**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-KSB**

 
| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|------------|------------------------------------------------------------------------------------------------|
| **OR**     |
| **o******  | **TRANSACTION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the fiscal year ended March 31,2002**

 

**CommissionFile No.  0-12817**

 

 

**PERFECTDATACORPORATION**

(Exact name of Registrantas specified in its charter)

 

| **California**                                                        |     | **95-3087593**                 |
|-----------------------------------------------------------------------|----------|--------------------------------|
| *(State or Other Jurisdiction of Incorporation or Organization)* | * * | *(IRS Employer**I.D.  Number)* |

 

| **110 West Easy Street**                    |   |         |
|---------------------------------------------|--------|--------------|
| **Simi Valley, California**                 |   | **93065**    |
| *(Address of Principal Executive  Offices)* |   | *(Zip Code)* |

 

**Registrant’s Telephone Number,Including Area Code:**

(805) 581-4000

 

**Securities registered pursuant toSection 12 (b) of the Act:**

None

 

**Securities registered pursuant toSection 12 (g) of the Act:**

Common Stock

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý  No  o.

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-KSB or any amendments to this Form 10-KSB.  o

 

As of May 31, 2002, the aggregate market value of thevoting stock held by nonaffiliates of the Registrant was $8,134,030.

 

As of May 31, 2002, the Registrant had 6,159,530shares of Common Stock outstanding.

 

 

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**PART I**

 

**Forward-Looking and Cautionary Statements.**

 

With the exception of historical information, the matters discussed inthis Annual Report on Form 10-K include certain forward-looking statements thatinvolve risks and uncertainties.  Inconnection with the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, the Company is hereby identifying informationthat is forward-looking and, accordingly, involves risks and uncertainties,including, without limitation, statements regarding the Company’s futurefinancial performance, that governmental regulations will not negatively andmaterially impact the Company’s current operations, the Company’s ability tocompete in the competitive environment in which the Company operates, and theresults or success of discussions with other entities on mergers, acquisitions,or alliance possibilities and expansion of the Company’s current productofferings.  As a result, actual resultsmay differ materially from those described in the forward-lookingstatement.  The Company cautions thatthe foregoing list of important factors is not exclusive.  The Company does not undertake to update anyforward-looking statement in this Report.

 

**Item 1.****           Business.**

 

**General**

 

PerfectData Corporation (the “Company”) was incorporated in the Stateof California on June 8, 1976.  TheCompany was originally founded by an experienced group of engineers and dataprocessing professionals to design and manufacture a proprietary line ofmagnetic media maintenance equipment - disk pack cleaners and inspectors.  This line of equipment, which has since beendiscontinued, was originally sold to Original Equipment Manufacturers (OEMs)such as Burroughs Corporation (now Unisys Corporation), DEC (Digital EquipmentCorporation), NCR Corporation and 3M Corporation.  Sales of these products by such well-known companies contributedto increased user awareness as to the need for routine computer care andmaintenance.  It also broughtcredibility to the Company as a key manufacturer in the industry.

 

With the evolution of the computer work environment from the sterile,climate-controlled surroundings of a clean room to the mainstream office andhome environments, simple preventative maintenance has become a key element inmaintaining equipment efficiency and personal productivity.  The Company’s cleaning and maintenanceproducts are designed to address the needs of the end users of computers andoffice automation equipment and by maintenance organizations as part of preventativemaintenance programs to reduce equipment “down time” and service costs and toincrease product life.

 

**Change inControl**

 

On March 31, 2000 (the “Closing Date”), Millennium Capital Corporation(“Millennium”), JDK & Associates Inc. (“JDK”) and other buyers (Millennium,JDK and these other buyers are collectively referred to herein as the “Buyers”)purchased from the Company, pursuant to a Stock Purchase Agreement dated as ofJanuary 20, 2000 (the “Stock Purchase Agreement”) by and among the Company,Millennium, JDK and persons or entities which became Buyers pursuant to theStock Purchase Agreement subsequent to its execution, an aggregate of 1,333,333shares of the Company’s Common Stock, no par value (the “Common Stock”), at$2.25 per share or an aggregate purchase price of $2,999,999.25.  A copy of the Stock Purchase Agreement isfiled (by incorporation by reference) as an exhibit to this Report and isincorporated herein by this reference.

 

On the Closing Date, as a result of the foregoing closing, Millenniumand JDK became financial advisors to the Company to seek acquisitions andfinancings on its behalf pursuant to a Consulting Agreement dated as of January20, 2000 (the “Consulting Agreement”) by and among Millennium, JDK and theCompany.  For their services, Millenniumand JDK are to receive a cash fee equal to five percent of the Consideration(as defined) received or paid by the Company with respect to the acquisition orthe financing offering.  A copy of theConsulting Agreement is filed (by incorporation by reference) as an exhibit tothis Report and is incorporated herein by this reference.  See also Note (7) to Financial Statements inthis Report.

 

 

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At a directors’ meeting on the Closing Date, as contemplated by theStock Purchase Agreement, Joseph Mazin, then the Chairman, President and ChiefExecutive Officer of the Company, and Ronald M. Chodorow resigned as directorsof the Company, the number of directors was increased from three to five andBrian Maizlish, Timothy D. Morgan, Corey P. Schlossmann and Harris A. Shapirowere elected as directors to fill the vacancies.  Tracie Savage continued as a director.

 

The shareholders approved the Stock Purchase Agreement and the relatedtransactions at a Special Meeting of Shareholders held on March 31, 2000.

 

Since the change in control, the Company has been seeking acquisitionswhich may or may not be related to its current business.  There can, of course, be no assurance thatany such acquisition will be effected.

 

**The Industry**

 

The Company’s products are sold in the computer and office equipmentaccessories and supplies market.  Thismarket targets small, medium and large sized businesses as well as the homeenvironment.

 

This market is serviced mainly by office product catalogs, officesuperstores, mass merchants, consumer electronics retailers, warehouse clubsand computer superstores.  The Companyis organized to service all of these distribution channels.  The Company believes that the marketpotential for its products will continue to grow and increase in size.  However, there can be no assurance that theCompany will realize any of this potential.

 

**Products**

 

The Company designs, assembles and/or packages all of its cleaning andmaintenance products which it markets and distributes.  The Company sub-contracts for its componentsfrom a variety of established suppliers and manufacturers.  The Company believes that there arealternative sources for these components should an existing supplier ormanufacturer no longer be available on acceptable terms.

 

The consumable cleaning and preventative maintenance products are forhome, office and computer environments. These products are designed to eliminate or minimize contamination inand around computer and office automation equipment.  Use of the Company’s products on a regular basis reduces equipmentdowntime and the need for unnecessary service and repairs.

 

The Company’s principal selling product is the PerfectDuster EcoDusterline of compressed gas dusters.  Thisproduct is offered in a variety of formulations to meet competitive pressuresand buyer demand.  All of these dustersare 100% CFC free and contain no ozone depleting chemicals that could damagethe ozone layer in the earth’s upper atmosphere.

 

Other products that the Company presently sells are CD and tape drivecleaners, CD player cleaners, static control products, laser and inkjet printercleaners, fax and copy machine cleaners, and a variety of premoistened cleaningwipes for specific equipment.

 

**Marketing**

 

**Customers.  **The Company’s products are sold primarily throughretail distribution under the Company’s “PerfectData” trademark.  The retail distribution channel is comprisedof office product catalogs, office product distributors and dealers, stationeryand computer retail stores and large warehouse/superstore type accounts.

 

While the Company sold products to more than 200 customers in theUnited States, Canada and other countries during the fiscal year ended March31, 2002 (“fiscal 2002”), approximately 85% of the Company’s net sales wereaccounted for by its 10 largest customers. Two customers accounted for 33% and 28%, respectively, of totalsales.  Sales to these customers weremade pursuant to specific purchase orders and neither customer is obligated topurchase the Company’s products under any other agreement.  The loss of either or both of these 

 

 

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customerscould have an adverse effect on the Company’s business.  No other customer accounted for more than10% of the Company’s net sales in fiscal 2002.

 

**SalesOrganization.**

 

**Domestic Sales.  **Sales of products under the Company’s registered trademark“PerfectData” are made by independent manufacturers’ representative groups,dealers and large distributors.  Sales ofthe Company’s products to Original Equipment Manufacturers under private labelarrangements are handled by Company sales personnel located in California and,on a selected basis, by certain assigned independent manufacturers’representatives.  Agreements between theCompany and manufacturers’ representatives or distributors may be terminated onshort notice by either party.

 

**InternationalSales.   **Sales of the Company’s products worldwide are handled by the Company’ssales personnel located in California through international distributors andcustomers.  The Company has noagreements with foreign distributors.

 

**CustomerService and Support.  **In order to enhance customer service, training,field support and technical support, the Company has a toll free 800 phonenumber.

 

All products are sold with a “return to manufacturer” warranty forreplacement of damaged or defective goods only.  Products are warranted for 90 days from the date ofpurchase.  Dealers and distributors arerequired to perform this replacement service on behalf of the Company.  All products returned for warrantyreplacement must receive a written return authorization receipt from theCompany prior to the return of any goods. Costs incurred annually by the Company for product warranties have beeninsignificant.

 

**Competition**

 

The Company believes that neither the Company nor any of itscompetitors has had a dominant position in the cleaning and maintenancemarket.  There are many competitors inthis market and some of these competitors are substantially larger in size andhave greater financial resources than the Company.

 

The Company believes that the effectiveness, quality, service and theprice competitiveness of its products, along with its marketing efforts andprograms, product selection and responsiveness to accounts’ needs, have beenthe principal basis on which it competes in this market.

 

The Company’s ability to maintain or increase its market share andexpand its business will depend, in large measure, on its ability to conceive, design,develop and introduce new products to its existing product lines; to continueto offer more products and marketing programs within the Company’s establishedchannels of distribution; and to enter new markets and/or open new channels ofdistribution with related product offerings. There can be no assurance,however, that the Company will achieve any or all of these objectives.

 

**Materials andSupplies**

 

The nature of the raw materials used in the Company’s products arevarious chemicals, metals, plastics and paper goods.  The Company assembles and/or packages its products in the UnitedStates from materials and supplies purchased primarily from domestic vendorsand sub-contractors.  Some of theassembled component parts are manufactured by vendors located in the Far Eastbecause it is more cost effective to obtain goods and fabrication expertise atsignificantly reduced costs when compared with purchasing the same goodsdomestically.

 

The Company believes that its established relationships with its vendorsand suppliers are in good order. The Company has not experienced anysignificant production delays or loss of revenue due to the lack of parts ormaterial shortages.

 

The Company, as a matter of standard business procedures, regularlyreviews its vendor relationships and continually searches for new sources andways to produce its products both domestically and internationally with theimprovement of quality, delivery or lowered cost of goods as its goals.

