U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-22514
PHOTONICS CORPORATION
(Name of Small Business Issuer as specified in its charter)
CALIFORNIA
(State of other jurisdiction of incorporation or organization)
77-0102343
(I.R.S. Employer Identification Number)
1515 CENTRE POINTE DRIVE
MILPITAS, CA 95035
(Address of principal executive offices)
Issuer's telephone number: (408) 942-4000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ].
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
COMMON STOCK, $0.001 PAR VALUE
(Class)
4,329,144
(Outstanding at November 8, 1996)
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(THIS PAGE INTENTIONALLY LEFT BLANK)111PHOTONICS CORPORATION
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FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE NUMBER
INTRODUCTION PHOTONICS CORPORATION
Summary 2
The Market 2
The Competition 3
The Strategy 3
Products 4
Intellectual Property 4
Talent 5
Sales, Distribution and Customer Service 5
Research & Development 5
Manufacturing 6
Current Developments 6
Private Financing 6
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Interim Financial Statements . 8
Consolidated Balance Sheet as of September 30,
1996 and December 31 1995 . . . . . . . . . 9
Consolidated Statements of Operations for the Three
and Six Months Ended September 30, 1996 and 1995 10
Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 1996 and 1995. 11
Notes to Consolidated Financial Statements . 12
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . 14
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings. . . . . . . . . . . . . . 16
ITEM 2 Changes in Securities . . . . . . . . . . . . 16
ITEM 3 Defaults Upon Senior Securities . . . . . . 16
ITEM 4 Submission of Matters of a Vote of Security
Holders . . . . . . . . . . . . . . . . . . 16
ITEM 5 Other Information . . . . . . . . . . . . . . 16
ITEM 6 Exhibits and Reports on Form 8-K . . . . . . 16
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PHOTONICS CORPORATION
FORM 10-QSB
INTRODUCTION
This report contains forward-looking statements and the Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of numerous factors, including those set forth
below and elsewhere in this report. The industry in which the Company competes
is characterized by extreme rapid changes in technology and frequent new
product introductions. The Company believes that its long-term growth will
depend largely on its ability to continue to enhance existing products and to
introduce new products and features that meet the continually changing
requirements of customers. While the Company has invested in new products and
processes, there can be no assurance that it can continue to introduce new
products and features on a timely basis or that certain of its products and
processes will not be rendered noncompetitive or obsolete by its competitors.
SUMMARY
Photonics Corporation, doing business as DTC Data Technology ("DTC" or
"Company"), designs, develops and markets Integrated Device Electronics ("IDE")
and Small Computer Systems Interface ("SCSI") disk controllers and Input /
Output ("I/O") products for personal computers. Disk controllers provide the
interface between the computer and hard drive(s) while I/O products provide the
interface between the computer and peripheral devices such as a mouse, modem or
printer. In late 1994 and early 1995, DTC Data Technology Corporation became
the leading supplier of after market IDE controller cards, shipping as many as
120,000 cards per month (shipments have shrunk, in the current quarter, to
30,000 cards per month, see discussion below). During this time DTC Data
Technology Corporation established low cost contract manufacturing capability,
developed comprehensive distribution channels and established strong name and
trademark recognition. Photonics having acquired DTC Data Technology
Corporation in March 1996, intends to use DTC's established name recognition
and eventually rename the company DTC Data Technology Corporation.
During the third quarter of 1996, the Company's shipments of IDE controller
cards were reduced to approximately 30,000 units per month due in part to the
shrinking market (see discussion below) and due in part to product
availability. Lacking adequate working capital, the Company was unable to
obtain enough products to meet customer demands. These potential sales were
lost forever as customers turned to other suppliers to meet their needs. At the
current shipping rate, the Company is not meeting its operating expenses. With
the shrinking of IDE market, the Company has developed a new product strategy,
as described below, and needs to raise capital to finance its plans.
THE MARKET
Today, the market for IDE controller cards is in decline because Intel, which
dominates the personal computer ("PC") motherboard market, has incorporated the
IDE controller function onto its motherboards. While the Company intends to
continue to sell IDE controller cards as long as there exists a market for
these products, it is the Company's intention to base its future on a new line
of SCSI controller cards.
