**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-KSB**

 

| **ý** |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|------------|--------|------------------------------------------------------------------------------------------------|
|       |   |                                                                                           |
| **o**      |   | **TRANSACTION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |   |                                                                                           |
|       |   | **For the fiscal year  ended March 31, 2003**                                                  |
|       |   |                                                                                           |
|       |   | **Commission File No.  0-12817**                                                          |

 

| **PERFECTDATA  CORPORATION**                                     |
|------------------------------------------------------------------|
| (Exact name of Small Business Issuer 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) |
|                                                             |   |   |
| Issuer’s Telephone Number,  Including Area Code:            |
| **(805) 581-4000**                                               |
|                                                             |
| Securities registered pursuant  to Section 12 (b) of the Act:    |
| **None**                                                         |
|                                                             |
| Securities registered pursuant  to Section 12 (g) of the Act:    |
| **Common Stock**                                                 |

 

Check whether the issuer (1) has filed all reports required to be filedby Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days:

 

Yesý Noo.

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B is not contained herein, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendments to this Form 10-KSB. o

 

Issuer’s revenues for its most recent fiscal year: $2,005,000.

 

As of May 31, 2003, the aggregate market value of the voting stock heldby nonaffiliates of the issuer was $3,619,800.

 

As of May 31, 2003, the issuer had 6,159,530 shares of Common Stockoutstanding.

 

 

----

 

**PART I**

 

**Forward-Lookingand Cautionary Statements.**

 

With the exception of historical information,the matters discussed in this Annual Report on Form 10-KSB include certainforward-looking statements that involve risks and uncertainties.  In connection with the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995, the Companyis hereby identifying information that is forward-looking and, accordingly,involves risks and uncertainties, including, without limitation, statementsregarding the Company’s future financial performance, that governmentalregulations will not negatively and materially impact the Company’s currentoperations, the Company’s ability to compete in the competitive environment inwhich the Company operates, and the results or success of discussions withother entities on mergers, acquisitions, or alliance possibilities andexpansion of the Company’s current product offerings.  As a result, actual results may differ materially from thosedescribed in the forward-looking statement. The Company cautions that the foregoing list of important factors is notexclusive.  The Company does notundertake to update any forward-looking statement in this Report.

 

**Item 1. Business.**

 

**General**

 

PerfectData Corporation (the “Company”) wasincorporated in the State of California on June 8, 1976.  The Company was originally founded by anexperienced group of engineers and data processing professionals to design and manufacturea proprietary line of magnetic media maintenance equipment - disk pack cleanersand inspectors.  This line of equipment,which has since been discontinued, was originally sold to Original EquipmentManufacturers (OEMs) such as Burroughs Corporation (now Unisys Corporation),DEC (Digital Equipment Corporation), NCR Corporation and 3M Corporation.  Sales of these products by such well-knowncompanies contributed to increased user awareness as to the need for routinecomputer care and maintenance.  It alsobrought credibility to the Company as a key manufacturer in the industry.

 

With the evolution of the computer workenvironment from the sterile, climate-controlled surroundings of a clean roomto the mainstream office and home environments, simple preventative maintenancehas become a key element in maintaining equipment efficiency and personalproductivity.  The Company’s cleaningand maintenance products are designed to address the needs of the end users ofcomputers and office automation equipment and by maintenance organizations aspart of preventative maintenance programs to reduce equipment “down time” andservice costs and to increase product life.

 

**Proposed Change in Control**

 

On May 5, 2003, the Company announced that itexecuted a letter of intent with SuperCom Ltd., an Israeli-based developer ofsmart card solutions (“SuperCom”), pursuant to which a newly incorporatedsubsidiary of the Company in Israel would be merged into SuperCom and SuperComwould become a subsidiary of the Company. In connection with such merger, the shareholders of SuperCom wouldexchange their shares of SuperCom common stock for shares of the Company’sCommon Stock, no par value (the “Common Stock”).  If the transaction is closed as currently contemplated, at theclosing of the merger, shareholders of SuperCom would own, after payment offees and expenses, an aggregate of 72.5% of the shares of the Common Stock on afully-diluted basis.  The shareholdersof the Company prior to the merger would own, after payment of fees andexpenses, an aggregate of 21.5% of the shares of the Common Stock on afully-diluted basis, provided that, if the Company has less than $2,000,000 ofFinal Net Available Cash (as defined) at the closing, then the post-mergerownership to be allocated to the Company’s shareholders would beproportionately reduced.  As of March31, 2003, the Company’s Final Net Available Cash was $1,751,000.  The Company is currently reviewingalternatives, if any, to increase Final Net Available Cash.  However, because of anticipated continuingloses and expenses, there can be no assurance that the Company will meet this$2,000,000 requirement when and if the SuperCom transaction closes.

 

The closing of the transaction is subject tocertain conditions, including execution of a definitive merger agreement, thecompletion of due diligence, shareholder approvals, the registration of theshares issued to SuperCom shareholders on a Registration Statement on Form S-4and the sale or other disposition of the current operations of the

 

2

----

 

Company. There can be no assurance that the merger will be consummated or, ifconsummated, that it will be consummated on the terms set forth in the letterof intent.

 

**The Industry**

 

The Company’s products are sold in thecomputer and office equipment accessories and supplies market.  This market targets small, medium and largesized businesses as well as the home environment.

 

This market is serviced mainly by officeproduct catalogs, office superstores, mass merchants, consumer electronicsretailers, warehouse clubs and computer superstores.  The Company is organized to service all of these distributionchannels.  The Company believes that themarket potential for its products will continue to grow and increase insize.  However, there can be noassurance that the Company will realize any of this potential.

 

**Products**

 

The Company designs, assembles and/orpackages all of its cleaning and maintenance products which it markets anddistributes.  The Company sub-contractsfor its components from a variety of established suppliers andmanufacturers.  The Company believesthat there are alternative sources for these components should an existingsupplier or manufacturer no longer be available on acceptable terms.

 

The consumable cleaning and preventativemaintenance products are for home, office and computer environments.  These products are designed to eliminate orminimize contamination in and around computer and office automation equipment.  Use of the Company’s products on a regularbasis reduces equipment downtime and the need for unnecessary service andrepairs.

 

The Company’s principal selling product isthe PerfectDuster EcoDuster line of compressed gas dusters.  This product is offered in a variety offormulations to meet competitive pressures and buyer demand.  All of these dusters are 100% CFC free andcontain no ozone depleting chemicals that could damage the ozone layer in theearth’s upper atmosphere.

 

Other products that the Company presentlysells are CD and tape drive cleaners, CD player cleaners, static controlproducts, laser and inkjet printer cleaners, fax and copy machine cleaners, anda variety of premoistened cleaning wipes for specific equipment.

 

During the past three fiscal years theCompany has been seeking acquisitions which may or may not be related to itscurrent business.  The Board is of theopinion that profitability on a continuous basis will not be achieved absent anacquisition of a new business or businesses and/or new products.  There can be no assurance as to when anysuch acquisition will be consummated or when profitability on more than amonthly basis will be achieved, if at all. During the past two years, two potential acquisitions were activelypursued; however, both terminated for different reasons and the Companyincurred expenses in connection therewith. See the section “Terminated Acquisitions” in this Item 1 to the Reportand the section “Results of Operations” in Item 6 to this Report.

 

**Marketing**

 

**Customers.**  TheCompany’s products are sold primarily through retail distribution under theCompany’s “PerfectData” trademark.  Theretail distribution channel is comprised of office product catalogs, officeproduct distributors and dealers, stationery and computer retail stores andlarge warehouse/superstore type accounts.

 

While the Company sold products to more than160 customers in the United States, Canada and other countries during thefiscal year ended March 31, 2003 (“fiscal 2003”), approximately 86% of theCompany’s net sales were accounted for by its 10 largest customers.  Two customers accounted for 47% and 23%,respectively, of total sales.  Sales tothese customers were made pursuant to specific purchase orders and neithercustomer is obligated to purchase the Company’s products under any otheragreement.  The loss of either or bothof these customers could have an adverse effect on the Company’s business.  No other customer accounted for more than10% of the Company’s net sales in fiscal 2003.

 

3

----

 

**Sales Organization.**

 

**Domestic Sales.**  Sales ofproducts under the Company’s registered trademark “PerfectData” are made byindependent manufacturers’ representative groups, dealers and largedistributors.  Sales of the Company’sproducts to Original Equipment Manufacturers under private label arrangementsare handled by Company sales personnel located in California and, on a selectedbasis, by certain assigned independent manufacturers’ representatives.  Agreements between the Company andmanufacturers’ representatives or distributors may be terminated on shortnotice by either party.

 

**International Sales. **Sales of the Company’s products worldwide arehandled by the Company’s sales personnel located in California throughinternational distributors and customers. The Company has no agreements with foreign distributors.

 

**Customer Service and Support.**  In orderto enhance customer service, training, field support and technical support, theCompany has a toll free 800 phone number.

 

All products are sold with a “return tomanufacturer” warranty for replacement of damaged or defective goods only.  Products are warranted for 90 days from thedate of purchase.  Dealers and distributorsare required 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 Companynor any of its competitors has had a dominant position in the cleaning andmaintenance market.  There are manycompetitors in this market and some of these competitors are substantiallylarger in size and have greater financial resources than the Company.

 

The Company believes that the effectiveness,quality, service and the price competitiveness of its products, along with itsmarketing efforts and programs, product selection and responsiveness toaccounts’ needs, have been the principal basis on which it has competed in thismarket.