 

 

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The Company does not believe that federal, state and local provisionswhich have been enacted or adopted regulating the discharge of material intothe environment, or otherwise relating to the protection of the environment,have had, or will have, any material effect on its capital expenditures, itspotential earnings or its competitive position.

 

**Employees**

 

At March 31, 2002, the Company employed 10 persons, of whom 4 wereengaged in assembly and testing, 2 in marketing and sales, and 4 in general managementand administration.

 

The Company believes that its relations with its employees aregood.  The Company has never had a workstoppage and none of its employees are represented by a labor union.  The expansion of the Company’s currentoperations will be dependent, in part, on its ability to attract and retainhighly qualified employees.  There canbe no assurance that the Company will be successful in these efforts.

 

**TerminatedAcquisition**

 

From October 2001 to February 2002, the Company was engaged innegotiations pursuant to which the shareholders of GraphCo Technologies, Inc.(“GraphCo”) would acquire a majority interest in, and control of the Board of,the Company.  GraphCo is a technologies,software and systems development company providing advanced security solutionsfor biometric identification, secure access, surveillance and secure lawenforcement incident management.  Thenegotiations were mutually terminated on February 19, 2002.

 

**Item 2.****           Properties.**

 

The Company is subject to a long-term lease for a building constructedin Simi Valley for the specific needs of the Company.  The modern industrial building, comprising approximately 24,500square feet, was completed during June 1993. The lease is for a term of ten years and includes an option topurchase.  During September 2001, theCompany sublet approximately 6,700 square feet of its facility to anothercompany for use as warehousing pursuant to a 20-month sublease.

 

**Item 3.****           Legal Proceedings.**

 

As of March 31, 2002, there were no material pending legal proceedingsto which the Company was a party or of which any of its property was thesubject.

 

**Item 4.****           Submission of Matters to a Vote of SecurityHolders.**

 

None.

 

**PART II**

 

**Item 5.****           Market for the Registrant’s Common Equity andRelated Stockholder Matters.**

 

**MarketInformation**

 

The Common Stock of the Company is traded on the Nasdaq SmallCap Marketunder the symbol PERF.  The followingtable sets forth the range of high and low sales prices per share of the CommonStock for the indicated quarters of fiscal 2002 and the fiscal year ended March31, 2001 (“fiscal 2001”) as reported by Nasdaq.

 

 

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|           |   | **Sales Price** |   |
|----------------|--------|-----------------|--------|
|           |   | **High**        |   | **Low** |   |
| **2002**       |   |            |   |   |   |
| First Quarter  |   | $               | 1.70   |   | $ | .88 |   |
| Second Quarter |   | $               | 1.59   |   | $ | .57 |   |
| Third Quarter  |   | $               | 4.10   |   | $ | 1.00 |   |
| Fourth Quarter |   | $               | 3.25   |   | $ | .68 |   |
|           |   |            |   |   |   |
| **2001**       |   |            |   |   |   |
| First Quarter  |   | $               | 19.06  |   | $ | 3.12 |   |
| Second Quarter |   | $               | 5.94   |   | $ | 2.25 |   |
| Third Quarter  |   | $               | 4.31   |   | $ | .91 |   |
| Fourth Quarter |   | $               | 3.00   |   | $ | 1.00 |   |

 

#### **Holders**

 

The approximate number of shareholders at March 31, 2002 was 1,800determined by security position listings.

 

## **Dividends**

 

Because of its losses from operations, the Company has not paid anycash dividends on the Common Stock and, until profitability is restored, as towhich and when there can be no assurance, the Company does not intend to payany cash dividends.

 

 

**Item 6.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

#### **Critical AccountingPolicies**

 

Managementbelieves that the following discussion addresses the Company’s most criticalaccounting policies, which are those that are most important to the portrayalof the Company’s financial conditionand results, and require the most difficult, subjective and complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain.

 

Allowance for Doubtful Accounts:

 

The Companyevaluates the collectibility of its accounts receivable and provides anallowance for estimated losses that may result from customers’ inability topay.  The amount of the reserve isdetermined by analyzing known uncollectible accounts, aged receivables andcustomers’ credit-worthiness.  Amountslater determined and specifically identified to be uncollectible are writtenoff against the allowance.

 

Valuation of Inventory:

 

Inventories arevalued at the lower of cost or market. Cost is determined using the first-in, first-out method.  Market value is dependent primarily onconsumer demand and competitor productofferings.  The Company reviewsinventories and records adjustments for any decline in its value belowcost.   Adjustments are primarilydetermined by identifying excess and slow-moving products based upon priorsales, estimating values for such items, and providing for any losses in valuebased upon those estimates.

 

 

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## **Results of Operations**

 

Net sales infiscal 2002 were $1,716,000, a decrease of $447,000, or 21%, from net sales of$2,163,000 in fiscal 2001.

 

The Companybelieves that this decline in net sales in fiscal 2002 primarily related to thecondition of the general economy and the economic slowdown being experienced inthe computer and office products industries, rather than being due tocompetitive conditions or that the Company had lost customers.

 

Included in fiscal2001 were $154,000 of sales related to the Silkyboard (TM) keyboard and screen protectoraccessory product.  In October 2000, theCompany had entered into an interim license agreement to market 50,000 units ofthe Silkyboard keyboard and screen protector accessory for use with the Palmcomputing platform and other PDAs.  TheCompany’s option to acquire a permanent worldwide license with respect to theSilkyboard product, or to acquire all rights thereto, expired unexercised onDecember 22, 2000.  The Company’sinterim license expired on February 1, 2001, and the Company had until October27, 2001 to sell its remaining inventory of Silkyboard products.  In fiscal 2002, sales of this product wereless than $2,000.  The virtual absence ofsales of this product in fiscal 2002 accounted for more than 30% of the declinein sales from fiscal 2001.

 

Cost of goods sold(“Costs”) as a percentage of net sales was 73% for fiscal 2002, as compared to82% for fiscal 2001.  The decrease inCosts in fiscal 2002 directly related to a reduction in the write-down of certaininventories for products that the Company was either deeply discounting ordiscontinuing.  In fiscal 2002, thesecosts aggregated $55,000, of which $7,000 related to the Company’s remaininginventory value of Silkyboard products. In fiscal 2001, these costs aggregated $196,000, of which $136,000 wasrelated to the Company’s inventory of Silkyboard products.  Also included in fiscal 2001 Costs wereroyalties of $46,000 related to Silkyboard product sales.

 

Selling, Generaland Administrative Expenses (“Expenses”) for fiscal 2002 and 2001 were$1,310,000 and $1,815,000, respectively.

 

The decrease inExpenses of $505,000, or 28%, in fiscal 2002 primarily related to cost-cuttingmeasures implemented by the Company at the close of the first fiscal quarterended June 30, 2001.  This included,among others, a reduction in personnel, closing the acquisition and mergeroffice and a reduction in legal fees.

 

Included in fiscal2002 Expenses were costs related to the negotiations with Graphco.  (See the paragraph Terminated Acquisitionunder Item 1. Business).  These expensesaggregated approximately $88,000.

 

The Boardcontinues to seek potential acquisitions, including those in businesses notrelated to the Company’s current operations, as the Company’s long-term “turnaround” strategy.  Although the Companyhas performed significant due diligence with respect to certain other potentialacquisitions proposed to management, as of this date, there has been nopotential acquisition which, after such investigation, has been deemedattractive enough for the Board to authorize preparation of a definitiveagreement.  The directors believe thatthe volatility of the stock market in 2001 and 2002 has adversely affected theCompany’s search.  The Board has,accordingly, concluded that it may take longer to close a suitable acquisitionthan initially contemplated, but remains confident that this objective can beachieved over time.  There can, ofcourse, be no assurance as to when and if a suitable acquisition will beconsummated.

 

Other Income forfiscal 2002 was primarily dividend income of $93,000 net of a loss onsecurities of $37,000.  Other Income forfiscal 2001 was primarily dividend income of $216,000, net of a loss onimpairment of assets from securities of $37,000 and a loss on securities of$14,000.

 

The decreased netloss in fiscal 2002 from that in fiscal 2001 was primarily related to thedecline in Costs and Expenses as described above.  The Board believes that profitability will not be obtained absentthe acquisition of a new business or businesses and or new products.  The Company is currently pursuing bothalternatives.  However, there can be noassurance as to when such pursuits will be successful or as to whenprofitability will be achieved, if at all.

 

 

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### **Liquidity and CapitalResources**

 

The Company’s cashdecreased $419,000 in fiscal 2002.  Thedecrease resulted from cash used in operating activities of $590,000 offset bythe cash provided from the sale of marketable securities of $171,000.  The cash used in operating activities wasprimarily the result of the net loss of $795,000 as well as a decrease inaccounts payable, partially offset by decreases in inventories and accounts receivable.

 

The Company had acurrent ratio of better than 8 to 1 at fiscal year end and no long-term debt.

 

As a result of thecontinuing negative cash flows from operations, the Company is dependent on theinvested proceeds from its March 2000 private placement in order to meet itspayable requirements.  Long term, asindicated above, the Company must seek a new line of business, whether throughacquisition or otherwise.

 

The Companybelieves that, as a result of the cash described in the preceding paragraph,its working capital is adequate to fund the Company’s operations and itsrequirements for the fiscal year ending March 31, 2003.  See Note 2 to Financial Statements for adescription of the concentration of credit risk which the Company has bykeeping these funds only in three banks.

 

At March 31, 2002,the Company had net operating loss and general business tax credit carryforwards for income tax purposes of approximately $5,885,000 and $12,000respectively, available to reduce future potential Federal income taxes.

 

**Item 7.****           Financial Statements.**

 

The information required by this Item is incorporated herein byreference to the financial statements listed in Item 13 of Part III of thisReport.

 

**Item 8.****           Changes in and Disagreements on Accounting andFinancial Disclosure.**

 

None.

 

**PART III**

 

**Item 9.****           Directors and Executive Officers.**

 

**Directors and Executive Officers**

 

The following table contains certain informationrelating to the directors and executive officers of the Company as of May 31,2002.

 
| **Name**             |   | **Age** |   | **Position**                                                             |
|----------------------|--------|---------|--------|--------------------------------------------------------------------------|
| Harris A. Shapiro    |   | 66      |   | Chief Executive  Officer, Director and Chairman of the Board             |
|                 |   |    |   |                                                                     |
| Bryan Maizlish       |   | 40      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Timothy D. Morgan    |   | 47      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Tracie Savage        |   | 39      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Corey P. Schlossmann |   | 47      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Irene J. Marino      |   | 57      |   | Vice President Finance,  Chief Financial Officer and Corporate Secretary |

 

 

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**Business History**

 

Mr. Harris A.Shapiro was elected as a director of the Company and Chairman of the Board onMarch 31, 2000.  On September 7, 2000,he was designated Chief Executive Officer of the Company.  Mr. Shapiro has been the President ofMillennium Capital Corporation, a consulting firm specializing in mergers andacquisitions, since 1994.  He was SeniorVice President Corporate Finance of Gilford Securities Incorporated, aregistered broker-dealer, from January 1, 1999 to March 29, 2000.  Prior to Gilford Securities, he was aManaging Director of Whale Securities Co., L.P., then a registeredbroker-dealer, from June 1993 until December 1998.