According to InfoCorp of Santa Clara, CA, sales of SCSI disk controllers were
$994 million in 1995. This represents a compound annual rate of growth of 49%
from $202 million in 1991. The continued increase in THE number of
workstations, network and Internet web site file servers, using SCSI
controllers, has fueled this growth. Alternatives to SCSI controllers, such as
SSA (Serial SCSI Architecture) and Fibre Channel are newer technologies which
may still be years away from general acceptance due to their lack of product
standards and the continuous improvements of SCSI controllers. While the SCSI
market is forecast to grow at least 25% per year for the next 5 years, there
PHOTONICS CORPORATION
FORM 10-QSB
can be no assurances that the SCSI market won't be replaced by an alternative
technology.
The SCSI market today has one dominate supplier, Adaptec Inc. With calendar
year 1995 revenues of $593 million, Adaptec controls nearly 60% of the SCSI
market and has posted growth greater than 39% in each of the last two years.
Consistent with prior periods, the year to year growth in Adaptec's third
quarter 1996 revenues of $215 million was 44% with gross margins of 56%. Both
Adaptec's growth and gross margins are higher than the industry average. In
addition to Adaptec, there are about a dozen other SCSI suppliers, each with
revenues less than $50 million.
The SCSI protocol is not precise which causes each company's SCSI offering to
be vendor unique and incompatible with the products of the other vendors.
Adaptec was the first company to focus on the SCSI market and, because of its
domination in the SCSI market from the beginning, its products have become the
de facto industry standard. The continued incompatibility among the competing
products of all other vendors has allowed Adaptec to remain the dominant SCSI
supplier in the market even with its premium pricing strategy. Customers who
are unwilling to deal with current or future compatibility issues have had no
alternative but to purchase the Adaptec solution at a significant premium.
Without an Adaptec compatible solution, neither DTC nor any other SCSI supplier
can provide Adaptec customers an acceptable alternative.
THE COMPETITION
Besides DTC, which currently markets non-Adaptec compatible SCSI products, and
Adaptec, the other current suppliers of SCSI products are: Acculogic, Always,
DPT, Advanced System Products, CMD, Forex, LDP, Mylex, Promise, Q Logic, SIIG
and Symbios ("Other Competitors"). Trantor, Future Domain and Buslogic, each of
which was a recent independent supplier in the SCSI market, have been acquired
in the last two years. Currently, none of the Other Competitors offers an
Adaptec compatible solution and each tries to differentiate its products with
higher performance at prices lower than that of Adaptec. None of these Other
Competitors has been able to achieve a significant lasting success with their
SCSI products either in terms of market share or profitability.
THE STRATEGY
THE COMPANY'S STRATEGY IS TO DEVELOP A FAMILY OF ADAPTEC COMPATIBLE SCSI
CONTROLLER CARDS WITH A SUPERIOR VALUE TO THE MARKET'S CURRENT OFFERINGS.
DTC has been in the SCSI market since 1990 and has, in the past, developed
several high performance (non-Adaptec-compatible) SCSI products. These
products, as with the products of the Other Competitors, have not gained
general market acceptance and there can be no assurances that general market
acceptance can be attained with DTC's proposed Adaptec compatible products.
Although the engineering resources of the Company have been reduced due to the
decline of the IDE market, both of the key hardware and software managers who
engineered the Company's previous SCSI products are still with the Company. As
a result of the Company's prior success in the highly competitive IDE market,
the Company has developed access to low cost contract manufacturing, learned to
operate on low overheads, developed strong name recognition, and established
broad sales channels. With the stated strategy and the above mentioned
strengths, the Company believes it will be in the unique position to be able to
offer SCSI users a cost effective Adaptec compatible product.
The Company's strategy is similar to that used by the PC clone manufacturers to
establish themselves in the PC market. IBM was one of the first to enter the
personal computer market and established itself as the de facto standard.
Initially, clone manufactures offered their alternatives at a price lower than
IBM's, however these offerings were not totally IBM compatible. IBM was able to
remain dominate until the clone manufactures, led by Compaq, began producing an
IBM compatible PC. Today, IBM is no longer the dominant supplier
PHOTONICS CORPORATION
FORM 10-QSB
and shares the market with Compaq, Dell, Gateway, Packard Bell and others.