 

Assuming that the proposed SuperComtransaction is not consummated, the Company’s ability to maintain or increaseits market share and expand its business will depend, in large measure, on itsability to conceive, design, develop and introduce new products to its existingproduct lines; to continue to offer more products and marketing programs withinthe Company’s established channels of distribution; and to enter new marketsand/or open new channels of distribution with related product offerings. Therecan be no assurance, however, that the Company will achieve any or all of theseobjectives.

 

**Materials and Supplies**

 

The nature of the raw materials used in theCompany’s products are various chemicals, metals, plastics and papergoods.  The Company assembles and/orpackages its products in the United States from materials and suppliespurchased primarily from domestic vendors and sub-contractors.  Some of the assembled component parts aremanufactured by vendors located in the Far East because it is more costeffective to obtain goods and fabrication expertise at significantly reducedcosts when compared with purchasing the same goods domestically.

 

The Company believes that its establishedrelationships with its vendors and suppliers are in good order. The Company hasnot experienced any significant production delays or loss of revenue due to thelack of parts or material shortages.

 

The Company, as a matter of standard businessprocedures, has regularly reviewed its vendor relationships and has searchedfor new sources and ways to produce its products both domestically andinternationally with the improvement of quality, delivery or lowered cost ofgoods as its goals.

 

4

----

 

The Company does not believe that federal,state and local provisions which have been enacted or adopted regulating thedischarge of material into the environment, or otherwise relating to theprotection of the environment, have had, or will have, any material effect onits capital expenditures, its potential earnings or its competitive position.

 

**Employees**

 

At March 31, 2003, the Company employed 8persons, of whom 3 were engaged in assembly and testing, 2 in marketing and sales,and 3 in general management and administration.

 

The Company believes that its relations withits employees are good.  The Company hasnever had a work stoppage and none of its employees are represented by a laborunion.  The expansion of the Company’scurrent operations will be dependent, in part, on its ability to attract andretain highly qualified employees. There can be no assurance that the Company will be successful in theseefforts.

 

**TerminatedAcquisitions**

 

From October 2001 to February 2002, theCompany was engaged in negotiations pursuant to which the shareholders ofGraphCo 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 companyproviding advanced security solutions for biometric identification, secureaccess, surveillance and secure law enforcement incident management.  The negotiations were mutually terminated onFebruary 19, 2002.

 

In August and September 2002, the Company wasengaged in negotiations with another privately-held company, with annualrevenues approximating $100 million, pursuant to which the stockholders of thatcompany would acquire a majority interest in, and control of the Board of, theCompany.  Just as the parties wereprepared to execute a definitive merger agreement, the other company receivedan offer from another very large public company and negotiations wereterminated during the weekend of September 20, 2002.

 

**Item 2. Properties.**

 

The Company is subject to a long-term leasefor a building constructed in Simi Valley for the specific needs of theCompany.  The modern industrialbuilding, comprising approximately 24,500 square feet, was completed during June1993.  The lease is for a term of tenyears and includes an option to purchase. The option expired unexercised in June 2000.  During September 2001, the Company sublet approximately 6,700square feet of its facility to another company for use as warehousing pursuantto a 20-month sublease.  Both theCompany and the subtenant will continue to occupy the facility on amonth-to-month basis upon expiration of the lease and sublease in June 2003.

 

**Item 3. Legal Proceedings.**

 

As of March 31, 2003, there were no materialpending legal proceedings to which the Company was a party or of which any ofits property was the subject.

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

None.

 

**PART II**

 

**Item 5. Market for the Registrant’s Common Equity and Related StockholderMatters.**

 

 

**Market Information**

 

The Common Stock of the Company is listed onthe OTC Bulletin Board under the symbol PERF. Prior to April 17, 2003, the Common Stock was traded on the NasdaqSmallCap Market.  The following tablesets forth the range

 

5

----

 

of high and low sales prices per share of theCommon Stock for the indicated quarters of fiscal 2003 and the fiscal yearended March 31, 2002 (“fiscal 2002”) as reported by Nasdaq.

 
|           |   | **Sales Price** |   |
|----------------|--------|-----------------|--------|
|           |   | **High**        |   | **Low** |   |
|           |   |            |   |   |   |
| **2003**       |   |            |   |   |   |
| First Quarter  |   | $               | 1.65   |   | $ | .69 |   |
| Second Quarter |   | $               | 1.70   |   | $ | .69 |   |
| Third Quarter  |   | $               | 1.00   |   | $ | .55 |   |
| Fourth Quarter |   | $               | .84    |   | $ | .50 |   |
|           |   |            |   |   |   |
| **2002**       |   |            |   |   |   |
| First Quarter  |   | $               | 1.70   |   | $ | .88 |   |
| Second Quarter |   | $               | 1.59   |   | $ | .57 |   |
| Third Quarter  |   | $               | 4.10   |   | $ | 1.00 |   |
| Fourth Quarter |   | $               | 3.25   |   | $ | .68 |   |

 

#### **Holders**

 

The approximate number of shareholders atMarch 31, 2003 was 1,700 determined by security position listings.

 

**Dividends**

 

Because of its losses from operations, theCompany has not paid any cash dividends on the Common Stock and, untilprofitability is restored, as to which and when there can be no assurance, theCompany does not intend to pay any cash dividends.

 

**UnregisteredSecurities Sales**

 

There were no sales or other issuances ofsecurities during fiscal 2003 that were not registered under the Securities Actof 1933, as amended (the “Securities Act”).

 

**Item 6. Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

**CriticalAccounting Policies**

 

Management believes that the following discussion addresses theCompany’s most critical accounting policies, which are those that are mostimportant to the portrayal of the Company’s financial condition and results,and require the most difficult, subjective and complex judgments, often as aresult of the need to make estimates about the effect of matters that areinherently uncertain.

 

Allowance for Doubtful Accounts:

 

The Company evaluates the collectibility of its accounts receivable andprovides an allowance for estimated losses that may result from customers’inability to pay.  The amount of thereserve is determined by analyzing known uncollectible accounts, agedreceivables and customers’ credit-worthiness. Amounts later determined and specifically identified to be uncollectibleare written off against the allowance.

 

Valuation of Inventory:

 

Inventories are valued at the lower of cost or market.  Cost is determined using the first-in,first-out method.  Market value isdependent primarily on consumer demand and competitor product offerings.  The

 

6

----

 

Company reviews inventories and records adjustments for any decline inits value below cost.   Adjustments areprimarily determined by identifying excess and slow-moving products based uponprior sales, estimating values for such items, and providing for any losses invalue based upon those estimates.

 

## **Results of Operations**

 

Net sales in fiscal 2003 increased $289,000, or 17%, to $2,005,000 fromnet sales of $1,716,000 in fiscal 2002. The increased sales in fiscal 2003 were a result of an increase in salesvolume with the Company’s existing customers.

 

Cost of Goods sold (“Costs”) as a percentage of net sales was 66% forfiscal 2003, as compared to 73% for fiscal 2002.  The decrease in Costs related to a reduction in labor expenses aswell as the absence of inventory write-downs. Included in the year-earlier period were write-downs of certaininventories, aggregating $55,000, which were made for products the Company wasdeeply discounting or discontinuing.

 

Selling, General and Administrative Expenses (“Expenses”) for fiscal2003 and 2002 were $1,358,000 and $1,310,000, respectively.  The increase in Expenses related to costsassociated with the Company’s efforts to find a suitable merger candidate.  The costs, which included legal fees,amongst others, and which related to a specific transaction with a specificmerger candidate, as described in the section “Terminated Acquisitions” in Item1 to this Report, aggregated approximately $115,000.

 

Other Income for fiscal 2003 was primarily dividend income of$40,000.  Other Income for fiscal 2002was primarily dividend income of $93,000 net of a loss on securities of$37,000.

 

The decreased net loss in fiscal 2003 from that in fiscal 2002 directlyrelated to the increased sales, as described above.

 

The Board is pleased with the increased sales and the reduction incosts other than those relating to seeking acquisitions.  However, the Board believes thatprofitability on a long-term basis will not be obtained absent the acquisitionof a new business or businesses and/or new products.  For this reason the Board resumed its search for a suitableacquisition candidate immediately after the termination in September 2002 ofthe acquisition negotiations described above. There can be no assurance as to when such pursuits will be successful oras to when profitability will be achieved, if at all.

 

On May 5, 2003, the Company announced that it had executed a letter ofintent for a proposed merger transaction with SuperCom Ltd., (NASDAQ Europe:SPRC), headquartered in Raanana, Israel. There can be no assurance that the merger will be consummated.

 

### **Liquidity and Capital Resources**

 

The Company’s cash decreased $585,000 in fiscal 2003.  The decrease resulted from cash used inoperating activities of $585,000.  Thecash used in operating activities was primarily the result of the net loss of$642,000 as well as an increase in inventories partially offset by an increase inaccounts payable.

 

The Company had a current ratio of better than 6 to 1 at fiscal yearend and no long-term debt.

 

As a result of the continuing negative cash flows from operations, theCompany is dependent on the invested proceeds from its March 2000 privateplacement in order to meet its payable requirements.  Long term, as indicated above, the Company must seek a new lineof business, whether through acquisition or otherwise.

 

The Company believes that, as a result of the cash described in thepreceding paragraph, its working capital is adequate to fund the Company’soperations and its requirements for the fiscal year ending March 31, 2004.  See Note 2 to Financial Statements for adescription of the concentration of credit risk which the Company has bykeeping these funds only in two banks.