 

Mr. Bryan Maizlishwas elected as a director of the Company on March 31, 2000.  Since August 2000, he has been serving as adirector for Lockheed Martin.  Priorthereto, he served as the Executive Vice President, Chief Strategy Officer andChief Financial Officer of MagnetInteractive Noor Group Ltd., a private company furnishing engineeringcomprehensive interactive services. Prior thereto, he held various managerial positions for over a decadewith companies in the media communications industry, such as MCA, Inc., Gulf& Western Corporation and Gene Roddenberry’s Norway Corporation.  Mr. Maizlish serves on the ArchitectureCommittee, Service Provider Group and Marketing Counsels at Sun Microsystemsfor the SunTone Certification program.

 

Mr. Timothy D.Morgan was elected as a director of the Company on March 31, 2000.  He has, since October 1997, been aconsultant on matters of business strategies, taxation, finance and assetprotection techniques, and providing interim Chief Financial Officer andController services.  From 1980 throughOctober 1997, he was a principal of Abacus Tax and Financial Services, a firmspecializing in tax compliance and pension plan administration.  Prior to 1982, Mr. Morgan was manager ofpurchasing and accounting departments for various companies, including DennisonEastman Corporation, Syntel Cavitron, Incorporated, and Contempo Casuals,Incorporated.

 

Ms. Tracie Savage was elected in July 1995 as a director of theCompany.  She is currently a main newsAnchor for KFWB Radio in Los Angeles. She previously worked for the Los Angeles television subsidiary of theNational Broadcasting Company, Inc. (“NBC”). From March 1994 to March 2001, Ms. Savage was the co-anchor of NBCChannel 4’s “Today in L.A.: Weekend”. From 1991 to 1994, she was a general assignment reporter for theindependent Los Angeles station, KCAL. Ms. Savage has been in broadcast journalism for more than 16 years andhas been the recipient of numerous awards and honors in her field.

 

Mr. Corey P.Schlossmann was elected as a director of the Company on March 31, 2000.  Mr. Schlossmann has been Chief ExecutiveOfficer since October 1999, and Chief Financial Officer since January 1999, ofNationwide Auction Systems.  SinceJanuary 1996, he also serves as a partner of Gordon, Fishburn &Schlossmann, a management consulting and accounting firm.  Mr. Schlossmann was a partner of Hankin& Co., a consulting firm, from 1988 until 1995.

 

Ms. Irene J. Marino originally joined the Company in March 1982 andrejoined the Company in September 1987 after a leave of approximately fourmonths.  Ms. Marino was promoted toManager of Finance and Administration in March 1983 and to Controller andAssistant Secretary in March 1986.  Uponrejoining the Company in September 1987, Ms. Marino assumed the positions ofController, Chief Financial Officer and Secretary of the Company.  She was appointed Vice President of Financein August 1989, and has more than 35 years’ experience in finance, accountingand administration.

 

## **Other Directorships**

 

Since October 1999, Corey P. Schlossmann has served as a director ofEntrade, Inc., a New York Stock Exchange holding company whose onlinesubsidiaries (including Nationwide Auction Systems of which he is an executiveofficer as indicated in the preceding section “Business History”) provideauction and asset disposition services to the utility and manufacturingindustries, among others.

 

No other director of the Company serves as a director of a company witha class of securities registered pursuant to Section 12 of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), or any companyregistered as an investment company under the Investment Company Act of 1940,as amended.

 

 

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## **Compliance with Section 16(a) of the Exchange Act**

 

Based solely on a review of Forms 3 and 4 furnished to the Companyunder Rule 16a-3(e) promulgated under the Exchange Act, with respect to fiscal2002, the Company is not aware of any director or executive officer of the Companywho failed to file on a timely basis, as disclosed in such forms, reportsrequired by Section 16(a) of the Exchange Act during fiscal 2002.

 

As of March 31, 2002, i.e., the end of fiscal 2002, there wereno beneficial owners of 10% or more of the Common Stock known to the Companyother than Joseph Mazin who was, until July 27, 2000, the President and ChiefExecutive Officer of the Company and, until March 31, 2000, a director of thecompany.  Mr. Mazin has advised theCompany that he timely filed all reports required by Section 16(a) of theExchange Act during fiscal 2002.

 

**Item 10.****    Executive Compensation.**

 

**SummaryCompensation Table**

 

The following table provides certain summary information concerning thecompensation earned for services rendered in all capacities to the Companyduring each of the last three fiscal years by the Company’s Chief ExecutiveOfficer as of the end of the last fiscal year. No other executive officer of the Company earned in excess of $100,000:

 

**SUMMARYCOMPENSATION TABLE**

 
|                               |   | **Annual  Compensation** |       | **Long-Term  Compensation** |   | **Other  Compensation**              |   |
|------------------------------------|--------|--------------------------|------------|-----------------------------|--------|--------------------------------------|--------|
| **Name and****Principal Position** |   | **Year**                 | ** ** | **Salary**                  |   | **Securities Underlying****Options** |   | **($)** |   |
|                               |   |                     |       | **($)**                     |   |                                 |   |   |   |
| Harris  A. Shapiro (1)             |   | 2002                     |       | 118,125                     |   | —                               |   | 1,750 | (2) |
| Chief  Executive Officer and       |   | 2001                     |       | 87,500                      |   | 25,000                               |   | 2,750 | (2) |
| Chairman  of the Board             |   | 2000                     |       | —                      |   | —                               |   | — |   |

 

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(1)          The Board designated Mr. Shapiro as the Chief Executive Officer of theCompany effective September 2000.  TheCompany and Mr. Shapiro entered into a one-year employment agreement inSeptember 2000 providing for a base annual salary of $150,000.  The Board extended his contract at the samesalary until June 2002.

 

(2)          Mr. Shapiro was paid cash compensation for his services as a director.

 

**Option /SARGrants in Last Fiscal Year**

 

**(1)****                                 2000 Option Plan**

 

In May 2000, the Board of Directors of the Company adopted the StockOption Plan of 2000 (the “ 2000 Option Plan”). In October 2000, the shareholders of the Company approved the 2000Option Plan and ratified options previously granted.  The Company registered under the Securities Act of 1933, asamended (the “Securities Act”), the shares issuable upon the exercise ofoptions granted pursuant to the 2000 Option Plan in a Registration Statement onForm S-8 filed on December 13, 2000.  As a result of such filing, optionees who are not affiliates of theCompany may resell the shares of the Common Stock received upon exerciseimmediately, while affiliates will require a “re-offer prospectus” to resell orwait one year after exercise to resell pursuant to the exemption of Rule 144under the Securities Act.  The Companyhas not as yet filed such re-offer prospectus. The 2000 Option Plan provides for the grant of options to purchaseshares of the Common Stock to directors, officers, employees and consultants ofthe Company.  Non-qualified stockoptions may be granted to directors, officers, employees and consultants.  Incentive stock options, as such form isdefined in Section 422 of the Internal Revenue Code of 1986, as amended (the“Code”), may be granted only to employees. The term of the 2000 Option Plan is for ten years and it provides forthe grants of an aggregate of 2,000,000 shares of the Common 

 

 

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Stock.  The 2000 Option Plan may be administered bythe Board, its Compensation Committee, or any other Committee designated by theBoard.

 

The 2000 OptionPlan, consistent with the provisions of the Code, provides that the exerciseprice of an incentive stock option shall not be less than the fair market valueof the Common Stock on the date of grant, except that, if the employee ownsstock possessing more than 10% of the total combined voting power of allclasses of stock, the exercise price of the option must be at least 110% of thefair market value of the Common Stock on the dateof grant and the incentive stock option cannot be exercised after five yearsfrom the date of grant.  No stock optiongranted has, and no option to be granted under the 2000 Option Plan may have, aterm in excess of ten years.  Theexercise price of a non-statutory or nonqualified option may be less than thefair market value on the date of grant.

 

The number ofshares subject to an outstanding option and the exercise price thereof aresubject to adjustment in the event of a stock dividend, stock split,reorganization, recapitalization, combination of shares, change in corporatestructure or similar events.  Nofractional shares will be issued upon exercise and the Company has no obligation to pay for such fractionalshare.

 

Options granted todate are not exercisable during the first year after the date of grant andthereafter become exercisable in annual installments of 25% each.  It is expected that future options will begranted on a similar basis.  Someoptions to be granted to employees may have performance goals as the conditionprecedent to becoming exercisable.

 

Options to begranted under the 2000 Option Plan will generally be non-transferable and not immediatelyexercisable.

 

If the optionee’semployment will terminate for any reason other than his or her death ordisability, he or she may, for a period of up to three months, exercise theoption to the extent exercisable upon the date of termination.  If theoptionee’s employment will terminate because of his or her total and permanentdisability (asdefined in the Code), the optionee will have 12 months toexercise the stock option to the extent exercisable upon the date oftermination.  In the event of otherdisability causing termination, the optionee may have six months  (three months in the event the optioneewants continuous treatment of the stock option as an incentive stock option) toexercise the stock option to the extent exercisable upon the date of termination.  If the optionee dies, his estate may exercisethe stock option to the extent exercisable upon the date of death of theoptionee, whether it occurred during the initial term or during the three, sixor 12-month periods described in the three preceding sentences.  In no event may a stock option be exercisedbeyond its original expiration date. Similar provisions will be applicable to optionees who are notemployees.

 

For a consultant to be eligible to receive a grant of a stock optionunder the 2000 Option Plan, the optionee must be a natural person and theservices rendered for the Company must be of a bona fide nature and not inconnection with the offer or sale of securities of the Company in a capitalraising transaction and do not directly or indirectly promote or maintain amarket for the Company’s securities.

 

At March 31, 2002, options covering a total of 260,000 shares of theCommon Stock were outstanding under the 2000 Option Plan at a weighted averageexercise price of $11.25 per share.

 

**(2)****                                 Activity in Fiscal 2002**

 

During fiscal 2002, an option for 2,500 shares was granted to anexecutive officer of the Company.

 

No stock options were granted to theCompany’s Chief Executive Officer who is the sole executive officer named inthe Summary Compensation Table during fiscal 2002.

 

The Company has never granted any stockappreciation rights (SARs).