The Company believes that, if it can become entrenched in the market and
satisfy the customers' needs for an alternative SCSI solution, any potential
new competitors may be left with few opportunities for market expansion. There
are, however, no assurances that the Company can design, develop, or market
such an Adaptec compatible product or that the Company can effectively use its
earlier established sales channels. Furthermore, Adaptec has significant
financial, legal, and marketing resources. A focused response by Adaptec,
against DTC, might have severe impact on the Company's ability to succeed with
this strategy.
PRODUCTS
The Company will, for a time, continue to market its IDE and I/O product cards,
although they no longer generate sufficient operating income to meet the
Company's operating costs.
In October 1996, the Company started marketing a low end Adaptec compatible
ISA-SCSI product based on its proprietary DTC50C18 chip. This low-end product
is intended to be marketed to Original Equipment Manufacturers ("OEM") and
Value Added Retailers ("VAR") who could "bundle" such a controller card with
their SCSI peripherals such as scanners or CD-ROMs. This low end market, which
represents 10% to 20% of the overall SCSI market, commands low prices and is
much more cost competitive than the high end market. Although the Company
believes it can be cost competitive and generate a profit with these low end
products, there can be no assurances that it can either book sufficient sales
or maintain adequate margins to justify its entry into this market. As of
November 1, 1996, the Company had yet to receive any large orders for this
product and there can be no assurances that the Company can, even with a lower
unit sales price, convince the OEMs and VARs to switch to DTC.
The Company is in the process of developing a family of high end Adaptec
compatible PCI-SCSI products which would include high performance features that
are not currently found on Adaptec products. While the Company believes that
the new SCSI products, selling at a lower unit price and having certain high
performance features will represent an attractive alternative to the Other
Competitors' and Adaptec's offerings, there can be no assurances that the users
of these SCSI products will embrace the new DTC offerings.
The Company is committed to continuous product improvement which the Company
believes is necessary for greater market penetration of its Adaptec compatible
SCSI products.
INTELLECTUAL PROPERTY
The Company has studied the intellectual property issues (and performed patent
searches) related to the SCSI products which it intends to market and is
unaware of any patents or intellectual property owned by any other party which
would impede the development or sale of its proposed line of Adaptec compatible
SCSI products. However, there can be no assurances that such legal challenges
will not come and will not adversely affect the design, development or
marketing of the Adaptec compatible SCSI product.
Software is an important ingredient for success in the controller market. DTC
has a large library of copyrighted IDE and SCSI software drivers and utilities
for various operating systems including DOS, OS/2, UNIX, Novell,
Windows 3.1, and Windows 95. DTC, having designed several SCSI and IDE ASICs,
recently acquired the design rights to the ASIC used in its low end DTC50C18
ISA-SCSI product. However, there are no assurances that any SCSI competitor
might not file and / or be awarded a patent or copyright that might prevent
the Company from pursuing its SCSI strategy.
PHOTONICS CORPORATION
FORM 10-QSB
EMPLOYEES
The Company has worked on the development of SCSI based devices since 1990 and
believes that it has the technical resources needed to design and develop the
proposed Adaptec compatible SCSI products. The Company intends to further
augment its technical staff in order to accelerate the SCSI developments. In
addition, the Company believes that its general management is both adequate for
the current position of the Company and capable of executing its plans
regarding the Adaptec compatible market. The Company plans to hire additional
employees as needed to deliver and gain market acceptance for the new Adaptec
compatible products.
SALES, DISTRIBUTION AND CUSTOMER SERVICE
The Company currently sells its products through domestic and international
independent distributors, computer retailers and OEMs. In the United States and
Canada, the Company sells to 15 of the top 20 national distributors to the
computer industry including Ingram Micro, Merisel, Tech Data, Ameriquest and
Globelle (the top five distributors) who in turn distribute the Company's
products to smaller retailers, OEMs and VARs. The Company also sells its
products in the United States and Canada to large national computer retailers
such as CompUSA, Computer City, Best Buy and Micro-Center. These distributors
and national computer retailers are substantially identical to those used by
Adaptec and there can be no assurances that Adaptec will not use its influence,
as the market leader, to minimize DTC's marketing and sales effort in these
distribution channels. In addition, the Company also sells and has sold its
products on an OEM basis to PC System and subsystem manufacturers such as Acer,
Creative Labs, Diamond Computer, Gateway, Goldstar, Mitsumi, and Turtle Beach.