 

7

----

 

At March 31, 2003, the Company had net operating loss and generalbusiness tax credit carry forwards for income tax purposes of approximately$5,152,000 and $12,000 respectively, available to reduce future potentialFederal income taxes.

 

**Item 7. Financial Statements.**

 

The information required by this Item isincorporated herein by reference to the financial statements listed in Item 13of Part III of this Report.

 

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

 

None.

**PART III**

 

**Item9.  Directors and Executive Officers.**

 

**Directorsand Executive Officers**

 

The following table contains certaininformation relating to the directors and executive officers of the Company asof May 1, 2003:

 
| **Name**             |   | **Age** |   | **Position**                                                             |
|----------------------|--------|---------|--------|--------------------------------------------------------------------------|
|                 |   |    |   |                                                                     |
| Harris A. Shapiro    |   | 67      |   | Chief Executive Officer, Director and  Chairman of the Board             |
|                 |   |    |   |                                                                     |
| Bryan Maizlish       |   | 41      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Timothy D. Morgan    |   | 48      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Tracie Savage        |   | 40      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Corey P. Schlossmann |   | 48      |   | Director                                                                 |
|                 |   |    |   |                                                                     |
| Irene J. Marino      |   | 58      |   | Vice President Finance, Chief Financial  Officer and Corporate Secretary |

 

**BusinessHistory**

 

Mr. Harris A. Shapiro was elected as a director of the Company and itsChairman of the Board on March 31, 2000. On September 7, 2000, he was designated Chief Executive Officer ofthe Company.  Mr. Shapiro has been thePresident of Millennium Capital Corporation, a consulting firm specializing inmergers and acquisitions, since 1994. He was Senior Vice President Corporate Finance of Gilford SecuritiesIncorporated, a registered broker-dealer, from January 1, 1999 to March 29,2000.  Prior to Gilford Securities, hewas a Managing Director of Whale Securities Co., L.P., a registered broker-dealer,from June 1993 until December 1998.

 

Mr. Bryan Maizlish was elected as a director of the Company on March31, 2000.  He is currently working atLockheed Martin Management and Data Systems and has been employed at LockheedMartin Corporation since August 2000. Prior thereto, he served as the Executive Vice President, Chief StrategyOfficer and Chief Financial Officer of Magnet Interactive/Noor Group Ltd., aprivate company furnishing comprehensive consulting, engineering andinteractive services.  Prior thereto, heheld various managerial positions for over a decade with companies in the mediacommunications industry, such as MCA, Inc., Gulf & Western Corporation andGene Roddenberry’s Norway Corporation.

 

Mr. Timothy D. Morgan was elected as a director of the Company on March31, 2000.  He has, since October 1997,been a consultant on matters of business strategies, taxation, finance andasset protection techniques, and providing interim Chief Financial Officer andController services.  None of theforegoing services or any of

 

8

----

 

those hereafter described were provided to the Company.  From 1980 through October 1997, he was aprincipal of Abacus Tax and Financial Services, a firm specializing in taxcompliance and pension plan administration. Prior to 1982, Mr. Morgan was manager of purchasing and accountingdepartments for various companies, including Dennison Eastman Corporation,Syntel Cavitron, Incorporated, and Contempo Casuals, Incorporated.

 

Ms. Tracie Savage was elected in July 1995 asa director of the Company.  She iscurrently a main news anchor for KFWB Radio in Los Angeles.  She previously worked for the Los Angelestelevision subsidiary of the National Broadcasting Company, Inc. (“NBC”).  From March 1994 to March 2001, Ms. Savagewas the co-anchor of NBC Channel 4’s “Today in L.A.: Weekend”.  From 1991 to 1994, she was a generalassignment reporter for the independent Los Angeles station, KCAL.  Ms. Savage has been in broadcast journalismfor more than 16 years and has been the recipient of numerous awards and honorsin her field.

 

Mr. Corey P. Schlossmann was elected as a director of the Company onMarch 31, 2000.  Mr. Schlossmann hasbeen Chief Executive Officer since October 1999, and Chief Financial Officersince January 1999, of Nationwide Auction Systems.  Since January 1996, he has also served 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 theCompany in March 1982 and rejoined the Company in September 1987 after a leaveof approximately four months.  Ms.Marino was promoted to Manager of Finance and Administration in March 1983 andto Controller and Assistant Secretary in March 1986.  Upon rejoining the Company in September 1987, Ms. Marino assumedthe positions of Controller, Chief Financial Officer and Secretary of theCompany.  She was appointed VicePresident of Finance in August 1989, and has more than 35 years’ experience infinance, accounting and administration.

 

## **OtherDirectorships**

 

Since October 1999, Corey P. Schlossmann hasserved as a director of Entrade, Inc., a New York Stock Exchange holdingcompany whose online subsidiaries (including Nationwide Auction Systems ofwhich he is an executive officer as indicated in the preceding section“Business History”) provide auction and asset disposition services to theutility and manufacturing industries, among others.

 

No other director of the Company serves as adirector of a company with a class of securities registered pursuant to Section12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), orany company registered as an investment company under the Investment Company Actof 1940, as amended.

 

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

 

Based solely on a review of Forms 3 and 4furnished to the Company under Rule 16a-3(e) promulgated under the ExchangeAct, with respect to fiscal 2003, the Company is not aware of any director orexecutive officer of the Company who failed to file on a timely basis, asdisclosed in such forms, reports required by Section 16(a) of the Exchange Actduring fiscal 2003.

 

As of March 31, 2003, i.e., the end offiscal 2003, there were no beneficial owners of 10% or more of the Common Stockknown to the Company other than Joseph Mazin who was, until July 27, 2000, thePresident and Chief Executive Officer of the Company and, until March 31, 2000,a director of the company.  Mr. Mazinhas advised the Company that he timely filed all reports required by Section16(a) of the Exchange Act during fiscal 2003.

 

**Item 10. Executive Compensation.**

 

**SummaryCompensation Table**

 

The following table provides certain summaryinformation concerning the compensation earned for services rendered in allcapacities to the Company during each of the last three fiscal years by theCompany’s Chief Executive Officer as of the end of the last fiscal year.  No other executive officer of the Companyearned in excess of $100,000:

 

9

----

 

**SUMMARY COMPENSATION TABLE**

 
| **Name and****Principal  Position** |     | **Annual  Compensation** |       | **Long-Term  CompensationSecurities Underlying  Options** |   | **Other  Compensation** |   |
|-------------------------------------|----------|--------------------------|------------|-----------------------------------------------------------|--------|-------------------------|--------|
|                                |     |                     |
|                                | **Year** |                     | **Salary** |                                                      |   |
|                                |     |                     |       | **($)**                                                   |   |                    |   | **($)** |   |
|                                |     |                     |       |                                                      |   |                    |   |   |   |
| Harris A.  Shapiro (1)              |     | 2003                     |       | 150,000                                                   |   | 35,000                  |   | 2,250 | (2) |
| Chief  Executive Officer and        |     | 2002                     |       | 118,125                                                   |   | —                  |   | 1,750 | (2) |
| Chairman of  the Board              |     | 2001                     |       | 87,500                                                    |   | 25,000                  |   | 2,750 | (2) |

 

----

(1)          The Boarddesignated Mr. Shapiro as the Chief Executive Officer of the Company effectiveSeptember 2000.  The Company and Mr.Shapiro entered into a one-year employment agreement in September 2000providing for a base annual salary of $150,000.  The Board has, from time to time, extended the term of hiscontract at the same salary, with the current expiration being the earlierof  (a) September 30, 2003 or (b) theconsummation of the transaction with SuperCom (see the section “ProposedChanges in Control” in Item 1 to this Report).

 

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

 

**Option/SAR Grants in Last Fiscal Year**

 

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

 

In May 2000, theBoard of Directors of the Company adopted the Stock Option Plan of 2000 (the “2000 Option Plan”).  In October 2000, theshareholders of the Company approved the 2000 Option Plan and ratified optionspreviously granted.  The Companyregistered under the Securities Act the shares issuable upon the exercise ofoptions granted or to be granted pursuant to the 2000 Option Plan in aRegistration Statement on Form S-8 filed on December 13, 2000.   As a result of such filing, optionees whoare not affiliates of the Company may resell the shares of the Common Stockreceived upon exercise immediately, while affiliates will require a “re-offerprospectus” to resell or wait one year after exercise to resell pursuant to theexemption of Rule 144 under the Securities Act.  The Company has not as yet filed such re-offer prospectus.  The 2000 Option Plan provides for the grantof options to purchase shares of the Common Stock to directors, officers,employees and consultants of the Company. Non-qualified stock options may be granted to directors, officers,employees and consultants.  Incentivestock options, as such form is defined in Section 422 of the Internal RevenueCode of 1986, as amended (the “Code”), may be granted only to employees.  The term of the 2000 Option Plan is for tenyears and it provides for the grants of an aggregate of 2,000,000 shares of theCommon Stock.  The 2000 Option Plan iscurrently administered by the Board.

 

The 2000 Option Plan, consistent with the provisions of the Code,provides that the exercise price of an incentive stock option shall not be lessthan the fair market value of the Common Stock on the date of grant, exceptthat, if the employee owns stock possessing more than 10% of the total combinedvoting power of all classes of stock, the exercise price of the option must beat least 110% of the fair market value of the Common Stock on the date of grantand the incentive stock option cannot be exercised after five years from thedate of grant.  No stock option grantedhas, and no option to be granted under the 2000 Option Plan may have, a term inexcess of ten years.  The exercise priceof a non-statutory or nonqualified option may be less than the fair marketvalue on the date of grant.

