the manufacturing of hardware and the sale of 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 the application software, 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
13
change the "to do" instructions is intended to fine tune the engine for maximum
performance given any different set of variables at the racetrack. 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 customized like 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, Lawrence 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 igniter 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
igniters 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 igniters 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.
14
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
September 2001, that dialog has not progressed, and there are no further
developments to report on this project.
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 continues to seek new applications for its Plasma Drive product, and
has sold a unit to Moller Industries of Davis, California. Moller is developing
low-pollution engines and is experimenting with the Plasma Drive for use on
these engines. These engines would be used on aircraft and automobiles, and are
intended to replace conventional piston engines. As of September 30, 2001,
Moller has not completed testing of the plasma system.
The Company has also begun a dialogue with Pratt & Whitney Aerosciences Center
of Seattle, Washington about using the Plasma Drive in experiments on their
pulse detonation engine. The pulse detonation engine is being studied as a
possible replacement for the jet engines now in use by airlines and the
military. As of September 30, 2001, Pratt & Whitney has not placed an order, and
is still studying the proposal.
The US Mine Safety and Health Administration has purchased a single unit for use
in their experimentation. As of September 30, 2001, reports from USMSHA have
been favorable.
15
The results of these experiments by Moller Industries, Pratt & Whitney
Aerosciences Center and the US Mine Safety and Health Administration are not
known at this time, nor is it known if these experiments will result in future
sales by the Company. The Company is considering limited experimentation using
plasma drives on late model Porsche cars.
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 created a marketing plan, presentation folders and Mercedes brochures
at a cost of $17,629. The Company now has the option of putting Shapiro &
Company on retainer for $3000.00 per month to handle public relations. Until it
is financially able to put Shapiro & Company on retainer, the Company will
continue to foster word of mouth advertising, will continue to conduct sales
training missions to the Company's wholesale distributors, has continued to
improve and expand its website, and has initiated a low-cost postcard mailing
campaign to alert distributors to new product offerings.
The Company sells to eight 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. 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 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 third quarter of
2000, the Company repaired no units and replaced three units; in the third
quarter of 2001, the Company repaired no units and replaced one unit. In the
first nine months of 2000, the Company repaired two units and replaced seven
units. In the first nine months of 2001, the Company repaired one unit and
replaced five units. 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 Company's short-term marketing strategy is to begin shipment of the Mercedes
products, as well as spark plugs, spark plug wire sets, wiring harness repair
parts (Porsche models), pre-amps and coils 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, and as of
September 30, 2001, the Company has begun shipping these products. The Company
is working to expand distribution of these new offerings.
16
The interim marketing strategy is to develop the Honda and Toyota product line
in the first quarter of 2002, 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.
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. Revised
guidelines for improving light truck and SUV fuel economy being formulated by
the EPA in 2001 may potentially have a positive effect on the Company's sales.
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. By outsourcing the production of certain components of
the Company's products, the Company will be able to reassign employees who
currently manufacture those components in-house, to assembly and testing
activities, increasing production with minimal expansion of payroll and payroll
tax expenses.
17
RESULTS OF OPERATIONS
In the first nine months of 2001, the Company experienced 4.4% sales growth as
gross sales increased from $198,509 in the first nine months of 2000 to $207,635
for the current period. A total of 1228 units were sold in the first nine months
of 2001 at an average price of $165. A total of 1206 units were sold in the
first nine months of 2000 at an average price of $165. In the first nine months
of 2001, the company continued to ship its current product line from stock and
began shipping several new products.
Gross profit in the first nine months of 2000 was $92,601 compared to $136,435
in the first nine months of 2001. As a percentage of sales, gross profit
increased in the first nine months of 2001 to 66% from 47% in the first nine
months of 2000. This was due to the sale of new products with a lower cost of
goods sold and resulting higher profit margin which the Company began shipping
in 2001.
The Company's efforts to reduce expenses and increase sales have resulted in a
net income from operations in the third quarter of 2001 of $13,693, reducing its
accumulated deficit. The Company continues its vigorous yet cost-effective
efforts to maintain this reduction in deficit and move the Company into a
profitable position.