These OEMs also use products supplied by Adaptec and there can be no assurances
that Adaptec will not use its influence, as the market leader, to minimize
DTC's marketing and sales effort with this distribution channel. With the
current decline in sales and the limitations on product availability, the
Company's access to these channels of distribution has diminished and there can
be no assurances that these distributors, national computer retailers, or OEMs
will continue to purchase the Company's products.
The Company's customer service and technical support organization is located in
Milpitas, California and provides customers with software driver updates,
upgrade programs and warranty service. The technical support personnel assist
end users and distributors via telephone, fax-back facsimile services, a 24
hour bulletin board service and an Internet Web site (WWW.datatechnology.com).
As is common practice in the personal computer industry, the Company frequently
grants distributors limited rights to return unsold inventories of the
Company's products in exchange for new purchases, as well as price protection.
There can be no assurances that the Company's current allowances
will be sufficient or that any future returns or price changes will not have a
material adverse effect on operating results.
RESEARCH & DEVELOPMENT
The Company believes that continued investment in research and development is
critical to successful new product introductions, which address market needs,
on a timely and cost effective basis. DTC's knowledge and expertise in SCSI
predates the founding of Adaptec and the Company has completed similar SCSI
projects in the past. There can be no assurances, however, that the Company can
design and develop this new line of SCSI products.
The Company has just completed the development of its low end Adaptec
compatible ISA-SCSI line of products. For the high end PCI-SCSI product family,
the Company has completed the architectural and product specifications for the
Application Specific Integrated Circuit ("ASIC") and plans to
outsource the design phase of the ASIC to another firm. This practice is
intended to allow the Company to focus on its own SCSI expertise and leverage
the ASIC knowledge of the outside design firm thereby reducing the cost and
PHOTONICS CORPORATION
FORM 10-QSB
time to market. Development of the Adaptec compatible high end PCI-SCSI
products as well as a number of enhancements to the IDE and I/O products, the
Company currently markets, are in process. There can be no assurances, however,
that the efforts of the outside design firm will yield a viable ASIC that will
have the desired functionality or compatibility.
MANUFACTURING
Over the years the Company has developed business relationships with various
contract board manufacturers in the Far East which currently supply DTC with
highly cost competitive finished product. It is the Company's intention to
continue utilizing these sources of production. Not having to invest in capital
equipment and/or purchase raw material inventories and being able to take
advantage of the lower cost of labor and overhead utilized by such contract
manufacturers, the Company believes that it will be able to conserve its cash
position, allow the Company greater operational flexibility and keep the
Company focused on its areas of expertise. There can, however, be no assurances
that these manufacturing sources will remain available to DTC and that they can
produce the quality of product the Company will need in the future.
CURRENT DEVELOPMENTS
The Company has recently developed a family of low end compatible Adaptec
ISA-SCSI controller cards based on its proprietary DTC50C18 chip. Management
believes that the introduction of this Adaptec compatible product line paves
the way for the future introduction of the high end line of PCI-SCSI products
as discussed above. Shipment of samples of the low end Adaptec compatible
products began in October 1996 and shipment in quantities are anticipated in
the fourth quarter of 1996. The Company has yet to receive any large orders for
this product and there can be no assurances that the Company can, even with a
lower unit sales price, convince the OEMs and VARs to switch from their
existing suppliers to DTC.
The architectural design and product specifications for the high end PCI-SCSI
Adaptec compatible ASIC chip that would yield the PCI-SCSI products mentioned
above have been completed and the Company has received preliminary bids from
various firms for the ASIC chip design. Additionally, the tools have already
been created which would allow the Company to debug and verify the operation of
its design. The Company believes that, given the progress to date, the first
high end Adaptec compatible SCSI disk controllers can be commercially available
within eight months after the successful completion of the Private Financing
discussed below. Even if the Company succeeds in raising the sought after
funds, there can be no assurances that the development of the ASIC would not be
beyond the financial capabilities of the Company. Should the Company be
unable to complete the proposed financing, there can be no assurances that the
proposed SCSI plan can be executed or that the Company can continue to be
viable.