 

 

11

----

 

**OptionExercises and Values**

 

The following table provides certain summary information concerning the exercise of options during fiscal 2002and unexercisable options held as of the end of fiscal 2002 by the ChiefExecutive Officer who is the sole executive officer named in the SummaryCompensation Table:

 

**AGGREGATEDOPTION EXERCISES IN LAST FISCAL YEAR**

**AND FISCAL YEAREND OPTION VALUES**

 
| **Name**          | ** ** | **Shares  Acquired  On****Exercise** | ** ** | **Value****Realized** |   | **Number of  Unexercised  Options Held at****Fiscal  Year End** | ** ** | **Value of  Unexercised In-the-****Money Optionsat FY-End** |   |
|-------------------|------------|--------------------------------------|------------|-----------------------|--------|-----------------------------------------------------------------|------------|-------------------------------------------------------------|--------|
|              |       | **(#)**                              |       | **($)**               |   | **(#)**                                                         |       | **($)**                                                     |   |
| Harris A. Shapiro |       | —                               |       | —                |   | 50,000                                                          | (1)        |                                                        | (2)    |

 

----

(1)                                  As of March 31, 2002, options were exercisable topurchase 24,999 shares.

 

(2)                                  Such value is based upon the market value of theCommon Stock as of March 31, 2002, less the exercise price payable per shareunder such options.  As of March 31,2002, the market value was less than the exercise price.

 

**Directors’Compensation**

 

Each director is paid $250.00 for telephonic participation and $500.00for attendance in person at a meeting of the Board.

 

Directors may be granted stock options as compensation for theirservices.  During fiscal 2002, no newoptions were granted to directors of the Company.

 

There are no otherrelationships with respect to otherentities that would require disclosure here under Item 404 of Regulation S-K.

 

**Item 11.****    Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.**

 

**SecurityOwnership**

 

The following table sets forth, as of May 31, 2002, certain informationwith respect to all shareholders known by the Company to be beneficial ownersof more than 5% of its outstanding shares of the Common Stock, the ChiefExecutive Officer of the Company (being the sole executive officer named in theSummary Compensation Table in Item 10 to this Report), all directors and allofficers and directors of the Company as a group.  The ownership information was furnished to the Company by theperson or entity.

 

 

12

----

 
| **Name and Address  of Beneficial Owner**                                                                                        |   | **Number of  Shares  of Common Stock  Beneficially Owned** |   | **Percentage  of  Common Stock  Beneficially Owned (1)** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|----------------------------------------------------------|--------|
| Joseph  Mazin  11120 Sherman Way  Sun Valley, CA  91252                                                                     |   | 794,997                                                    | (2)    | 12.9                                                     |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| Flamemaster  Corporation  11120 Sherman Way  Sun Valley, CA  91252                                                          |   | 537,997                                                    |   | 8.7                                                      |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| William  B. Wachtel,  Trustee of Digital Trust (3)  c/o Wachtel & Masyr, LLP  110 East 59th Street  New York, NY  10022 |   | 427,873                                                    |   | 6.9                                                      |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| Harris  A. Shapiro (4)  110 West Easy Street  Simi Valley, CA 93065                                                              |   | 309,499                                                    | (5)    | 5.0                                                      |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| Bryan  Maizlish (6)  9705 Conestoga Way  Potomac, MD  20854                                                                 |   | 29,255                                                     | (7)    | Nil                                                      |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| Timothy  D. Morgan (6)  11734 Gladstone Circle  Fountain Valley, CA  92708                                                  |   | 30,455                                                     | (7)    | Nil                                                      |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| Tracie  Savage (6)  6212 Banner Avenue  Los Angeles, CA  90038                                                              |   | 39,555                                                     | (8)    | Nil                                                      |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| Corey  P. Schlossmann (6)  19654-A Roscoe Blvd.  Northridge, CA  91324                                                      |   | 459,758                                                    | (7)    | 7.4                                                      |   |
|                                                                                                                             |   |                                                       |   |                                                     |   |
| All  directors and officers as a group  (6 in number)                                                                            |   | 873,338                                                    | (9)    | 13.9                                                     |   |

 

----

(1)                                  The percentages computed in the table are basedupon 6,159,530 shares of the Common Stock which were outstanding on May 31,2002.  Effect is given, pursuant to Rule13-d(1)(i) under the Exchange Act, to shares issuable upon the exercise ofoptions currently exercisable or exercisable within 60 days of May 31, 2002.

 

(2)                                  Theshares of the Common Stock reported in the table include (a) 537,997 sharesowned by Flamemaster Corporation (“Flamemaster”) for which Mr. Mazin has votingpower as the President, Chairman and Chief Executive Officer of Flamemaster;(b) 36,000 shares owned by the Flamemaster Employees’ Profit Sharing Plan forwhich Mr. Mazin is the fiduciary; and (c) 23,000 shares owned by AltiusInvestment Corporation (“Altius”) for which Mr. Mazin has shared voting poweras Chairman of the Board of Altius.  Theshares reported in the table also include (x) 5,000 shares issuable upon theexercise of an option expiring November 6, 2003 and (y) 1,000 shares issuableupon the exercise of an option expiring January 27, 2003, both options beingheld by Donna Mazin, his wife.  Certainof the shares reported in the table are owned by Ms. Mazin or as to whichshares she shares dispositive and voting powers with Mr. Mazin.

 

(3)                                  WilliamB. Wachtel as the Trustee of the Digital Trust has, under the trust agreement,sole voting and investment power with respect to the shares reported in thetable. Harris Shapiro, currently the Chairman of the Board, Chief ExecutiveOfficer and a director of the Company, was the settler of the Digital Trust andmade an irrevocable grant to it of the assets which the Digital Trust used toeffect the purchase of the shares.  Thebeneficiaries of the Digital Trust are Mr. Shapiro’s children and grandchildrenwho survive him, although the Trustee, in his absolute discretion, may pay orapply yearly income or the principal of the Trust to any beneficiary.  Because he made an irrevocable grant and hasno voting or investment power with 

 

 

13

----

 

respect to the shares,Mr. Shapiro is not the beneficial owner of the shares reported in the table asbeing owned of record by the Digital Trust and beneficially by the Trustee.

 

(4)                                  Mr.Shapiro is the Chairman of the Board, the Chief Executive Officer and adirector of the Company.

 

(5)                                  The shares of the Common Stock reported inthe table reflect (a) 284,500 shares owned by Millennium for which Mr. Shapirohas voting power as its President; (b) 16,666 shares issuable upon the exerciseof an option expiring March 30, 2010 under the 2000 Option Plan; and (c) 8,333shares issuable upon the exercise of an option expiring September 6, 2010 underthe 2000 Option Plan.  The shares of theCommon Stock reported in the table do not include (x) 8,334 shares issuableupon the exercise of the option described in (b) or (y) 16,667 shares issuableupon the exercise of the option described in (c), neither of which wasexercisable as to such shares at May 31, 2002 or within 60 daysthereafter.  In addition, the shares ofthe Common Stock do not reflect 10,000 shares issuable upon the exercise of aConsulting Warrant which, if not granted to a third person or persons, may beexercised by Millennium.

 

(6)                                  Adirector of the Company.

 

(7)                                  The shares of the Common Stock reported inthe table include (a) 16,666 shares issuable upon the exercise of an optionexpiring March 30, 2010 under the 2000 Option Plan and (b) 8,333 sharesissuable upon the exercise of an option expiring September 6, 2010 under the2000 Option Plan.  The shares of theCommon Stock reported in the table do not include (x) 8,334 shares issuableupon the exercise of the option described in (a) or (y) 16,667 shares issuableupon the exercise of the option described in (b), neither of which wasexercisable as to such shares at May 31, 2002 or within 60 days thereafter.

 

(8)                                  The shares of the Common Stock reported inthe table include (a) 10,000 shares issuable upon the exercise of an optionexpiring July 20, 2005; (b) 16,666 shares issuable upon the exercise of anoption expiring March 30, 2010 under the 2000 Option Plan; and (c) 8,333 sharesissuable upon the exercise of an option expiring September 6, 2010 under the2000 Option Plan.  The shares of theCommon Stock reported in the table do not include (x) 8,334 shares issuable upon the exercise of the option described in (b) or(y) 16,667 shares issuable upon the exercise of the option described in (c),neither of which was exercisable as to such shares at May 31, 2002 or within 60days thereafter.

 

(9)                                  The shares of the Common Stock reported inthe table include (a) those shares indicated in the text to Notes 5, 7 and 8and (b) 1,500 shares issuable to an executive officer upon the exercise of anoption expiring February 3, 2003.  Theshares of the Common Stock reported in the table do not include those issuableupon the exercise of an option expiring October 30, 2011 to purchase 2,500shares granted to this executive officer under the 2000 Option Plan which wasnot exercisable at May 31, 2002 or within 60 days thereafter.

 

 

14

----

 

**Equity Compensation Plans**

 

The followingtable sets forth, as of March 31, 2002, certain summary information withrespect to compensation plans under which shares of the Company’s Common Stockare authorized for issuance:

 

**EQUITYCOMPENSATION PLAN INFORMATION**

 
| ** **                                                            | ** ** | **Number of   securities  to be issued upon  exercise of outstanding   options, warrants and  rights** | ** ** | **Weighted-average  price of  outstanding  options, warrants  and rights** | ** ** | **Number of****securities remainingavailable for futureissuance under equitycompensation plans(excluding securitiesreflected in  column (a))** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                  |       |                                                                                                        |       |                                                                       |       |                                                                                                                                           |       |
|                                                                  |       | **(a)**                                                                                                     |       | **(b)**                                                                    |       | **(c)**                                                                                                                                        |       |
| Equity  compensation plans approved by security holders               |       | 291,500                                                                                                     |       | $                                                                          | 10.27      |                                                                                                                                           | 1,740,000  |   |
|                                                                  |       |                                                                                                        |       |                                                                       |       |                                                                                                                                           |       |
| Equity  compensation plans not approved by security holders  (1) |       | 33,000                                                                                                      |       | $                                                                          | 2.43       |                                                                                                                                           | 63,000     |   |
|                                                                  |       |                                                                                                        |       |                                                                       |       |                                                                                                                                           |       |
| Total                                                                 |       | 324,500                                                                                                     |       | $                                                                          | 9.48       |                                                                                                                                           | 1,803,000  |   |

 

----

(1)                                  Plansnot approved by the Company’s shareholders are:

 

(a)                                  InApril 1999, the Board of Directors authorized a reserve of 100,000 shares ofthe Common Stock for granting of warrants and options.  Said warrants and options are sold for aprice of five cents per share and have an exercise price of $1.56 pershare.  The term is three years fromdate of issuance.

 

(b)                                 InNovember 2000, the Board of Directors granted a consultant of the Company anoption expiring November 26th, 2003 to purchase 20,000 shares of the CommonStock at an exercise price of $3.00 per share.

 

Item 12.       Certain Relationships and RelatedTransactions.

 

None.

 

Item 13.       Exhibits, FinancialStatements and Reports on Form 8-K.

 

(a)                                  DocumentsFiled with Report

 

(1)                                  FinancialStatements

 

The financialstatements listed on the accompanying Index to Financial Statements are filedas part of this Report.