 

The number of shares subject to an outstanding option and the exerciseprice thereof are subject to adjustment in the event of a stock dividend, stocksplit, reorganization, recapitalization, combination of shares, change incorporate structure or similar events. No fractional shares will be issued upon exercise and the Company has noobligation to pay for such fractional share.

 

Options granted to date are not exercisable during the first year afterthe date of grant and thereafter become exercisable in annual installments of25% each.  It is expected that futureoptions, if any, will be granted on a similar basis.  Some options to be granted to employees may have performancegoals as the condition precedent to

 

10

----

 

becoming exercisable.  If theproposed transactions with SuperCom (see the section “Proposed Changes inControl” in Item 1 to this Report) is consummated, as to which there can be noassurance, the 2000 Option Plan would be terminated except as to thenoutstanding options.

 

Options granted under the 2000 Option Plan are non-transferable and notimmediately exercisable.  Futureoptions, if any, are expected to be granted on the same basis.

 

If the optionee’s employment will terminate for any reason other thanhis or her death or disability, he or she may, for a period of up to threemonths, exercise the option to the extent exercisable upon the date oftermination.  If the optionee’semployment will terminate because of his or her total and permanent disability(as defined in the Code), the optionee will have 12 months to exercise thestock option to the extent exercisable upon the date of termination.  In the event of other disability causingtermination, the optionee may have six months (three months in the event the optionee wants continuous treatment ofthe stock option as an incentive stock option) to exercise the stock option tothe extent exercisable upon the date of termination.  If the optionee dies, his estate may exercise the stock option tothe extent exercisable upon the date of death of the optionee, whether itoccurred during the initial term or during the three, six or 12-month periodsdescribed in the three preceding sentences. In no event may a stock option be exercised beyond its originalexpiration date.  Similar provisionswill be applicable to optionees who are not employees.

 

For a consultant to be eligible to receive agrant of a stock option under the 2000 Option Plan, the optionee must be anatural person and the services rendered for the Company must be of a bona fidenature and not in connection with the offer or sale of securities of theCompany in a capital raising transaction and do not directly or indirectlypromote or maintain a market for the Company’s securities.

 

At March 31, 2003, options covering a totalof 185,000 shares of the Common Stock were outstanding under the 2000 OptionPlan at a weighted average exercise price of $1.29 per share.

 

**(2)****                                 Activity in Fiscal 2003**

 

During fiscal 2003, each of the fivedirectors, including Harris A. Shapiro, the Chief Executive Officer of theCompany, was granted stock options aggregating 35,000 shares of the CommonStock.

 

In September 2002, each of the fivedirectors, including Harris A. Shapiro, the Chief Executive Officer of theCompany, agreed to cancel options granted in March 2000 and September 2000,aggregating 50,000 shares of the Common Stock. The directors agreed to such cancellations because a proposedacquisition agreement pending at the time required such cancellation andbecause both counsel to the Company and counsel to the proposed acquisitioncandidate advised them that continuance thereof could cause material adversecharges to the Company under California law.

 

The Company has never granted any stockappreciation rights (SARs)

 

**Option Grants, Exercises and Values**

 

The following table provides certain summaryinformation concerning the granting of options during fiscal 2003 to the ChiefExecutive Officer who is the sole executive officer named in the SummaryCompensation Table:

 

##### **OPTION GRANTS IN LAST FISCAL YEAR**

 
| **Name**          |   | **Number of  Options  Granted** |   | **% of Total  Options  Granted to  Employees in  Fiscal Year** |   | **Exercise  Price per  Share** |       | **Expiration  Date** | ** ** |
|-------------------|--------|---------------------------------|--------|----------------------------------------------------------------|--------|--------------------------------|------------|----------------------|------------|
|              |   | **(#)**                         |   |                                                           |   | **($)**                        | ** ** |                 | ** ** |
| Harris A. Shapiro |   | 10,000                          |   | 100                                                            | %      | 1.60                           |       | 6/18/12              |       |
| Harris A. Shapiro |   | 25,000                          |   | 100                                                            | %      | 1.00                           |       | 9/25/12              |       |

 

11

----

 

The following table provides certain summaryinformation concerning the exercise of options during fiscal 2003 andunexercisable options held as of the end of fiscal 2003 by the Chief ExecutiveOfficer who is the sole executive officer named in the Summary CompensationTable:

 

**AGGREGATED OPTIONEXERCISES IN LAST FISCAL YEARAND FISCAL YEAR END OPTION VALUES**

 
| **Name**           |   | **Shares  Acquired  On  Exercise** |   | **Value  Realized** |   | **Number of  Unexercised  Options Held at  Fiscal Year End** |   | **Value of  Unexercised In-the-  Money Options  at FY-End** |   |
|--------------------|--------|------------------------------------|--------|---------------------|--------|--------------------------------------------------------------|--------|-------------------------------------------------------------|--------|
|               |   | **(#)**                            |   | **($)**             |   | **(#)**                                                      |   | **($)**                                                     |   |
|               |   |                               |   |                |   |                                                         |   |                                                        |   |
| Harris A.  Shapiro |   | —                             |   | —              |   | 35,000                                                       | (1)    |                                                        | (2)    |

 

----

(1)                                  As of March 31, 2003, no options wereexercisable.

 

(2)                                  Such value is based upon the market value of theCommon Stock as of March 31, 2003, less the exercise price payable per shareunder such options.  As of March 31,2003, the market value was less than the exercise price.

 

**Directors’ Compensation**

 

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

 

Directors may be granted stock options ascompensation for their services.  Duringfiscal 2003, each of the five directors agreed to cancel options previouslygranted under the 2000 Option Plan, aggregating 50,000 shares of Common Stock.During fiscal 2003, each of the five directors were granted stock options underthe 2000 Option Plan aggregating 35,000 shares of Common Stock.  See also “(2) Activity in Fiscal 2003” under“Option/SAR Grants in Last Fiscal Year.

 

There are no other relationships with respect to other entities thatwould require disclosure here under Item 404 of Regulation S-K.

 

**Item11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

**SecurityOwnership**

 

The following table sets forth, as of May 31,2003, certain information with respect to all shareholders known by the Companyto be beneficial owners of more than 5% of its outstanding shares of the CommonStock, the Chief Executive Officer of the Company (being the sole executiveofficer named in the Summary Compensation Table in Item 10 to this Report), alldirectors and all officers and directors of the Company as a group.  The ownership information was furnished tothe Company by the person or entity.

 
| **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            |   | 793,997                                                    | (2)    | 12.9                                                     |   |
|                                                                    |   |                                                       |   |                                                     |   |
| Flamemaster  Corporation  11120 Sherman Way  Sun Valley, CA  91252 |   | 537,997                                                    |   | 8.7                                                      |   |

 

12

----

 
| **Name and Address  of Beneficial Owner**                                                                                 |   | **Number of  Shares  of Common Stock  Beneficially Owned** |   | **Percentage  of  Common Stock  Beneficially Owned (1)** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|----------------------------------------------------------|--------|
| 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)10 West Easy StreetSimi Valley, CA 93065                                                             |   | 287,833                                                    | (5)    | 4.7                                                      |   |
|                                                                                                                      |   |                                                       |   |                                                     |   |
| Bryan Maizlish (6)  9705 Conestoga Way  Potomac, MD 20854                                                                 |   | 7,589                                                      | (7)    | Nil                                                      |   |
|                                                                                                                      |   |                                                       |   |                                                     |   |
| Timothy D. Morgan (6)  11734 Gladstone Circle  Fountain Valley, CA 92708                                                  |   | 8,789                                                      | (7)    | Nil                                                      |   |
|                                                                                                                      |   |                                                       |   |                                                     |   |
| Tracie Savage (6)  6212 Banner Avenue  Los Angeles, CA  90038                                                        |   | 17,889                                                     | (8)    | Nil                                                      |   |
|                                                                                                                      |   |                                                       |   |                                                     |   |
| Corey P. Schlossmann (6)  19654-A Roscoe Blvd  Northridge, CA 91324                                                       |   | 458,092                                                    | (7)    | 7.4                                                      |   |
|                                                                                                                      |   |                                                       |   |                                                     |   |
| All directors and officers as a group(6 in number)                                                                        |   | 784,133                                                    | (9)    | 12.7                                                     |   |

 

----

(1)                                  The percentages computed in the table are basedupon 6,159,530 shares of the Common Stock which were outstanding on May 31,2003.  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, 2003.

 

(2)                                  The shares of theCommon Stock reported in the table include (a) 537,997 shares owned byFlamemaster Corporation (“Flamemaster”) for which Mr. Mazin has voting power asthe President, Chairman and Chief Executive Officer of Flamemaster; (b) 36,000shares owned by the Flamemaster Employees’ Profit Sharing Plan for which Mr.Mazin is the fiduciary; and (c) 23,000 shares owned by Altius InvestmentCorporation (“Altius”) for which Mr. Mazin has shared voting power as Chairmanof the Board of Altius.  The sharesreported in the table also include 5,000 shares issuable upon the exercise ofan option expiring November 6, 2003 being held by Donna Mazin, his wife.  Certain of the shares reported in the tableare owned by Ms. Mazin or as to which shares she shares dispositive and votingpowers with Mr. Mazin.