PRIVATE FINANCING
The Company and an investment banker are in the process of finalizing a private
placement memorandum in which the Company proposes to raise a minimum of $3.48
million to a maximum of $5.5 million to fund the development of the high end
Adaptec compatible SCSI family of products as well as for general business and
working capital purposes. The offering will be made on a "best efforts, all or
none" basis with respect to the minimum and on a "best efforts" basis with
respect to the additional investment sought up to the maximum. The offering
will consist of the Company's Series A Convertible Preferred Stock ("Preferred
Stock") that, when designated, will carry a 10% cumulative dividend, payable
twelve months in arrears in the form of Common Stock. The Preferred Stock will
be convertible at any time at the option of the holder into an equal number of
shares of the Company's Common Stock and will also have standard anti dilution
protection, a liquidation preference and voting rights. At the option of the
Company, the Preferred Stock will be
PHOTONICS CORPORATION
FORM 10-QSB
subject to mandatory conversion into an equal number of shares of the Company's
Common Stock provided that the closing bid price for the Company's Common Stock
equals or exceeds $2.50 per share (as adjusted for any subsequent stock
dividends, splits, combinations or the like) for twenty consecutive trading
days and the Company has a currently effective registration statement on file
with the Securities and Exchange Commission covering the underlying Common
Stock to be issued upon conversion. At the time of its sale, the Preferred
Stock, and Common Stock issuable upon conversion thereof, will not be
registered under the Securities Act of 1933, as amended (the "Act") and may not
be offered or sold in the United States absent registration or an applicable
exemption from the registration requirements. This offering will target only
sophisticated investors who meet the definition of accredited investor as set
forth in Rule 501 of Regulation D under the Act. While the Company intends to
move forward with the Private Financing, there can be no assurances that the
minimum amount sought can be raised or that the Company will be able to
successfully implement its strategy with the net proceeds.
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PHOTONICS CORPORATION
FORM 10-QSB
PART I FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The condensed consolidated interim financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated interim financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's Annual Report on Form 10-KSB/A
for the year ended December 31, 1995.
The accompanying consolidated interim financial statements have been prepared,
in all material respects, in conformity with the standards of accounting
measurements set forth in Accounting Principles Board Opinion No. 28 and
reflect, in the opinion of management, all adjustments, which are of a normal
recurring nature, necessary to summarize fairly the financial position and
results of operations for such periods. The results of operations for such
interim periods are not necessarily indicative of the results to be expected
for the full year.
<TABLE>
<CAPTION>
PHOTONICS CORPORATION
Consolidated Balance Sheet
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
September 30,1996 December 31,1995
ASSETS (unaudited) (unaudited)
CURRENT ASSETS:
Cash and cash equivalents 145 31
Accounts receivable 1198 1642
Inventories 1105 774
Prepaid expenses and other current assets 218 155
Total current assets 2666 2602
Furniture and equipment 150 45
Other assets 14 14
Total assets 2830 2661
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Notes payable 603 0
Current portion of long term liabilities 0 155
Accounts payable 2480 2577
Accrued liabilities 1167 2573
Total current liabilities 4250 5305
Long term liabilities 0 1573
Deferred foreign taxes 0 1800
Total liabilities 4250 8678
Minority interest in subsidiaries 125 125
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock 4 18
Additional paid in capital 44098 40437
Capital stock subscribed 9 500
Accumulated deficit -45810 -47251
Cumulative translation adjustment 154 154
Total shareholders' equity (deficiency) -1545 -6142
Total liabilities and shareholders' equity 2830 2661
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
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<TABLE>
<CAPTION>
PHOTONICS CORPORATION
Consolidated Statements of Operations
(amounts in thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
Revenues:
Product sales 1135 2602 5355 11318
Costs and expenses:
Cost of Revenue 858 3581 4047 10489
Research and development 184 215 528 634
Selling, general and administrative 650 841 2202 2233
Loss on disposal of assets and 0 0 0 242
divestiture of business unit
Income (loss) from -557 -2035 -1422 -2280
operations
Interest income (expense) and Other income, 2885 -1 2864 89
net (see foot note)
Profit (loss) before taxes 2328 -2036 1442 -2191
Provision for taxes 0 0 1 1
Net income (loss) 2328 -2036 1441 -2192
Net income (loss) per share 0.54 -0.76 0.36 -0.85
Shares used in per share calculation 4,332 2,681 4,044 2,581
</TABLE>