 

 

15

----

 

(2)                                  Exhibits

 

The exhibitslisted on the accompanying Index to Exhibits are filed as part of  this Report.

 

(b)                                 Reportson Form 8-K

 

Noreports on Form8-K were filed by the Company during the last quarter of the fiscal year endedMarch 31, 2002.

 

 

16

----

 

**PERFECTDATA CORPORATION**

 

**SEC Form10-KSB**

 

**Index toFinancial Statements**

 

| **Financial  Statements**                                                                                      |   | **Page** |
|----------------------------------------------------------------------------------------------------------------|--------|----------|
| Independent Auditors’ Report — March 31, 2002 and  2001                                              |   | F-1      |
|                                                                                                           |   |     |
| Balance Sheet — March 31, 2002                                                                            |   | F-2      |
|                                                                                                           |   |     |
| Statements of  Operations —   Years Ended March 31, 2002 and 2001                                         |   | F-3      |
|                                                                                                           |   |     |
| Statements of  Shareholders’ Equity and Comprehensive Income (Loss)   Years Ended March 31, 2002 and 2001 |   | F-4      |
|                                                                                                           |   |     |
| Statements of  Cash Flows —   Years Ended March 31, 2002 and 2001                                         |   | F-5      |
|                                                                                                           |   |     |
| Notes to Financial Statements                                                                                  |   | F-6      |

 

 

17

----

 

**IndependentAuditors’ Report**

** **

** **

** **

The Board of Directors and Shareholders

PerfectData Corporation:

 

 

We have audited the accompanying balance sheet ofPerfectData Corporation as of March 31, 2002, and the related statements ofoperations, shareholders’ equity and comprehensive income (loss), and cashflows for the years ended March 31, 2002 and 2001. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits. 

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion. 

 

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial position of PerfectDataCorporation as of March 31, 2002, and the results of its operations and itscash flows for the years ended March 31, 2002 and 2001 in conformity withaccounting principles generally accepted in the United States of America.

 

/s/ KPMG LLP

 

 

Los Angeles, California

May 10, 2002 

 

 

F-1

----

 

**PERFECTDATACORPORATION**

** **

Balance Sheet

 

March 31, 2002

 

(Amounts in thousands, exceptshare amounts)

 
| **Assets**                                                                                          |   |
|-----------------------------------------------------------------------------------------------------|--------|
| Current assets:                                                                                     |   |   |   |
| Cash and cash  equivalents                                                                          |   | $ | 2,758 |   |
| Accounts  receivable, net                                                                           |   | 178 |   |
| Inventories                                                                                         |   | 154 |   |
| Prepaid expenses  and other current assets                                                          |   | 36 |   |
| Total current  assets                                                                               |   | 3,126 |   |
|                                                                                                |   |   |   |
| Property and equipment, at cost, net                                                                |   | 26 |   |
| Other assets, net                                                                                   |   | 19 |   |
|                                                                                                |   | $ | 3,171 |   |
|                                                                                                |   |   |   |
| **Liabilities  and Shareholders’ Equity**                                                      |   |
| Current liabilities:                                                                                |   |   |   |
| Accounts payable                                                                                    |   | $ | 207 |   |
| Accrued  salaries, wages, and vacation                                                              |   | 38 |   |
| Other accrued  expenses                                                                             |   | 119 |   |
| Total current  liabilities                                                                          |   | 364 |   |
|                                                                                                |   |   |   |
| Commitments and contingencies (note 9)                                                              |   |   |   |
|                                                                                                |   |   |   |
| Shareholders’ equity:                                                                          |   |   |   |
| Preferred stock.  Authorized 2,000,000 shares; none issued                                          |   | — |   |
| Common stock, no  par value. Authorized 10,000,000 shares; issued and outstanding 6,159,530  shares |   | 11,206 |   |
| Accumulated  deficit                                                                                |   | (8,399 | ) |
| Net  shareholders’ equity                                                                      |   | 2,807 |   |
|                                                                                                |   | $ | 3,171 |   |

 

 

See accompanying notes to financial statements.

 

 

F-2

----

 

**PERFECTDATACORPORATION**

** **

Statements of Operations

 

Years ended March 31, 2002 and2001

 

(Amounts in thousands, except pershare information)

 
|                                          |   | **2002** |   | **2001** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| Net sales                                     |   | $        | 1,716  |     | 2,163  |   |
| Cost of goods sold                            |   | 1,255    |   | 1,763    |   |
| Gross profit                                  |   | 461      |   | 400      |   |
|                                          |   |     |   |     |   |
| Selling, general, and administrative expenses |   | 1,310    |   | 1,815    |   |
| Loss from  operations                         |   | (849     | )      | (1,415   | )      |
|                                          |   |     |   |     |   |
| Other income:                                 |   |     |   |     |   |
| Interest, net                                 |   | —   |   | 16       |   |
| Other, net                                    |   | 54       |   | 140      |   |
| Net loss                                      |   | $        | (795   | )        | (1,259 | ) |
|                                          |   |     |   |     |   |
| Net loss per common share:                    |   |     |   |     |   |
| Basic and  diluted                            |   | $        | (0.13  | )        | (0.21  | ) |
|                                          |   |     |   |     |   |
| Weighted average shares outstanding:          |   |     |   |     |   |
| Basic and  diluted                            |   | 6,159    |   | 6,114    |   |

 

 

See accompanying notes to financial statements.

 

 

F-3

----

 

**PERFECTDATACORPORATION**

** **

Statements of Shareholders’ Equity and

Comprehensive Income (Loss) (Notes7 and 8)

 

Years ended March 31, 2002 and 2001

 

(Amounts in thousands)

 
|                                               |   | **Comprehensive  loss** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated  deficit** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Net  shareholders’  equity** | ** ** |
|----------------------------------------------------|--------|-------------------------|------------|------------|------------|------------|------------|--------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
|                                               |   |
|                                               |   | **Common  stock**       |
|                                               |   | **Shares**              |       | **Amount** |
| Balance at March 31, 2000                          |   |                    |       | 6,094      |       | $          | 11,088     |                     | (6,345     | )                                                    | (24        | )                                   | 4,719      |   |
|                                               |   |                    |       |       |       |       |       |                     |       |                                                 |       |                                |       |
| Stock compensation                                 |   | —                  |       | —     |       | 57         |       | —                   |       | —                                               |       | 57                                  |       |
| Common stock issued upon exercise of stock options |   | —                  |       | 65         |       | 61         |       | —                   |       | —                                               |       | 61                                  |       |
| Comprehensive loss:                                |   |                    |       |       |       |       |       |                     |       |                                                 |       |                                |       |
| Net unrealized loss on marketable securities       |   | $                       | (9         | )          | —     |       | —     |                     | —     |                                                 | (9         | )                                   | (9         | ) |
| Net loss                                           |   | (1,259                  | )          | —     |       | —     |       | (1,259                   | )          | —                                               |       | (1,259                              | )          |
| Total comprehensive loss                           |   | $                       | (1,268     | )          |       |       |       |                     |       |                                                 |       |                                |       |   |
|                                               |   |                    |       |       |       |       |       |                     |       |                                                 |       |                                |       |
| Balance at March 31, 2001                          |   |                    |       | 6,159      |       | 11,206     |       | (7,604                   | )          | (33                                                  | )          | 3,569                               |       |
|                                               |   |                    |       |       |       |       |       |                     |       |                                                 |       |                                |       |
| Comprehensive loss:                                |   |                    |       |       |       |       |       |                     |       |                                                 |       |                                |       |
| Realized loss on marketable securities             |   | $                       | —     |       | —     |       | —     |                     | —     |                                                 | 33         |                                | 33         |   |
| Net loss                                           |   | (795                    | )          | —     |       | —     |       | (795                     | )          | —                                               |       | (795                                | )          |
| Total comprehensive loss                           |   | $                       | (795       | )          |       |       |       |                     |       |                                                 |       |                                |       |   |
|                                               |   |                    |       |       |       |       |       |                     |       |                                                 |       |                                |       |
| Balance at March 31, 2002                          |   |                    |       | 6,159      |       | $          | 11,206     |                     | (8,399     | )                                                    | —     |                                | 2,807      |   |

 

 

See accompanying notes to financial statements.

 

 

F-4

----

 

**PERFECTDATACORPORATION**

** **

Statements of Cash Flows

 

Years ended March 31, 2002and 2001

 

(Amounts in thousands)

 
|                                                                         |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash flows from operating activities:                                        |   |     |   |     |   |
| Net loss                                                                     |   | $        | (795   | )        | (1,259 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |     |   |     |   |
| Depreciation and  amortization                                               |   | 31       |   | 25       |   |
| Stock  compensation                                                          |   | —   |   | 57       |   |
| Loss on sale or  impairment charge of marketable securities                  |   | 37       |   | 46       |   |
| (Increase)  decrease in accounts receivable                                  |   | 73       |   | (18      | )      |
| (Increase)  decrease in inventories                                          |   | 237      |   | (16      | )      |
| Decrease in prepaid  expenses and other assets                               |   | 17       |   | 8        |   |
| Increase  (decrease) in accounts payable                                     |   | (153     | )      | 138      |   |
| Increase  (decrease) in accrued expenses                                     |   | (37      | )      | 57       |   |
| Net cash used in  operating activities                                       |   | (590     | )      | (962     | )      |
|                                                                         |   |     |   |     |   |
| Cash flows from investing activities:                                        |   |     |   |     |   |
| Purchases of  property and equipment                                         |   | —   |   | (29      | )      |
| Sale of  marketable securities                                               |   | 171      |   | 20       |   |
| Net cash  provided by (used in) investing activities                         |   | 171      |   | (9       | )      |
|                                                                         |   |     |   |     |   |
| Cash flows from financing activities:                                        |   |     |   |     |   |
| Proceeds from  the exercise of stock options                                 |   | —   |   | 61       |   |
| Net cash  provided by financing activities                                   |   | —   |   | 61       |   |
| Net decrease in  cash and cash equivalents                                   |   | (419     | )      | (910     | )      |
|                                                                         |   |     |   |     |   |
| Cash and cash equivalents at beginning of year                               |   | 3,177    |   | 4,087    |   |
| Cash and cash equivalents at end of year                                     |   | $        | 2,758  |     | 3,177  |   |
|                                                                         |   |     |   |     |   |
| Supplemental disclosure of cash flow information:                            |   |     |   |     |   |
| Cash paid during  the year for:                                              |   |     |   |     |   |
| Income taxes                                                                 |   | $        | — |     | — |   |
| Interest                                                                     |   | —   |   | —   |   |

 

 

See accompanying notes to financial statements.