 

(3)                                  William B. Wachtel asthe Trustee of the Digital Trust has, under the trust agreement, sole votingand investment power with respect to the shares reported in the table. HarrisA. Shapiro, currently the Chairman of the Board, Chief Executive Officer and adirector of the Company, was the settler of the Digital Trust and made anirrevocable grant to it of the assets which the Digital Trust used to effectthe 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 respect to the shares, Mr. Shapiro is notthe beneficial owner of the shares reported in the table as being owned ofrecord by the Digital Trust and beneficially by the Trustee.

 

13

----

 

(4)                                  Mr. Shapiro is theChairman of the Board, the Chief Executive Officer and a director of theCompany.

 

(5)                                  The shares of theCommon Stock reported in the table reflect (a) 284,500 shares owned byMillennium Capital Corporation (“Millennium”) for which Mr. Shapiro has votingpower as its President; and (b) 3,333 shares issuable upon the exercise of anoption expiring June 19, 2012 under the 2000 Option Plan.  The shares of the Common Stock reported inthe table do not include (x) 6,667 shares issuable upon the exercise of theoption described in (b) or (y) 25,000 shares issuable upon the exercise of anoption expiring September 25, 2012 granted to Mr. Shapiro under the 2000 OptionPlan, neither of which was exercisable as to such shares at May 31, 2003 orwithin 60 days thereafter.  In addition,the shares of the Common Stock do not reflect 10,000 shares issuable upon theexercise of a Consulting Warrant which, if not granted to a third person orpersons, may be exercised by Millennium.

 

(6)                                  A director of theCompany.

 

(7)                                  The shares of theCommon Stock reported in the table include (a) 3,333 shares issuable upon theexercise of an option expiring June 19, 2012 under the 2000 Option Plan.  The shares of the Common Stock reported inthe table do not include (x) 6,667 shares issuable upon the exercise of theoption described in (a) or (y) 25,000 shares issuable upon the exercise of anoption expiring September 25, 2012 granted under the 2000 Option Plan, neitherof which was exercisable as to such shares at May 31, 2003 or within 60 daysthereafter.

 

(8)                                  The shares of theCommon Stock reported in the table include (a) 10,000 shares issuable upon theexercise of an option expiring July 20, 2005; and, (b) 3,333 shares issuableupon the exercise of an option expiring June 19, 2012 under the 2000 OptionPlan.  The shares of the Common Stockreported in the table do not include (x) 6,667 shares issuable upon theexercise of the option described in (b) or (y) 25,000 shares issuable upon theexercise of an option expiring September 25, 2012 granted under the 2000 OptionPlan, neither of which was exercisable as to such shares at May 31, 2003 orwithin 60 days thereafter.

 

(9)                                  The shares of theCommon Stock reported in the table include (a) those shares indicated in thetext to Notes 5, 7 and 8 and (b) 625 shares issuable to an executive officerupon the exercise of an option expiring October 30, 2011 under  the 2000 Option Plan.  The shares of the Common Stock  reported in the table do not include (x)1,875 shares issuable upon the exercise of the option described in (b), none ofwhich was exercisable as to such shares at May 31, 2003 or within 60 days thereafter.

 

**Equity CompensationPlans**

 

The following table sets forth, as of March 31, 2003, certain summaryinformation with respect to compensation plans under which shares of theCompany’s Common Stock are authorized for issuance:

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
|                                                                  |   | **Number of   securities  to be issued upon  exercise of outstanding  options, warrants and  rights  (a)** |   | **Weighted-average  price of  outstanding  options, warrants  and rights  (b)** |   | **Number of  securities remaining  available for future  issuance under equity  compensation plans  (excluding securities  reflected in  column (a))  (c)** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                  |   |                                                                                                            |   |                                                                            |   |                                                                                                                                                        |   |
| Equity compensation plans approved by  security holders               |   | 216,500                                                                                                         |   | $            1.43        |   | 1,815,000                                                                                                                                                   |   |
|                                                                  |   |                                                                                                            |   |                                                                            |   |                                                                                                                                                        |   |
| Equity compensation plans not approved by  security holders  (1) |   | 25,000                                                                                                          |   | $            2.71        |   | 71,000                                                                                                                                                      |   |
| Total                                                                 |   | 241,500                                                                                                         |   | $            1.56        |   | 1,886,000                                                                                                                                                   |   |

 

14

----

 

----

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

 

(a)                                             In April1999, the Board of Directors authorized a reserve of 100,000 shares of theCommon Stock for granting of warrants and options.  Said warrants and options are sold for a price of five cents pershare and have an exercise price of $1.56 per share.  The term is three years from date of issuance.

 

(b)                                            In November2000, the Board of Directors granted a consultant of the Company an optionexpiring November 26th, 2003 to purchase 20,000 shares of theCommon Stock at an exercise price of $3.00 per share.

 

Item 12.  CertainRelationships and Related Transactions.

 

None.

 

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

 
| (a)    |   | Documents Filed with Report |
|--------|--------|-----------------------------|
|   |   |                        |
|   |   | (1)                         | Financial Statements |
|   |   |                        |
|   |   |                        | The financial statements listed on the  accompanying Index to Financial Statements are filed as part of this Report. |
|   |   |                        |
|   |   | (2)                         | Exhibits |

 
| **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             |   | Stock Purchase Agreement dated January 20,  2000 by and among the Company, Millennium Capital Corporation (“Millennium”),  JDK Associates, Inc. (“JDK”) and other Buyers (6) |

 

15

----

 
| **Exhibit  No.** |   | **Description of Exhibit**                                                                                                                                        |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                              |
| 10.8             |   | Letter Agreement dated January 20, 2000  (“Consulting Agreement”) by and among the Company, Millennium and JDK (7)                                      |
|             |   |                                                                                                                                                              |
| 10.9             |   | Stock Option Plan of 2000 of the Company  (2)                                                                                                                     |
|             |   |                                                                                                                                                              |
| 10.10            |   | Forms of Stock Option Agreements (8)                                                                                                                              |
|             |   |                                                                                                                                                              |
| 10.11            |   | Consulting Agreement dated August 29, 2000  by and between the Company and Terry J. Baker (9)                                                                     |
|             |   |                                                                                                                                                              |
| 10.12            |   | Employment Agreement dated September 1,  2000 by and between the Company and Harris Shapiro (9)                                                                   |
|             |   |                                                                                                                                                              |
| 10.13            |   | Letter Agreement dated October 25, 2000 by  and among the Company, Alexei Afanasiev and Business Solutions Group, Inc.  (9)                                       |
|             |   |                                                                                                                                                              |
| 10.14            |   | License Agreement dated October 27, 2000 by  and between the Company and Alexei Afanasiev (9)                                                                     |
|             |   |                                                                                                                                                              |
| 10.15            |   | Letter Agreement, Security Agreement and  Promissory Note each dated October 27, 2000 and each by and between the  Company and Business Solutions Group, Inc. (9) |
|             |   |                                                                                                                                                              |
| 10.16            |   | Stock Option Agreement dated November 27,  2000 by and between the Company and Terry J. Baker (9)                                                                 |
|             |   |                                                                                                                                                              |
| 10.17            |   | Sales Agent Agreement dated March 1, 2001  by and between the Company and Terry J. Baker (9)                                                                      |
|             |   |                                                                                                                                                              |
| 23               |   | Consent of Independent Auditors (10)                                                                                                                              |
|             |   |                                                                                                                                                              |
| 99.1             |   | Certification of Chief Executive Officer  Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 (10)                                                  |
|             |   |                                                                                                                                                              |
| 99.2             |   | Certification of Chief Financial Officer  Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 (10)                                                  |
|             |   |                                                                                                                                                              |
| 99.3             |   | Certification Pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (10)                                                                                         |

 

----

(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.

 

16

----

 

(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 definitive Proxy Statement dated March 10, 2000filed on March 14, 2000.

 

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

 

(8)                              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.

 

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

 

(10)                        Filed or,in the case of Exhibit 99.3, furnished herewith.

 

(b)                                 Reportson Form 8-K

 

No reports on Form 8-K were filed by the Company during the lastquarter of the fiscal year ended March 31, 2003.

 

17

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or15 (d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis Report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| PERFECTDATA CORPORATION   |
|---------------------------|
|                      |   |
|                      | By: /s/ | Irene J. Marino |   |
|                      | Irene J. Marino, Authorized  Officer and  Principal Financial and Accounting Officer |
|                      |   |
|                      |   |
| Date:  June 23, 2003 |   |
|                           |  |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities indicatedon June 23, 2003.  

 
| **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

----

 

**PERFECTDATACORPORATION**

 

**SEC Form 10-KSB**

 

**Index to Financial Statements**

 
| **Financial Statements**                                                                                      | **Page** |
|---------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                          |     |
| Independent Auditors’ Report - March 31, 2003 and 2002                                                   | F-1      |
|                                                                                                          |     |
| Balance Sheet - March 31, 2003                                                                                | F-2      |
|                                                                                                          |     |
| Statements of Operations -  Years Ended March 31, 2003and 2002                                                | F-3      |
|                                                                                                          |     |
| Statements of Shareholders’ Equity and  Comprehensive Income (Loss)  Years Ended March 31, 2003 and 2002 | F-4      |
|                                                                                                          |     |
| Statements of Cash Flows -  Years Ended March 31, 2003 and 2002                                               | F-5      |
|                                                                                                          |     |
| Notes to Financial Statements                                                                                 | F-6      |

 

19

----

 

 

355 SouthGrand AvenueSuite 2000Los Angeles, CA 90071-1568

 

**IndependentAuditors’ Report**

The Board of Directors andShareholdersPerfectData Corporation:

 

We haveaudited the accompanying balance sheet of PerfectData Corporation as of March31, 2003 and the related statements of operations, shareholders’ equity andcomprehensive income (loss), and cash flows for the years ended March 31, 2003and 2002. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of PerfectData Corporation as ofMarch 31, 2003 and the results of its operations and its cash flows for theyears ended March 31, 2003 and 2002 in conformity with accounting principlesgenerally accepted in the United States of America.