Footnote: See "Results of Operations" section of Management's Discussion and
Analysis for details.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
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<TABLE>
<CAPTION>
PHOTONICS CORPORATION
Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended
September 30,
1996 1995
Cash flows from operating activities:
Net income (loss) 1441 -2258
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 66 66
Changes in operating assets and liabilities:
Accounts receivable 444 797
Inventories -331 -635
Deposits and prepaid expenses -63 1255
Notes payable - current portion 603 -1903
Accounts payable -97 377
Accrued liabilities -1405 841
Net cash used in operating activities 658 -1460
Cash flows from investing activities:
Acquisition of furniture and equipment -171 -81
Net cash used in investing activities -171 -81
Cash flows from financing activities:
Proceeds from capital stock subscriptions and private placement 109 1517
Proceeds resulting from the DTC acquisition 1347
Repurchase of treasury stock -42
Reduction of deferred foreign taxes -1800
Borrowings (repayments) of notes payable and bank borrowings -29 -124
Net cash provided by financing activities -373 1351
Net decrease (increase) in cash and cash equivalents 114 -190
Cash and cash equivalents at beginning of year 31 239
Cash and cash equivalents at end of period 145 49
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
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PHOTONICS CORPORATION
NOTES TO CONSOLIDATED
September 30, 1996
(Unaudited)
1. Summary of Significant Accounting Policies
Effective March 5, 1996, Photonics Corporation (the "Company")
acquired all the assets and certain liabilities of DTC Data
Technology Corporation ("DTC") in exchange for the issuance to
DTC of shares and rights to shares of common stock representing
77.5% of the Company's outstanding stock. The transaction was
treated as a purchase for accounting purposes and DTC is
considered the acquirer. Accordingly, the financial statements
and accounting policies presented here are those of DTC and
should be read in conjunction with DTC's Form 10-K for the year
ended February 28, 1996. Although DTC is considered the
acquirer, the Company is the registrant and therefore the
Company retains its December 31 year end. Accordingly, the
Consolidated Balance Sheet for September 30, 1996 is that of the
combined company and the Consolidated Balance Sheet for December
31, 1995 is that of DTC. The Consolidated Statement of
Operations for the Nine Months Ended September 30, 1996 contains
two months of operations of DTC prior to the acquisition and
seven months of the combined Company and is compared with the
Consolidated Statement of Operations for the Nine Months Ended
September 30, 1995 which contains nine months of operations for
DTC only. The Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 1996 contains two months of
operations of DTC prior to the acquisition and seven months of
the combined Company and is compared with the Consolidated
Statement of Cash Flows for the Nine Months Ended September 30,
1995 which contains nine months of operations for DTC only.
2. Earnings (loss) per Share
For the nine months ended September 30, 1996, the earnings per
share has been computed based on the weighted average number of
shares outstanding after giving the effect to the 1 for 5
reverse split of the Company's common stock which became
effective February 12, 1996. For the nine months ended
September 30, 1995, loss per share was computed based on the
weighted average number of shares outstanding after giving the
effect to the exchange of 0.147853 shares of the Company's
Common Stock for each outstanding share of DTC stock
3. Inventories
Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market, and include material, labor and
attributable overhead.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C>
Raw materials and purchased parts 244 95
Work-in-process 250 247
Finished Goods 611 432
1105 774
</TABLE>
4. Property and Equipment
Property and equipment are stated at cost and, other than
leasehold improvements, are depreciated on a straight-line basis
over their estimated useful lives. Leasehold improvements are
amortized on a straight-line basis over the lesser of their
useful life or remaining term of the related lease.
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PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
Property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(unaudited) (unaudited)
<S> <C> <C> <C>
Machinery and Equipment 2483 2174
Furniture and fixtures 982 471
Leasehold Improvements 144 94
Total 3609 2739
Less accumulated depreciation and amortization 3459 2694
150 45
</TABLE>
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PHOTONICS CORPORATION
FORM 10-QSB
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with the Financial Statements and the related notes
thereto included in this report. The following discussion
contains forward-looking statements and the Company's actual
results could differ materially from those anticipated in these
forward-looking statements as a result of numerous factors,
including those set forth in the following discussion and
elsewhere in this report.