 

 

F-5

----

 

**PERFECTDATACORPORATION**

** **

Notes to FinancialStatements 

 

March 31, 2002 and 2001 

 

 

**(1)****                                ****Summary of SignificantAccounting Policies**

** **

***(a)******                                ******Descriptionof Business***

*** ***

PerfectData Corporation (theCompany) designs, assembles, and sells computer and office equipment care andmaintenance products. 

 

***(b)******                                ******CashEquivalents***

*** ***

The Company considers allhighly liquid certificates of deposit with an original maturity of three monthsor less to be cash equivalents. 

 

***(c)******                                 ******MarketableSecurities***

*** ***

The Company classifies itsdebt and equity securities in one of three categories: trading,available-for-sale, or held-to-maturity. Trading securities are bought and heldprincipally for the purpose of selling them in the near term. Held-to-maturitysecurities are those securities in which the Company has the ability and intentto hold the security until maturity. All securities not included in trading orheld-to-maturity are classified as available-for-sale. 

 

Trading andavailable-for-sale securities are recorded at fair value. Held-to-maturitysecurities are recorded at amortized cost, adjusted for the amortization oraccretion of premiums or discounts. Unrealized holding gains and losses ontrading securities are included in earnings. Unrealized holding gains andlosses, net of the related tax effect, on available-for-sale securities areexcluded from earnings and are reported as a separate component of othercomprehensive income until realized. Realized gains and losses from the sale ofavailable-for-sale securities are determined on a specific-identificationbasis. 

 

A decline in the marketvalue of any available-for-sale or held-to-maturity security below cost that isdeemed to be other than temporary results in a reduction in the carrying amountto fair value. The impairment is charged to earnings and a new cost basis forthe security is established. Premiums and discounts are amortized or accretedover the life of the related held-to-maturity or available-for-sale security asan adjustment to yield using the interest method. Dividend and interest incomeare recognized when earned. 

 

***(d)******                                ******Inventories***

*** ***

Inventories are stated atthe lower of cost or market. Cost is determined using the first-in, first-outmethod. 

 

***(e)******                                 ******FinancialInstruments***

*** ***

The carrying amounts relatedto cash and cash equivalents, accounts receivable, and accounts payableapproximate fair value due to their relatively short maturity. 

 

***(f)******                                   ******Plant andEquipment***

*** ***

Plant and equipment arestated at cost. 

 

 

F-6

----

 

Depreciation on plant andequipment is calculated using the straight-line method over the estimateduseful lives of the assets. Leasehold improvements are amortized straight lineover the shorter of the lease term or estimated useful life of the asset. Theestimated useful lives are as follows: 

 

| Machinery and equipment |   | 3 to 5 years  |
|-------------------------|--------|---------------|
| Furniture and fixtures  |   | 3 to 5 years  |
| Leasehold improvements  |   | Life of lease |
| Tooling                 |   | 1 to 5 years  |

 

***(g)******                                ******RevenueRecognition***

 

The Company recognizesrevenue on sales when products are shipped and the customer takes ownership andassumes risk of loss. 

 

***(h)******                                ******Loss perCommon Share***

 

Basic and diluted loss percommon share is based on the weighted average number of shares outstandingduring each of the respective periods. Diluted earnings per share includes thedilutive impact of stock options, warrants, or other equity instruments. Duringthe years presented herein, because net losses were incurred, the impact fromsuch common stock equivalents was antidilutive; accordingly, the common stockequivalents were excluded from the calculation. 

 

***(i)******                                   ******IncomeTaxes***

 

Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. The realizability ofdeferred tax assets is assessed throughout the year and a valuation allowanceis established accordingly. 

 

***(j)******                                   ******Use ofEstimates***

 

Management of the Companyhas made a number of estimates and assumptions relating to the reporting ofassets and liabilities and the disclosure of contingent assets and liabilitiesto prepare these financial statements in conformity with generally acceptedaccounting principles. Actual results could differ from those estimates. 

 

Significant estimatesinclude the allowance for doubtful accounts, inventory valuation, deferredincome tax asset valuation allowances, and the estimated future operating cashflows from the Company’s long-lived assets. Considerable management judgment isnecessary to estimate future operating cash flows as future cash flows areimpacted by competitive and other factors that are generally out ofmanagement’s control. Accordingly, actual results could vary significantly frommanagement’s estimates. 

 

 

F-7

----

 

***(k)******                                ******Stock-BasedCompensation***

 

The Company applies theintrinsic value-based method of accounting prescribed by Accounting PrinciplesBoard (APB) Opinion No. 25, *Accounting forStock Issued to Employees*, and related interpretations including FASBInterpretation No. 44, *Accounting forCertain Transactions involving Stock Compensation, an interpretation of APBOpinion No. 25,* issued in March 2000, to account for its fixed planstock options. Under this method, compensation expense is recorded on the dateof grant only if the current market price of the underlying stock exceeded theexercise price. SFAS No. 123, *Accounting forStock-Based Compensation*, established accounting and disclosurerequirements using a fair value-based method of accounting for stock-basedemployee compensation plans. The Company follows the fair value provisions ofSFAS No. 123 for options or warrants issued to nonemployee consultants. Asallowed by SFAS No. 123, the Company has elected to continue to apply theintrinsic value-based method of accounting described above and has adopted thedisclosure requirements of SFAS No. 123. 

 

***(l)******                                   ******Impairmentof Long-Lived Assets and Long-Lived Assets to Be Disposed Of***

 

The Company accounts forlong-lived assets in accordance with the provisions of SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*. This statement requiresthat long-lived assets and certain identifiable intangibles be reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto future net cash flows expected to be generated by the asset. If such assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell. 

 

***(m)******                             ******RecentlyIssued Accounting Standards***

 

In June 2001, the FASBissued SFAS No. 141, *Business Combinations*(SFAS No. 141), and SFAS No. 142, *Goodwilland Other Intangible Assets* (SFAS No. 142). SFAS No. 141 requiresthat the purchase method of accounting be used for all business combinations.SFAS No. 141 specifies criteria that intangible assets acquired in a businesscombination must meet to be recognized and reported separately from goodwill.SFAS No. 142 will require that goodwill and intangible assets with indefiniteuseful lives no longer be amortized, but instead tested for impairment at leastannually in accordance with the provisions of SFAS No. 142. SFAS No. 142 alsorequires that intangible assets with estimable useful lives be amortized overtheir respective estimated useful lives to their estimated residual values andreviewed for impairment in accordance with SFAS No. 121 and, subsequently, SFASNo. 144 after its adoption. 

 

The Company adopted theprovisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effectiveApril 1, 2002. Goodwill and intangible assets determined to have an indefiniteuseful life acquired in a purchase business combination completed after June30, 2001, but before SFAS No. 142 is adopted in full, are not amortized.Goodwill and intangible assets acquired in business combinations completedbefore July 1, 2001 continued to be amortized and tested for impairment priorto the full adoption of SFAS No. 142. The adoption of SFAS Nos. 141 and 142 isnot expected to have a material impact on the Company’s financial condition orresults of operations. 

 

 

F-8

----

 

In June 2001, the FASBissued SFAS No. 143, *Accounting for AssetRetirement Obligations* (SFAS No. 143). SFAS No. 143 requires theCompany to record the fair value of an asset retirement obligation as aliability in the period in which it incurs a legal obligation associated withthe retirement of tangible long-lived assets that result from the acquisition,construction, development, and/or normal use of the assets. The Company alsorecords a corresponding asset which is depreciated over the life of the asset.Subsequent to the initial measurement of the asset retirement obligation, theobligation will be adjusted at the end of each period to reflect the passage oftime and changes in the estimated future cash flows underlying the obligation.The Company is required to adopt SFAS No. 143 on April 1, 2003. The adoption ofSFAS No. 143 is not expected to have a material impact on the Company’sfinancial condition or results of operations. 

 

In August 2001 the FASBissued SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets (SFAS No. 144)*. SFAS No.144 addresses financial accounting and reporting for the impairment or disposalof long-lived assets. This statement requires that long-lived assets bereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to future net cash flows expected to be generated by the asset. Ifthe carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. SFAS No. 144 requires companiesto separately report discontinued operations and extends that reporting to a componentof an entity that either has been disposed of (by sale, abandonment, or in adistribution to owners) or is classified as held for sale. Assets to bedisposed of are reported at the lower of the carrying amount or fair value lesscosts to sell. The Company is required to adopt SFAS No. 144 on April 1, 2002.The adoption of SFAS No. 144 is not expected to have a material impact on theCompany’s financial condition or results of operations. 

 

In April 2002, the FASBissued SFAS No. 145, *Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections,* which requires that the extinguishment of debt not beconsidered an extraordinary item under APB Opinion No. 30, *Reporting the Results of Operations – Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and*Transactions, unless the debtextinguishment meets the unusual in nature and infrequency of occurrencecriteria in APB 30. SFAS No. 145 is effective for fiscal years beginning afterMay 15, 2002, and upon adoption, companies must reclassify prior period itemswhich do not meet the extraordinary item classification criteria in APB 30. Theadoption of SFAS No. 145 is not expected to have a material impact on theCompany’s financial condition or results of operations. 

 

**(2)****                                ****Concentration of Credit Risk**

 

Financial instruments whichpotentially subject the Company to a concentration of credit risk principallyconsist of cash, cash equivalents, and accounts receivable. 

 

As of March 31, 2002, theCompany had approximately $2,760,000 of cash and cash equivalents in threebanks which exposes the Company to concentration of credit risk. The cashdeposited at each bank is federally insured up to $100,000. 

 

 

F-9

----

 

The Company sells itsprincipal products to a number of customers in the retail industry. During theyears ended March 31, 2002 and 2001, two customers accounted for more than 10%of net sales. These customers each accounted for 28% and 33%, and 27% and 24%in 2002 and 2001, respectively. As of March 31, 2002 and 2001, approximately38% and 36% of recorded accounts receivable were from two wholesale/discountmerchants. For the years ended March 31, 2002 and 2001, sales made to thesecustomers amounted to $560,000 and $483,000 and $522,000 and $584,000,respectively. To reduce credit risk, the Company performs ongoing creditevaluations of its customers’ financial conditions but does not generally requirecollateral. New customers requiring large credit accounts are required toprovide letters of credit. 

 

**(3)****                                ****Marketable Securities**

 

During the year ended March31, 2002, the Company disposed of all of its available-for-sale securities,resulting in a realized loss of $37,000. Realized losses for sales ofavailable-for-sale securities for the year ended March 31, 2001 were $46,000.Net unrealized holding losses at March 31, 2002 and 2001 were approximately $0and $33,000, respectively. 