 

 

Los Angeles, California

May 9, 2003

 

F-1

----

 

**PERFECTDATA CORPORATION**

 

Balance Sheet

 

March31, 2003

 

(Amountsin thousands, except share amounts)

 
| **Assets**                                                                                          |   |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|
| Current  assets:                                                                                    |   |   |   |
| Cash  and cash equivalents                                                                          |   | $      | 2,173  |   |
| Accounts  receivable, net                                                                           |   | 158    |   |
| Inventories                                                                                         |   | 188    |   |
| Prepaid  expenses and other current assets                                                          |   | 62     |   |
| Total  current assets                                                                               |   | 2,581  |   |
|                                                                                                |   |   |   |
| Property  and equipment, at cost, net                                                               |   | 6      |   |
|                                                                                                |   | $      | 2,587  |   |
|                                                                                                |   |   |   |
| **Liabilities and Shareholders’ Equity**                                                       |   |   |   |
| Current  liabilities:                                                                               |   |   |   |
| Accounts  payable                                                                                   |   | $      | 283    |   |
| Accrued  compensation                                                                               |   | 38     |   |
| Other  accrued expenses                                                                             |   | 101    |   |
| Total  current liabilities                                                                          |   | 422    |   |
|                                                                                                |   |   |   |
| Commitments  and contingencies (note 8)                                                             |   |   |   |
|                                                                                                |   |   |   |
| 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                                                                                |   | (9,041 | )      |
| Net  shareholders’ equity                                                                      |   | 2,165  |   |
|                                                                                                |   | $      | 2,587  |   |

 

See accompanying notes tofinancial statements.

 

F-2

----

 

**PERFECTDATA CORPORATION**

 

Statements of Operations

 

Yearsended March 31, 2003 and 2002

 

(Amountsin thousands, except per share information)

 
|                                           |   | **2003** |   | **2002** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|
| Net  sales                                     |   | $        | 2,005  |     | 1,716  |   |
| Cost  of goods sold                            |   | 1,326    |   | 1,255    |   |
| Gross  profit                                  |   | 679      |   | 461      |   |
|                                           |   |     |   |     |   |
| Selling,  general, and administrative expenses |   | 1,358    |   | 1,310    |   |
| Loss  from operations                          |   | (679     | )      | (849     | )      |
| Other  income:                                 |   |     |   |     |   |
| Interest,  net                                 |   | —   |   | —   |   |
| Other,  net                                    |   | 37       |   | 54       |   |
| Net  loss                                      |   | $        | (642   | )        | (795   | ) |
|                                           |   |     |   |     |   |
| Net  loss per common share:                    |   |     |   |     |   |
| Basic  and diluted                             |   | $        | (0.10  | )        | (0.13  | ) |
|                                           |   |     |   |     |   |
| Weighted  average shares outstanding:          |   |     |   |     |   |
| Basic  and diluted                             |   | 6,159    |   | 6,159    |   |

 

See accompanying notes tofinancial statements.

 

F-3

----

 

**PERFECTDATA CORPORATION**

 

Statements of Shareholders’Equity and

ComprehensiveIncome (Loss) (notes 6 and 7)

 

Yearsended March 31, 2003 and 2002

 

(Amountsin thousands)

 
|                                    |   | **Comprehensive  loss** |   | **Common stock** |   | **Accumulated  deficit** |   | **Accumulated  other  comprehensive  income (loss)** |   | **Net  shareholders’  equity** |   |
|-----------------------------------------|--------|-------------------------|--------|------------------|--------|--------------------------|--------|------------------------------------------------------|--------|-------------------------------------|--------|
|                                    |   |                    |   |             |   |
|                                    |   |                    |   |             |   |
|                                    |   | **Shares**              |   | **Amount**       |   |                     |   |                                                 |
| 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 |   |
|                                    |   |                    |   |             |   |                     |   |                                                 |   |                                |   |   |   |
| Comprehensive  loss:                    |   |                    |   |             |   |                     |   |                                                 |   |                                |   |   |   |
| Net  loss                               |   | $                       | (642   | )                | — |                     | — |                                                 | (642   | )                                   | — |   | (642 | ) |
| Total  comprehensive loss               |   | $                       | (642   | )                |   |                     |   |                                                 |   |                                |   |   |   |   |
| Balance at March 31, 2003               |   |                    |   | 6,159            |   | $                        | 11,206 |                                                 | (9,041 | )                                   | — |   | 2,165 |   |

 

See accompanying notes tofinancial statements.

 

F-4

----

 

**PERFECTDATA CORPORATION**

 

Statements of Cash Flows

 

Yearsended March 31, 2003 and 2002

 

(Amountsin thousands)

 
|                                                                         |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash  flows from operating activities:                                       |   |     |   |     |   |
| Net  loss                                                                    |   | $        | (642   | )        | (795   | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |     |   |     |   |
| Depreciation  and amortization                                               |   | 20       |   | 31       |   |
| Loss  on sale or impairment charge of marketable securities                  |   | —   |   | 37       |   |
| Decrease  in accounts receivable                                             |   | 20       |   | 73       |   |
| (Increase)  decrease in inventories                                          |   | (34      | )      | 237      |   |
| (Increase)  decrease in prepaid expenses and other assets                    |   | (7       | )      | 17       |   |
| Increase  (decrease) in accounts payable                                     |   | 76       |   | (153     | )      |
| Decrease  in accrued expenses                                                |   | (18      | )      | (37      | )      |
| Net  cash used in operating activities                                       |   | (585     | )      | (590     | )      |
| Cash  flows from investing activities:                                       |   |     |   |     |   |
| Sale  of marketable securities                                               |   | —   |   | 171      |   |
| Net  cash provided by investing activities                                   |   | —   |   | 171      |   |
| Net  decrease in cash and cash equivalents                                   |   | (585     | )      | (419     | )      |
| Cash  and cash equivalents at beginning of year                              |   | 2,758    |   | 3,177    |   |
| Cash  and cash equivalents at end of year                                    |   | $        | 2,173  |     | 2,758  |   |
| Supplemental  disclosure of cash flow information:                           |   |     |   |     |   |
| Cash  paid during the year for:                                              |   |     |   |     |   |
| Income  taxes                                                                |   | $        | — |     | — |   |
| Interest                                                                     |   | —   |   | —   |   |

 

See accompanying notes tofinancial statements.

 

F-5

----

 

**PERFECTDATA CORPORATION**

 

Notes to FinancialStatements

 

March31, 2003 and 2002

 

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

 

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

 

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

 

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

 

Cash equivalents of$2,173,000 at March 31, 2003 consist of all highly liquid money marketinstruments with an original maturity of three months or less to be cashequivalents.

 

***(c)******                   ******Inventories***

 

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

 

***(d)******                  ******FinancialInstruments***

 

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

 

***(e)******                   ******Plant andEquipment***

 

Plant and equipment arestated at cost.

 

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 |

 

***(f)******                     ******Revenue Recognition***

 

The Company recognizesrevenue when products are shipped and the customer takes ownership and assumesrisk of loss, collection of the relevant receivable is probable, pervasiveevidence of an arrangement exists, and the sales price is fixed or determinable.

 

***(g)******                  ******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.

 

F-6

----

 

***(h)******                  ******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.

 

***(i)******                     ******Use ofEstimates***

 

The preparation of thefinancial statements requires management of the Company to make a number ofestimates and assumptions relating to the reported amount of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the period. Significant items subject to such estimates and assumptionsinclude 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.

 

***(j)******                     ******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 includingFASB Interpretation 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. As allowed by SFAS No. 123, the Company haselected to continue to apply the intrinsic-value-based method of accountingdescribed above and has adopted only the disclosure requirements of SFAS No.123.

 

The Company is adopting thedisclosure provisions of SFAS No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure*. Due to thereduction of the exercise price of fixed stock options through the cancelationof stock option awards and the granting of replacement awards, per FIN No. 44, *Accounting for Certain Transactions involving StockCompensation*, the Company has adopted variable accounting for thereplacement awards, per FIN No. 28, *Accountingfor Stock Appreciation Rights and Other Variable Stock Option or Award Plans.*

 

F-7

----

 

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 the grantdate for its stock options under SFAS No. 123 and SFAS No. 148, the Company’snet loss would have been increased to the pro forma amounts indicated below.The fair value of these options was estimated at the date of grant using aBlack-Scholes option-pricing model, assuming a risk-free interest rate of 4.57%– 6.26%, a ten-year term, 50% volatility, and $0 expected dividend rate.

 
|                                                                                                                         |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net  income, as reported                                                                                                     |   | $        | (642   | )        | (795   | ) |
| Deduct  total stock-based employee compensation expense determined under  fair-value-based method for all awards, net of tax |   | (4       | )      | (42      | )      |
| Pro  forma net income                                                                                                        |   | $        | (646   | )        | (837   | ) |
|                                                                                                                         |   |     |   |     |   |
| Basic  and diluted net loss per common share:                                                                                |   |     |   |     |   |
| As  reported                                                                                                                 |   | $        | (0.10  | )        | (0.13  | ) |
| Pro  forma                                                                                                                   |   | (0.10    | )      | (0.14    | )      |

 

***(k)******                  ******Impairmentof Long-Lived Assets andLong-Lived Assets to Be Disposed Of***

 

SFAS No. 144 provides asingle accounting model for long-lived assets to be disposed of. SFAS No. 144also changes the criteria for classifying an asset as held for sale andbroadens the scope of businesses to be disposed of that qualify for reportingas discontinued operations and changes the timing of recognizing losses on suchoperations. The Company adopted SFAS No. 144 on January 1, 2002. The adoptionof SFAS No. 144 did not affect the Company’s financial statements.