General and Administrative (G & A) expenses were $116,319 and $71,384 in the
first nine months of 2001 and 2000, respectively. As a percentage of sales, G &
A expenses increased to 55% from 36%. This increase was due to continuing
increases in legal and accounting fees associated with fulfilling the Company's
responsibilities as a fully reporting company, such as quarterly reviews of
financials by the Company's CPA firm, and legal review of SEC filings. Other G&A
increases are related to increases in salary resulting from bringing a dedicated
officer onboard to handle financial and legal matters, a very significant
increase in payroll taxes related to the Company's first-ever unemployment
claims by two former employees. Other factors in this increase in G&A expense
include the offering of health insurance benefits to its employees, an increase
in the lease payments on the Company's building, the Company's appearance at an
investor meeting to raise equity capital in California in the second quarter and
travel expenses related to R&D activities with US MagneGas. Other income for the
first nine months of 2001 increased over the first nine months of 2000 due to
the receipt of consulting fees associated with Mr. Lenarduzzi's research and
development work with US MagneGas in the second quarter of 2001.
Interest expenses increased from $4112 in the first nine months of 2000 to $7627
in the first nine months of 2001. Third-party debt levels increased
proportionately for 2001 year to date. This increase is due to the Company's
agreements with its attorneys and accountants to extend payment for fees
resulting from the Company's activities related to meeting the requirements of a
fully reporting company, and in creating its initial SEC filings.
18
Research and development expenses were $1600 in the first nine months of 2000
and $5143 in the first nine months of 2001. This increase is due to the
Company's research and preparations to add certain spark plug wire set
configurations to the product line.
Since the Company incurred net losses for both the first nine months of 2000 and
2001, there was no income tax liability for either quarter. As of September 30,
2001, the Company's approximate accumulated losses were $315,603 to be offset
against future income thru year-end Dec. 31, 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 responsibilities of being a fully
reporting company. These costs relating to full reporting resulted from the
Company's preparations to trade securities on the NASDAQ OTC-BB, which will fund
the mass production of all product lines.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the period ended September 30, 2001, the Company has posted a net income of
$13,693.Cost reductions and shipments to two new European distributors in the
3rd quarter of 2001 have contributed to this turnaround, as have sales of the
Company's newer products, which have higher profit margins.
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%. Interest is
variable, based on the Prime Rate plus 3%. Accrued interest is payable monthly,
and the maturity date is March 12, 2002. For the period ended September 30,
2001, the principal balance owed on this line of credit was $20,800, with an
interest rate of 9%.
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.
In the fourth quarter, the Company intends to extend the expiration date on
these warrants to 12/31/03.
At September 30, 2001, there were 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. By consent of the Board of Directors on June 12, 2001, the
Company sold 20,000 shares of restricted stock for $5,000 ($.25 per share) to
Kiowa Oil Company. No additional private placements were made in the 3rd quarter
of 2001.
19
As of September 30, 2001, the Company's cash reserves totaled $0 and total
current assets were $72,077. 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 September 30, 2001 was $53,705. Inventory at September 30, 2000 was
$39,698. The inventory turnover ratios were 1.33 and .99 for the nine month
periods ending September 30, 2001 and 2000, respectively. This slight increase
was due to an increase in production activity to fulfill second and third
quarter 2001 purchase orders. Accounts receivable ratios were 24 days and 30
days for the periods ending September 30, 2001 and 2000, respectively. Working
capital ratios were .54 and 5.15 for the periods ending September 30, 2001 and
2000, respectively. This change was due to a continuing increase in accounts
payable for legal and accounting services resulting from the Company's
preparation and filing of SEC forms, and accounting fees associated with the
preparation of financials required of the Company since it became fully
reporting. 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 September 30, 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. 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.
20
RECENT DEVELOPMENTS
- -------------------
In the third quarter of 2001, the Company continued 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 has compiled 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. In the third quarter
of 2001, the Company has continued to focus on sales of its core product line to
fund operations by seeking new distributors for its products in Europe and
Japan.
The Company's newly updated Internet site has been instrumental in making new
connections with two European parts distributors. On May 25, 2001, the Company
made an initial sale of ten units to Mittelmotor in Bochem, Germany, with their
commitment to purchase a minimum of 100 units per year, all sales final. Also in
the second quarter, the Company made a tentative agreement with similar terms
with a parts distributor in France, Jean Buser Porsche in Paris. These two
distributors accepted their first shipments in the third quarter. A second
German parts distributor, Trend Produkte, placed a large initial order in the
3rd quarter, requesting shipment in the 4th quarter.