 

**(4)****                                ****Inventories**

 

Inventories, consisting ofmaterials, labor, and other costs, are stated at the lower of cost or market.Inventories at March 31, 2002 are summarized as follows (dollars in thousands):

 

| Raw materials     |   | $   | 44     |   |
|-------------------|--------|-----|--------|--------|
| Work in process   |   | 6   |   |
| Finished products |   | 104 |   |
|              |   | $   | 154    |   |

 

**(5)****                                ****Property and Equipment**

 

Property and equipment atMarch 31, 2002 consist of: 

 

| Machinery and equipment                         |   | $      | 309    |   |
|-------------------------------------------------|--------|--------|--------|--------|
| Furniture and fixtures                          |   | 85     |   |
| Tooling                                         |   | 19     |   |
| Leasehold improvements                          |   | 155    |   |
|                                            |   | 568    |   |
|                                            |   |   |   |
| Less accumulated  depreciation and amortization |   | 542    |   |
|                                            |   | $      | 26     |   |

 

 

F-10

----

 

**(6)****                                 IncomeTaxes**

 

A reconciliation of the federal statutory income tax rate tothe effective income tax rate on loss from continuing operations is as follows:

 

|                                        |   | **March 31** |   |
|---------------------------------------------|--------|-------------------|--------|
|                                        |   | **2002**          |   | **2001** |   |
| Federal statutory rate                      |   | 34                | %      | 34 | % |
| Increases (reductions) in taxes due to:     |   |              |   |   |   |
| State income taxes (net of federal benefit) |   | 3                 |   | 3 |   |
| Change in valuation allowance               |   | (32               | )      | (30 | ) |
| Dividends-received deduction                |   | (2                | )      | (4 | ) |
| Other                                       |   | (3                | )      | (3 | ) |
|                                        |   | —            | %      | — | % |

 

The tax effects of temporary differences that giverise to a significant portion of the deferred tax assets at March 31, 2002are summarized as follows (in thousands):

 

| Deferred tax assets (liabilities): |   |   |   |
|------------------------------------|--------|--------|--------|
| Net operating losses               |   | $      | 2,159  |   |
| Inventories                        |   | 21     |   |
| Accrued expenses                   |   | 68     |   |
| Business tax credit carryforwards  |   | 12     |   |
| Other                              |   | (53    | )      |
|                               |   | 2,207  |   |
|                               |   |   |   |
| Less valuation allowance           |   | 2,207  |   |
|                               |   | $      | — |   |

 

At March 31, 2002, the Company had net operatingloss (NOL) carryforwards of approximately $5,885,000 and $1,787,000 for federalincome tax purposes and California income tax purposes, respectively, expiringin varying amounts through 2021. The NOL carryforwards, which are available tooffset future profits of the Company and are subject to limitations should a“change in ownership” as defined in the Internal Revenue Code occur, will beginto expire in 2003 if not utilized. Additionally, the Company has generalbusiness tax credit carryforwards of approximately $12,000 which will begin toexpire in 2006.

 

Realization of the future tax benefits of the NOLcarryforwards and other deferred tax assets is dependent on the Company’sability to generate future taxable income within the periods in which theybenefit. In assessing the likelihood of utilization of existing deferred taxassets, management considered the historical results of continuing operationsover the last three years and the current economic environment in which

 

 

F-11

----

 

the Company operates. Management has determined thatfuture taxable income of the Company will more likely than not be insufficientto realize the recorded net deferred tax assets of $2,207,000 and has recordeda valuation allowance of $2,207,000. During the years ended March 31,2002, the Company increased the valuation allowance in deferred tax assets by$188,000.

 

**(7)****                                ****Shareholders’ Equity**

 

On January 20, 2000, theCompany entered into certain agreements with Millennium Capital Corporation(MCC) and JDK Associates (JDK). Pursuant to the agreements, the Company sold 1,333,333 shares of itscommon stock to MCC, JDK, and certain of their associates and issued a warrantto purchase 1,800,000 shares of the Company’s common stock at $2.75 per share,for aggregate consideration of $3,000,000. In addition, under the agreements,MCC and JDK will provide financial advisory assistance to the Company insearching for and closing future acquisitions and financings for which theywill receive an advisory fee of 5% of the estimated purchase price for a futureacquisition or for additional capital raised in support of future acquisitions.The term of this agreement is five years. 

 

Because of the significanceof these agreements, theCompany was required to obtain, and they did obtain on March 31, 2000,shareholder approval. Immediately thereafter, the warrant holders exercisedwarrants to purchase 1,780,000 shares of common stock using a cashless exerciseprovision, resulting in the issuance on March 31, 2000 of 1,515,406 shares ofcommon stock. Accordingly, on March 31, 2000, 2,848,739 shares were issued foran aggregate consideration of $3,000,000. 

 

For financial reportingpurposes, the Company hasaccounted for these transactions as an increase in common stock for $3,000,000,recorded net of the applicable costs. The future 5% consulting fees will beaccounted for if and when occurred. 

 

The remaining warrants topurchase 20,000 shares ofcommon stock at $2.75 per share are outstanding at March 31, 2002. 

 

The articles ofincorporation authorize a class of preferred stock issuable in classes andseries with such designations, voting rights, redemption provisions, dividendrates, liquidation, andconversion rights and other preferences and limitations as may be determined bythe board of directors. No preferred stock was outstanding at March 31, 2002. 

 

**(8)****                                ****Stock Option and Bonus Plans**

** **

***1985 Stock Option Plan***

*** ***

During November 1985, theCompany adopted the 1985 stock option plan to grant incentive and nonqualifiedstock options to officers and key employees of the Company for the purchase ofup to 500,000 shares of the Company’s common stock. Under the Plan, optionswere granted at prices equal to or greater than fair market value at date ofgrant. The shares, subject to various limitations, are exercisable over termsnot to exceed ten years. No options were granted during the three years endedMarch 31, 2002. A total of 377,750 options were exercised through March 31,2002, with 11,500 options left outstanding. The 1985 plan has expired; therefore,no additional options can be issued under its terms. 

 

 

F-12

----

 

Activity under the Plan issummarized as follows: 

 
| ** **                             | ** ** | **Number of  shares** | ** ** | **Option  price  per share  (average)** | ** ** | **Aggregate** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------------------------|------------|---------------|------------|
| Options outstanding at  March 31, 2000 |       | 76,500                |       | $                                       | 0.9923     |          | 75,908     |   |
|                                   |       |                  |       |                                    |       |          |       |
| Options exercised                      |       | (65,000               | )          | 0.9375                                  |       | (60,938       | )          |
|                                   |       |                  |       |                                    |       |          |       |
| Options outstanding at  March 31, 2001 |       | 11,500                |       | 1.3017                                  |       | 14,970        |       |
|                                   |       |                  |       |                                    |       |          |       |
| Options exercised                      |       | —                |       | —                                  |       | —        |       |
|                                   |       |                  |       |                                    |       |          |       |
| Options outstanding at  March 31, 2002 |       | 11,500                |       |                                    |       | $             | 14,970     |   |
|                                        |            |                       |            |                                         |            |               |            |  |  |

 

On April 28, 1999, the boardof directors authorized the issuances of options or warrants to purchase up toan aggregate of 100,000 shares of common stock to directors, employees, orconsultants. The options or warrants were to be sold to the grantee at $0.05per share, to have an exercise price of $1.56 per share and to have athree-year term from the respective date of grant. Activity for these optionsand warrants is summarized as follows: 

 
| ** **                              | ** ** | **Shares** | ** ** | **Price** | ** ** | **Weighted  average option   price** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------|------------|--------------------------------------|------------|
| Outstanding at March 31,  2000          |       | 8,000      |       | $         | 1.56       |                                 | 1.56       |   |
|                                    |       |       |       |      |       |                                 |       |
| Issued                                  |       | 5,000      |       | 1.56      |       | 1.56                                 |       |
|                                    |       |       |       |      |       |                                 |       |
| Exercised                               |       | —     |       | —    |       | —                               |       |
|                                    |       |       |       |      |       |                                 |       |
| Warrants outstanding at  March 31, 2001 |       | 13,000     |       | 1.56      |       | 1.56                                 |       |
|                                    |       |       |       |      |       |                                 |       |
| Issued                                  |       | —     |       | —    |       | —                               |       |
|                                    |       |       |       |      |       |                                 |       |
| Exercised                               |       | —     |       | —    |       | —                               |       |
|                                    |       |       |       |      |       |                                 |       |
| Warrants outstanding at  March 31, 2002 |       | 13,000     |       |      |       | 1.56                                 |       |
|                                         |            |            |            |           |            |                                      |            |  |

 

The Company issued an optionto purchase 5,000 shares of common stock to a former employee during the yearended March 31, 2001. Stock compensation expense of $12,000 was determinedusing the Black-Scholes pricing model, assuming a risk-free interest rate of5.90%, a three-year term, 100% volatility, and $0 expected dividend rate. 

 

In addition, the board ofdirectors authorized and the Company issued an option to purchase 20,000 sharesof common stock to a consultant during the year ended March 31, 2001. Stockcompensation expense of $25,000 was determined using the Black-Scholes pricingmodel, assuming a risk-free interest rate of 6.13%, a three-year term, 100%volatility, and $0 expected dividend rate. 

 

 

F-13

----

 

***2000 Stock Option Plan***

 

On May 22, 2000, theCompany’s board of directors adopted the Stock Option Plan of 2000 ofPerfectData Corporation (the Plan) which provides for the granting of optionsto directors, officers, employees, and consultants of the Company. TheCompany’s board of directors reserved 1,000,000 shares of common stock underthe Plan. On September 7, 2000, the Company’s board of directors amended thePlan to reserve an additional 1,000,000 shares of common stock. On October 19,2000, the shareholders of the Company approved the Plan and ratified optionspreviously granted. 

 

Options granted under thePlan shall be at a price no less than the fair market value of the common stockon the date of grant or in the case of nonqualified stock options at a priceequal to or greater than 85% of the fair market value on the date of grant.Options issued under the Plan are exercisable at various times as determined bythe board of directors or its designee. 

 

On March 31, 2000, an optionto purchase 25,000 shares of common stock at $18.50 per share was granted toeach of the five directors. In addition, an option to purchase 25,000 shares ofcommon stock at $18.50 per share was granted to a member of the Advisory Board.On May 22, 2000, an option to purchase 25,000 shares of common stock at $4.13per share was granted to each of the two other members of the Advisory Board.On September 7, 2000, an option to purchase 25,000 shares of common stock at$4.63 per share was granted to each of the five directors. In addition, anoption to purchase 25,000 shares at $4.63 per share was granted to the first memberof the Advisory Board. All option grants were subject to the approval of thePlan. All option prices were equal to the fair market value at the time ofgrant. The fair market value of the stock on the date shareholder approval wasobtained was below the option price in all cases. All of the options describedwere to become exercisable in three substantially equal installments,commencing with the first anniversary of the respective date of grant. 

 

On October 31, 2001, theCompany granted options to purchase 10,000 shares of common stock at $3.43 pershare to five of its employees. The option price was equal to the fair marketvalue at the time of grant. All of the options described were to becomeexercisable in four substantially equal installments, commencing with the firstanniversary of the respective date of grant. 