 

In accordance with SFAS No.144, long-lived assets, such as property, plant, and equipment, and purchasedintangibles subject to amortization, are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying 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. Assets to be disposed of wouldbe separately presented in the balance sheet and reported at the lower of thecarrying amount or fair value less costs to sell, and are no longerdepreciated. The assets and liabilities of a disposed group classified as heldfor sale would be presented separately in the appropriate asset and liabilitysections of the balance sheet.

 

Prior to the adoption ofSFAS No. 144, the Company accounted for long-lived assets in accordance withSFAS No. 121, *Accounting for Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of*.

 

F-8

----

 

***(l)******                     ******RecentlyIssued Accounting Standards***

 

In June 2001, FASB issuedSFAS No. 143, *Accounting for AssetRetirement Obligations.*SFAS No. 143 requires the Company to recordthe fair value of an asset retirement obligation as a liability in the periodin which it incurs a legal obligation associated with the retirement oftangible long-lived assets that result from the acquisition, construction,development, and/or normal use of the assets. The Company also records acorresponding asset that is depreciated over the life of the asset. Subsequentto the initial measurement of the asset retirement obligation, the obligationwill be adjusted at the end of each period to reflect the passage of time andchanges in the estimated future cash flows underlying the obligation. TheCompany was required to adopt SFAS No. 143 on January 1, 2003. The adoption ofSFAS No. 143 did not have a material effect on the Company’s financialstatements.

 

In April 2002, the FASBissued SFAS No. 145, *Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections*. SFAS No. 145 amends existing guidance on reportinggains and losses on the extinguishment of debt to prohibit the classificationof the gain or loss as extraordinary, as the use of such extinguishments havebecome part of the risk management strategy of many companies. SFAS No. 145also amends SFAS No. 13 to require sale-leaseback accounting for certain leasemodifications that have economic effects similar to sale-leasebacktransactions. The provisions of the Statement related to the rescission ofStatement No. 4 is applied in fiscal years beginning after May 15, 2002.Earlier application of these provisions is encouraged. The provisions of theStatement related to Statement No. 13 were effective for transactions occurringafter May 15, 2002, with early application encouraged. The adoption of SFAS No.145 is not expected to have a material effect on the Company’s financialstatements.

 

In June 2002, the FASBissued SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*. SFAS No. 146 addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity*. Theprovisions of this Statement are effective for exit or disposal activities thatare initiated after December 31, 2002, with early application encouraged. Theadoption of SFAS No. 146 is not expected to have a material effect on theCompany’s financial statements.

 

In December 2002, the FASBissued SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123*. This Statement amends FASB Statement No. 123, *Accounting for Stock-Based Compensation,*toprovide alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based employee compensation. In addition,this Statement amends the disclosure requirements of Statement No. 123 torequire prominent disclosures in both annual and interim financial statements.Certain of the disclosure modifications are required for fiscal years endingafter December 15, 2002 and are included in the notes to these financialstatements.

 

**(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.

 

F-9

----

 

As of March 31, 2003, theCompany had approximately $2,173,000 of cash equivalents in two financialinstitutions, which exposes the Company to concentration of credit risk. TheCompany had approximately $2,138,000 invested in highly liquid money marketinstruments, which are not federally insured. The remaining $35,000 wasdeposited at a bank, which is federally insured up to $100,000.

 

The Company sells itsprincipal products to a number of customers in the retail industry. During theyears ended March 31, 2003 and 2002, two customers accounted for more than10% of net sales. These customers each accounted for 47% and 23%, and 33% and28% in 2003 and 2002, respectively. As of March 31, 2003 and 2002,approximately 78% and 38% of recorded accounts receivable were from twowholesale/discount merchants. For the years ended March 31, 2003 and 2002,sales made to these customers amounted to $942,000 and $457,000 and $560,000 and$483,000, respectively. To reduce credit risk, the Company performs ongoingcredit evaluations of its customers’ financial conditions but does notgenerally require collateral. New customers requiring large credit accounts arerequired to provide letters of credit.

 

**(3)****                      ****Inventories**

 

Inventories, consisting ofmaterials, labor, and other direct manufacturing costs, are stated at the lowerof cost or market. Inventories at March 31, 2003 are summarized as follows(dollars in thousands):

 

| Raw  materials     |   | $   | 68     |   |
|--------------------|--------|-----|--------|--------|
| Work  in process   |   | 1   |   |
| Finished  products |   | 119 |   |
|               |   | $   | 188    |   |

 

**(4)****                      ****Property and Equipment**

 

Property and equipment atMarch 31, 2003 consist of:

 

| Machinery  and equipment                        |   | $      | 309    |   |
|-------------------------------------------------|--------|--------|--------|--------|
| Furniture  and fixtures                         |   | 84     |   |
| Leasehold  improvements                         |   | 155    |   |
|                                            |   | 548    |   |
|                                            |   |   |   |
| Less  accumulated depreciation and amortization |   | 542    |   |
|                                            |   | $      | 6      |   |

 

F-10

----

 

**(5)****                      ****Income Taxes**

 

A reconciliation of thefederal statutory income tax rate to the effective income tax rate on loss fromcontinuing operations is as follows:

 
|                                         |   | **March 31** |   |
|----------------------------------------------|--------|--------------|--------|
|                                         |   | **2003**     |   | **2002** |   |
| Federal  statutory rate                      |   | 34           | %      | 34 | % |
| Increases  (reductions) in taxes due to:     |   |         |   |   |   |
| State  income taxes (net of federal benefit) |   | 6            |   | 6 |   |
| Change  in valuation allowance               |   | 46           |   | (37 | ) |
| Dividends-received  deduction                |   | (3           | )      | (2 | ) |
| California  net operating loss limitation    |   | (3           | )      | (3 | ) |
| Expiration  of federal net operating loss    |   | (74          | )      | — |   |
| Expiration  of general business credit       |   | (3           | )      | — |   |
| Other                                        |   | (3           | )      | 2 |   |
|                                         |   | —       | %      | — | % |

 

The tax effects of temporarydifferences that give rise to a significant portion of the deferred tax assetsat March 31, 2003 are summarized as follows (in thousands):

 

| Deferred  tax assets (liabilities): |   |   |   |
|-------------------------------------|--------|--------|--------|
| Net  operating losses               |   | $      | 1,878  |   |
| Inventories                         |   | (9     | )      |
| Accrued  expenses                   |   | 46     |   |
| Business  tax credit carryforwards  |   | 12     |   |
| Other                               |   | 17     |   |
|                                |   | 1,944  |   |
|                                |   |   |   |
| Less  valuation allowance           |   | 1,944  |   |
|                                |   | $      | — |   |

 

At March 31, 2003, theCompany had net operating loss (NOL) carryforwards of approximately $5,152,476and $2,162,657 for federal income tax purposes and California income taxpurposes, respectively, expiring in varying amounts through 2021. The NOLcarryforwards, which are available to offset future profits of the Company andare subject to limitations should a “change in ownership” as defined in theInternal Revenue Code occur, will begin to expire in 2003 if not utilized.Additionally, the Company has general business tax credit carryforwards ofapproximately $12,000 which will begin to expire in 2006.

 

Realization of the futuretax benefits of the NOL carryforwards and other deferred tax assets isdependent on the Company’s ability to generate future taxable income within theperiods in which they benefit. In assessing the likelihood of utilization ofexisting deferred tax assets, management considered the historical results ofcontinuing operations over the last three years and the current economicenvironment in which

 

F-11

----

 

the Company operates.Management has determined that future taxable income of the Company will morelikely than not be insufficient to realize the recorded net deferred tax assetsof $1,944,000 and has recorded a valuation allowance of $1,944,000. During theyear ended March 31, 2003, the Company increased the valuation allowance indeferred tax assets by $294,848.

 

**(6)****                      ****Shareholders’ Equity**

 

On January 20, 2000, theCompany entered into certain agreements with Millennium Capital Corporation(MCC) and JDK Associates Inc. (JDK). Pursuant to the agreements, the Companysold 1,333,333 shares of its common stock to MCC, JDK, and certain other buyersand issued a warrant to purchase 1,800,000 shares of the Company’s common stockat $2.75 per share, for aggregate consideration of $3,000,000. In addition,under the agreements, MCC and JDK will provide financial advisory assistance tothe Company in searching for and closing future acquisitions and financings forwhich they will receive an advisory fee of 5% of the estimated purchase pricefor a future acquisition which they introduced to the Company or for additionalcapital raised in support of future acquisitions. The term of this consultingagreement is five years. MCC and JDK have agreed to terminate the consultingagreement effective with a closing of a proposed transaction with SuperComLtd., an Israeli company, with JDK to receive 150,000 shares of the commonstock upon such termination. If the proposed transaction does not close, thenthe consulting agreement continues in effect.