Domestically, the Company added San Diego Motorsports (and its sister company,
Black Forest Racing) as new distributors in the second quarter. San Diego
Motorsports and Black Forest Racing specialize in high-performance racing parts
and accessories, and cater to professional race teams and Porsche enthusiasts.
At their own expense, they are marketing the Company's products via print ads,
and a featured page on their extensive website.
The Company has continued building finished product for the shelf of its
existing product line, is shipping 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
21
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.
The feedback the Company is receiving on initial sales of the Mercedes product
line has been very favorable in terms of product quality and market interest.
However, this product line is perceived as "too expensive" vs. rebuilt Mercedes
ignition systems (although the Perma-Tune is new equipment). Therefore, the
Company is considering a possible redesign or re-pricing of the product aimed at
eliminating this impediment to sales.
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
have now received production samples of the spark plug wire harness component of
the kits..
In the second quarter of 2001, the Company finalized design specifications with
Kingsborne for manufacturing wire sets, and expects production to begin in the
first quarter of 2002. 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 has continued 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. In
the second quarter, the Company began enclosing a Mercedes product line brochure
with every ignition unit it sells.
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. In the second quarter of
2001, the Company sold one unit to the US Mine Safety and Health Administration.
Results of their experimentation have been favorable, but the Company does not
know if this sale will result in additional sales.
22
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 (a scientific description of how the
Company's products work, written September 12, 2000 for distribution to the
Texas state legislature and selected research scientists) 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. A Perma-Tune Plasma Injector produces the plasma field by
subjecting the fuel-air mixture to a sudden blast of high-Voltage energy (32,000
Volts with a rise time of 2 nanoseconds) that 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.
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.
23
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.
As of the third quarter of 2001, the Company is waiting for US MagneGas to make
decisions on plans to create commercial applications resulting from its
successful experimentation using MagneGas with the Company's products.
USMagneGas' parent company, EarthFirst Technologies, reorganized its board of
directors in the third quarter, with additional personnel changes at USMagneGas,
and this has delayed decision-making regarding future commercial application of
these automotive applications. It is not known at this time if future sales will
result from these experiments.
In preparation for the release of its new Honda products, a dynamometer test was
conducted by a prospective Honda client at their own expense to compare the
Perma-Tune model HN010 against the Honda's stock ignition system at Redline
Performance in the Ft. Worth, Texas area. No other variables were changed in
this test. The customer's mechanics conducted the dyno test; Perma-Tune
personnel were not involved in the testing in any way. The purpose of the test
was to evaluate the ease of installation, and the possibility of achieving
increased performance using the Perma-Tune model HN010.
The mechanics gave the unit high marks for ease of installation, and showed by
their dyno testing that a 10.2% increase in torque and a 16.9% increase in
horsepower were produced by replacing the stock Honda ignition with the
Perma-Tune model HN010. Exhaust gas analysis equipment was not available at this
testing facility to quantify the reduction of tailpipe emissions or the increase
in fuel economy produced by the installation of the model HN010. The Company has
received copies of the dyno test results, and has verified with Redline
Performance that these test result printouts accurately represent their
findings.
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.
In May, 2001 the Company received further comments from the SEC on this amended
filing. As of June 30, 2001, the Company had completed responses to these
comments and was preparing a presentation to send to the SEC. On July 11, 2001,
the Company received correspondence from the SEC indicating that all comments
had been cleared. On August 14, 2001, the Company changed its trading symbol
from PTUE to PTUN in preparation for listing on the NASDAQ OTC-BB. On August 30,
2001, the Company received clearance to trade on the NASDAQ OTC-BB. These
changes were reported on Form 8-K.
24
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.
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
September 4, 2001, the Company reported changing its trading symbol
from PTUE to PTUN, and the quotation of its common stock on NASDAQ OTC-BB on
Form 8-K.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERMA-TUNE ELECTRONICS, INC.
By: /s/ Linda Decker
-------------------------
Linda Decker
Chief Financial Officer
Date: November 13, 2001
26