 

Effective May 31, 2001, theCompany dissolved the Advisory Board. All options held by Advisory Boardmembers were to be exercised within 60 days. No Advisory Board member exercisedhis option by July 31, 2001. Therefore, options to purchase 100,000 shares ofcommon stock were canceled as of March 31, 2002. 

 

 

F-14

----

 

Activity under the Plan issummarized as follows: 

 
|                                  |   | **Number of  shares** |   | **Option price  per share  (average)** |       | **Weighted  average option  price** |   |
|---------------------------------------|--------|-----------------------|--------|----------------------------------------|------------|-------------------------------------|--------|
| Options outstanding at March 31, 2001 |   | 350,000               |   | $                                      | 4.13-18.50 |                                | 10.50  |   |
|                                  |   |                  |   |                                   |       |                                |   |
| Options granted                       |   | 10,000                |   | 3.43                                   |       | 3.43                                |   |
|                                  |   |                  |   |                                   |       |                                |   |
| Options canceled                      |   | (100,000              | )      | 4.13-18.50                             |       | 7.84                                |   |
|                                  |   |                  |   |                                   |       |                                |   |
| Options exercised                     |   | —                |   | —                                 |       | —                              |   |
|                                  |   |                  |   |                                   |       |                                |   |
| Options outstanding at March 31, 2002 |   | 260,000               |   | 3.43-18.50                             |       | 11.25                               |   |
|                                       |        |                       |        |                                        |            |                                     |        |  |

 

Stock compensation expenseof $20,000 related to common stock options issued to consultants has beenrecognized in the Company’s financial statements for the year ended March 31,2001. Stock compensation expense was determined using the Black-Scholes pricingmodel, assuming a risk-free interest rate of 4.93%, a ten-year term, 100%volatility, and $0 expected dividend rate. 

 

As of March 31, 2002,options that were exercisable to purchase common stock totaled 125,000, at aweighted average exercise price of $13.87. As of March 31, 2002, 1,740,000shares were available for future grants. 

 

The weighted averageremaining contractual life of all outstanding options was approximately 8.5years as of March 31, 2002. The weighted average grant date fair value of alloutstanding options was $0.76 at March 31, 2002. 

 

The Company applies APBOption No. 25 in accounting for its employees and director stock option plans.Had the Company determined compensation cost based on the fair value at thegrant date for its stock options under SFAS No. 123, the Company’s net losswould have been increased to the pro forma amounts indicated below. The fair valueof these options was estimated at the date of grant using a Black-Scholespricing model, assuming a risk-free interest rate of 5.9-6.05%, a ten-yearterm, 100% volatility, and $0 expected dividend rate. 

 
|                                         |   | **March 31**                          |   |
|----------------------------------------------|--------|---------------------------------------|--------|
|                                         |   | **2002**                              |   | **2001** |   |
|                                         |   | **(000s,  except per share amounts)** |   |
| Net loss:                                    |   |                                  |   |   |   |
| As reported                                  |   | $                                     | (795   | ) | (1,259 | ) |
| Pro forma                                    |   | (837                                  | )      | (1,313 | ) |
| Basic and diluted net loss per common share: |   |                                  |   |   |   |
| As reported                                  |   | (0.13                                 | )      | (0.21 | ) |
| Pro forma                                    |   | (0.14                                 | )      | (0.21 | ) |
|                                              |        |                                       |        |  |  |  |

 

 

F-15

----

 

**(9)****                                ****Commitments andContingencies**

 

The Company leases itsfacility under a noncancelable operating lease that expires June 20, 2003. Inthe current year, the Company entered into a sublease agreement of certainwarehouse space in its facility that expires June 20, 2003. 

 

Rental expense, net ofsublease income, was $103,000 and $116,000 for the years ended March 31, 2002and 2001, respectively. 

 

Minimum annual rentalcommitments, net of sublease income of $36,000 and $9,000 for 2003 and 2004respectively, under operating leases are summarized as follows (in thousands): 

 

 

| 2003   |   | $  | 113    |   |
|--------|--------|----|--------|--------|
| 2004   |   | 28 |   |
|   |   | $  | 141    |   |

 

The Company is involved incertain legal actions resulting from the ordinary course of business. TheCompany believes the ultimate outcome of the legal actions in the aggregatewill not materially affect the financial position, results of operations, orliquidity of the Company. 

 

 

F-16

----

 

**SIGNATURES**

 

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this Report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 

PERFECTDATACORPORATION

 
| By: /s/ | Irene  J. Marino                            |
|---------|---------------------------------------------|
|    | Irene  J. Marino, Authorized Officer and    |
|    | Principal  Financial and Accounting Officer |

 

 

Date:  June 17, 2002

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities indicated on June 17, 2002.

 
| **Signature** |                  | **Title** |
|---------------|-----------------------|-----------|
|          |                  |      |
| /s/           | Harris  A. Shapiro    |      | Chief  Executive Officer, |
|          | Harris  A. Shapiro    |      | Chairman  of the Board and Director |
|          |                  |      | (Principal  Executive Officer) |
|          |                  |      |   |
| /s/           | Irene  J. Marino      |      | V.P.  Finance, Chief Financial Officer |
|          | Irene  J. Marino      |      | and  Corporate Secretary (Principal |
|          |                  |      | Financial  and Accounting Officer) |
|          |                  |      |   |
| /s/           | Bryan  Maizlish       |      | Director |
|          | Bryan  Maizlish       |      |   |
|          |                  |      |   |
| /s/           | Timothy  D. Morgan    |      | Director |
|          | Timothy  D. Morgan    |      |   |
|          |                  |      |   |
| /s/           | Tracie  Savage        |      | Director |
|          | Tracie  Savage        |      |   |
|          |                  |      |   |
| /s/           | Corey  P. Schlossmann |      | Director |
|          | Corey  P. Schlossmann |      |   |

 

 

18

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**INDEX TOEXHIBITS**

 

 

| **Exhibit  No.** |   | **Description  of Exhibit**                                                                                                                                        |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | Articles of  Incorporation as amended to date (1)                                                                                                                  |
|             |   |                                                                                                                                                               |
| 3.2              |   | Bylaws as amended to  date (2)                                                                                                                                     |
|             |   |                                                                                                                                                               |
| 10.1             |   | 1985 Employee Stock  Option Plan (3)                                                                                                                               |
|             |   |                                                                                                                                                               |
| 10.2             |   | Form of Incentive Stock  Option Agreement (3)                                                                                                                      |
|             |   |                                                                                                                                                               |
| 10.3             |   | Form of Non-Qualified  Stock Option Agreement (3)                                                                                                                  |
|             |   |                                                                                                                                                               |
| 10.4             |   | Form of Representative  Agreement between the Company and its Representatives (4)                                                                                  |
|             |   |                                                                                                                                                               |
| 10.5             |   | Form of Standard  Exclusive Distributor Agreement between the Company and its Distributors (4)                                                                     |
|             |   |                                                                                                                                                               |
| 10.6             |   | Standard Industrial  Lease dated August 26, 1991, between Wayne Mertes, Mamie Mertes, Mike Butler  and Sarah Butler, as lessor, and the Company, as lessee (5)     |
|             |   |                                                                                                                                                               |
| 10.7             |   | License Agreement  between the Company and Arthur D. Little Enterprises, Inc. (6)                                                                                  |
|             |   |                                                                                                                                                               |
| 10.8             |   | Stock Purchase  Agreement dated January 20, 2000 by and among the Company, Millennium, JDK  and other Buyers (7)                                                   |
|             |   |                                                                                                                                                               |
| 10.9             |   | Letter Agreement dated  January 20, 2000 (“Consulting Agreement”) by and among the Company,  Millennium and JDK (8)                                      |
|             |   |                                                                                                                                                               |
| 10.10            |   | Stock Option Plan of  2000 of the Company (2)                                                                                                                      |
|             |   |                                                                                                                                                               |
| 10.11            |   | Forms of Stock Option  Agreements (9)                                                                                                                              |
|             |   |                                                                                                                                                               |
| 10.12            |   | Consulting Agreement  dated August 29, 2000 by and between the Company and Terry J. Baker (10)                                                                     |
|             |   |                                                                                                                                                               |
| 10.13            |   | Employment Agreement  dated September 1, 2000 by and between the Company and Harris Shapiro (10)                                                                   |
|             |   |                                                                                                                                                               |
| 10.14            |   | Letter Agreement dated  October 25, 2000 by and among the Company, Alexei Afanasiev and Business  Solutions Group, Inc. (10)                                       |
|             |   |                                                                                                                                                               |
| 10.15            |   | License Agreement dated  October 27, 2000 by and between the Company and Alexei Afanasiev (10)                                                                     |
|             |   |                                                                                                                                                               |
| 10.16            |   | Letter Agreement,  Security Agreement and Promissory Note each dated October 27, 2000 and each  by and between the Company and Business Solutions Group, Inc. (10) |

 

 

19

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| 10.17  |   | Stock Option Agreement  dated November 27, 2000 by and between the Company and Terry J. Baker (10) |
|--------|--------|----------------------------------------------------------------------------------------------------|
|   |   |                                                                                               |
| 10.18  |   | Sales Agent Agreement  dated March 1, 2001 by and between the Company and Terry J. Baker (10)      |
|   |   |                                                                                               |
| 23     |   | Consent of Independent  Auditors (11)                                                              |

 

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(1)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for its fiscal yearended March 31, 1990.

 

(2)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for its fiscal yearended March 31, 2000.

 

(3)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for its fiscal yearended March 31, 1985.

 

(4)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for its fiscal yearended March 31, 1987.

 

(5)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for its fiscal yearended March 31, 1992.

 

(6)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for its fiscal yearended March 31, 1994.

 

(7)                                  Incorporatedby reference to the Company’s definitive Proxy Statement dated March 10, 2000filed on March 14, 2000.

 

(8)                                  Incorporatedby reference to the Company’s Form 8-K dated March 31, 2000 filed April 14,2000.

 

(9)                                  Thefour forms of stock option agreements used under the Stock Option Plan of 2000are filed as Exhibits 4(d)(1) to 4(d)(4), both inclusive, to the Company’sRegistration Statement on Form S-8, File No. 333-51774, and are incorporatedherein by this reference.

 

(10)                            Incorporatedby reference to the Company’s Annual Report on Form 10-K for its fiscal yearended March 31, 2001.

 

(11)                            Filedherewith.

 

 

20

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PerfectData Corporation

Annual Report on Form10-KSB

for

Fiscal Year Ended March31, 2002

Commission File No.0-12817

 

 

Index to Exhibits Filedwith Report

 

 

| ***Exhibit Number*** |   | ***Exhibit***                    |   | ***Page*** |
|----------------------|--------|----------------------------------|--------|------------|
| 23                   |   | Consent of Independent  Auditors |   | E-2        |

 

 

E-1

----