 

Because of the significanceof these agreements, the Company was required to obtain, and they did obtain onMarch 31, 2000, shareholder approval. Immediately thereafter, the warrantholders exercised warrants to purchase 1,780,000 shares of common stock,resulting in the issuance on March 31, 2000 of 1,515,406 shares of commonstock. Accordingly, on March 31, 2000, 2,848,739 shares were issued for anaggregate consideration of $3,000,000.

 

For financial reportingpurposes, the Company has accounted for these transactions as an increase incommon stock for $3,000,000, recorded net of the applicable costs. The future5% consulting fees will be accounted for if and when occurred.

 

The remaining warrants topurchase 20,000 shares of common stock at $2.75 per share are outstanding atMarch 31, 2003.

 

The articles ofincorporation authorize a class of preferred stock issuable in classes andseries with such designations, voting rights, redemption provisions, dividendrates, liquidation and conversion rights, and other preferences and limitationsas may be determined by the board of directors. No preferred stock wasoutstanding at March 31, 2003.

 

**(7)****                      ****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

 

F-12

----

 

or greater than fair marketvalue at date of grant. The shares, subject to various limitations, areexercisable over terms not to exceed ten years. No options were granted duringthe four years ended March 31, 2003. A total of 377,750 options were exercisedthrough March 31, 2003, with 10,000 options left outstanding. The 1985 plan hasexpired; therefore, no additional options can be issued under its terms.

 

On March 31, 2003, anemployee of the Company was terminated who was previously granted an option topurchase 1,500 shares of common stock at $2.0625 per share. As the terminatedemployee has 90 days to exercise, the option is outstanding as of March 31,2003.

 

Activity under the Plan issummarized as follows:

 
|                                   |   | **Number of  shares** |   | **Option price  per share  (average)** |   | **Aggregate** |   |
|----------------------------------------|--------|-----------------------|--------|----------------------------------------|--------|---------------|--------|
| Options  outstanding at March 31, 2001 |   | 11,500                |   | $                                      | 1.3017 |          | 14,970 |   |
|                                   |   |                  |   |                                   |   |          |   |
| Options  exercised                     |   | —                |   | —                                 |   | —        |   |
|                                   |   |                  |   |                                   |   |          |   |
| Options  outstanding at March 31, 2002 |   | 11,500                |   |                                   |   | 14,970        |   |
|                                   |   |                  |   |                                   |   |          |   |
| Options  canceled                      |   | —                |   | —                                 |   | —        |   |
|                                   |   |                  |   |                                   |   |          |   |
| Options  outstanding at March 31, 2003 |   | 11,500                |   | 1.3017                                 |   | $             | 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** |   |
|-----------------------------------------|--------|------------|--------|-----------|--------|-------------------------------------|--------|
| Warrants  outstanding at March 31, 2001 |   | 13,000     |   | $         | 1.56   |                                | 1.56   |   |
| Issued                                  |   | —     |   | —    |   | —                              |   |
| Canceled                                |   | —     |   | —    |   | —                              |   |
| Exercised                               |   | —     |   | —    |   | —                              |   |
| Warrants  outstanding at March 31, 2002 |   | 13,000     |   |      |   | 1.56                                |   |
| Issued                                  |   | —     |   | —    |   | —                              |   |
| Canceled                                |   | (8,000     | )      | 1.56      |   | 1.56                                |   |
| Exercised                               |   | —     |   | —    |   | —                              |   |
| Warrants  outstanding at March 31, 2003 |   | 5,000      |   |      |   | 1.56                                |   |
|                                         |        |            |        |           |        |                                     |        |  |

 

F-13

----

 

***2000 Stock Option Plan***

 

On May 22, 2000, theCompany’s board of directors adopted the Stock Option Plan of 2000 of PerfectDataCorporation (the 2000 Plan) which provides for the granting of options todirectors, officers, employees, and consultants of the Company. The Company’sboard of directors reserved 1,000,000 shares of common stock under the 2000Plan. On September 7, 2000, the Company’s board of directors amended the 2000Plan to reserve an additional 1,000,000 shares of common stock. OnOctober 19, 2000, the shareholders of the Company approved the 2000 Planand ratified options previously granted.

 

Options granted under the2000 Plan shall be at a price no less than the fair market value of the commonstock on the date of grant or in the case of nonqualified stock options at aprice equal to or greater than 85% of the fair market value on the date ofgrant. Options issued under the 2000 Plan are exercisable at various times asdetermined by the board of directors or its designee.

 

On October 31, 2001, theCompany granted an option to purchase 10,000 shares of common stock at $3.43per share to each of the five directors. The option price was equal to the fairmarket value 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 membersexercised their options by July 31, 2001. Therefore, options to purchase100,000 shares of common stock were canceled as of March 31, 2002.

 

On June 15, 2002, theCompany granted an option to purchase 10,000 shares of common stock at $1.60per share to each of the five directors. The option price was equal to 120% ofthe fair market value at the time of grant. All of the options described wereto become exercisable in three substantially equal installments, commencingwith the first anniversary of the respective date of grant.

 

On September 17, 2002, theboard of directors canceled the options granted to each director pursuant tothe 2000 Plan, on March 31, 2000 to purchase 25,000 shares of common stock at$18.50 per share and on September 7, 2000, to purchase 25,000 shares of thecommon stock at $4.63 per share. None of the options to purchase an aggregateof 250,000 shares were exercised.

 

On September 26, 2002, theCompany granted an option to purchase 25,000 shares of common stock at $1.00per share to each of the five directors. The fair market value of the stock onthe date shareholder approval was obtained was below the exercise price. All ofthe options described were to become exercisable in three substantially equalinstallments, commencing with the first anniversary of the respective date ofgrant. In accordance with FIN 44, the Company has adopted variable accountingfor these replacement awards. No compensation expense has been recognized inthe financial results as the fair market value has not exceeded the exerciseprice.

 

On March 31, 2003, anemployee of the Company was terminated who was previously granted an option topurchase 1,500 shares of common stock at $3.43 per share. None of the optionswere exercised. As the terminated employee has 60 days to exercise, the optionis outstanding as of March 31, 2003. The option subsequently expiredunexercised.

 

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, 2002 |   | 260,000               |   | $                                      | 3.43  – 18.50 |                                | 11.25  |   |
| Options  granted                       |   | 175,000               |   | 1.00  – 1.60                      |               | 1.17                                |   |
| Options  canceled                      |   | (250,000              | )      | 3.43  – 18.50                     |               | 10.97                               |   |
| Options  exercised                     |   | —                |   | —                                 |               | —                              |   |
|                                   |   |                  |   |                                   |               |                                |   |
| Options  outstanding at March 31, 2003 |   | 185,000               |   | 1.00  – 3.43                      |               | 1.29                                |   |
|                                        |        |                       |        |                                        |                    |                                     |        |  |

 

As of March 31, 2003,options to purchase 2,500 share of common stock are exercisable at a weightedaverage exercise price of $3.43. As of March 31, 2003, 1,815,000 shares wereavailable for future grants.

 

The weighted averageremaining contractual life of all outstanding options was approximately 9.5years as of March 31, 2003. The weighted average grant date fair value of alloutstanding options was $0.76 at March 31, 2003.

 

**(8)****                      ****Commitments**

 

The Company leases itsfacility under a noncancelable operating lease that expires June 20, 2003.During 2002, the Company entered into a sublease agreement of certain warehousespace in its facility that expires June 20, 2003.

 

Rental expense, net ofsublease income, was $100,000 and $103,000 for the years ended March 31, 2003and 2002, respectively.

 

Minimum rental commitments,net of sublease income of $9,000 for 2004, under operating leases aresummarized as follows (in thousands):

 

| 2004 |   | $ | 28 |   |
|------|--------|---|----|--------|

 

**(9)****                      ****Subsequent Event**

 

On May 5, 2003, the Companyannounced that it executed a letter of intent with SuperCom Ltd., anIsraeli-based developer of smart card solutions, pursuant to which a newlyincorporated subsidiary of the Company in Israel would be merged into SuperComand SuperCom would become a subsidiary of the Company. In connection with suchmerger, the shareholders of Supercom would exchange their shares of SuperComcommon stock for shares of the Company’s common stock, no par value. Theclosing of the transaction is subject to certain conditions, includingexecution of a definitive merger agreement, the completion of due diligence,shareholder approvals, the registration of the shares issued to SuperComshareholders and the sale or other disposition of the current operations of theCompany. There can be no assurance that the merger will be consummated or, ifconsummated, that it will be consummated on the terms set forth in the letterof intent.

 

F-15

----

 

**PerfectData Corporation**

**Index to Exhibits Filed with**

**Annual Report on Form 10-KSB**

 
| **Exhibit No.** |   | **Description  of Exhibit**                                                                                 |   | **Page** |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------|--------|----------|
| 23              |   | Consent of Independent Auditors                                                                             |   | E-2      |
|            |   |                                                                                                        |   |     |
| 99.1            |   | Certification of Chief Executive Officer Pursuant to Rule 13a-14  under the Securities Exchange Act of 1934 |   | E-3      |
|            |   |                                                                                                        |   |     |
| 99.2            |   | Certification of Chief Financial Officer Pursuant to Rule 13a-14  under the Securities Exchange Act of 1934 |   | E-5      |
|            |   |                                                                                                        |   |     |
| 99.3            |   | Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                         |   | E-7      |

 

E-1

----