RESULTS OF OPERATIONS
Net revenues for the nine months ended September 30, 1996 total
$5,355,000, a decrease of approximately $5,963,000 or 53%
reduction from the $11,318,000 reported for the nine months
ended September 30, 1995. The decline in revenues can be
attributed to i) a change in standards for high end PC's which
placed the IDE controller on the motherboard obviating the need
for DTC's IDE controller card and ii) a shortage of working
capital which has slowed the delivery of backlogged product.
The gross margin for the nine months ended September 30, 1996
was approximately 24% compared with approximately 7% for the
nine months ended September 30, 1995. The Company took a
$1,600,000 adjustment for excess and obsolete inventory in the
third quarter of 1995. Without the adjustment the gross margin
for the nine months ended September 30, 1995 would have been
21%.
Product development expenses were approximately $528,000, or 10%
of net revenues, for the nine months ended September 30, 1996
compared to approximately $634,000, or 6% of net revenues, for
the nine months ended September 30, 1995.
Selling, general and administrative expenses were approximately
$2,202,000, or 41% of net revenues, for the nine months ended
September 30, 1996 compared to $2,233,000, or 20% of net
revenues, reported for the nine months ended September 30, 1995.
There was no gain or loss on disposal of assets and divestiture
of business unit for the nine months ended September 30, 1996
compared to a loss of $242,000 reported for the nine months
ended September 30, 1995.
In the third quarter of 1996, the Company resolved three claims
that resulted in $2.9 million in Other Income. They were:
1) The elimination of the $1.8 million reserve for the
Taiwan tax claim. On May 13, 1996 notice was given to
all creditors of the Company of the dissolution of DTC
Data Technology Corporation. In the Photonics
acquisition of DTC, Photonics assumed all liabilities of
DTC, except certain liabilities of DTC arising from
claims made by the taxing authority of the Republic of
Taiwan. All creditors who had legitimate claims on DTC
were required, in the notice, to present their claims by
July 12, 1996. As of September 30, 1996, no claim had
been made by the Republic of Taiwan. The Company has
chosen to record the eliminated reserve in Other Income.
2) The elimination of the balance of $730,000 due the
liquidator of Qume LTD. A settlement was reached on
December 13, 1995 to pay approximately $80,000 of an
$810,000 claim. The last installment was
made in August 1996. The Company has accounted for the
elimination of the balance as Other Income.
3) The elimination of a $371,000 reserve for potential
claim by the IRS. The Company received a $371,000
payroll tax refund from the IRS in 1991. According to
Section 6532 of the Internal Revenue Code, any
PHOTONICS CORPORATION
FORM 10-QSB
claim for an Erroneous Refund must be presented within
two years of preparation. The two years has more than
lapsed.
The Company reported net income of approximately $1.4 million
for the nine months ended September 30, 1996 versus a net loss
of approximately $2.2 million for the nine months ended
September 30, 1995. The adjustments resulting in the $2.9
million Other Income less the operating loss of $1.4 million are
primarily responsible for the results for the nine months ended
September 30, 1996. The adjustments to excess and obsolete
inventory along with the declining sales are primarily
responsible for the results for the nine months ended September
30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased from $31,000 as of December
31, 1995 to $145,000 as of September 30, 1996. This increase was
due primarily to positive cash flows from the factoring of the
Company's receivables, as described below, and the bridge loans
less cash used in operating activities.
On November 14, 1994, DTC arranged a private line of credit for
$300,000 from CMC/TOPAZ Industries, Inc. This line of credit has
subsequently been increased to $700,000. The terms of this line
of credit are 2 points on each draw down plus 12% per annum.
Each draw down matures at the end of a 60 day period. As of
September 30, 1996 the outstanding balance was $513,000.
At December 31, 1995, DTC owed $1,728,000 to DTC Technology
Corporation. This debt was collateralized by a secured interest
in receivables and inventories. At the end of fiscal 1995, the
interest rate was 9.5% which was 0.5% over prime. As of March
31, 1996, this debt had been converted to equity as provided in
the Credit Assignment and Liquidation Agreement between the two
parties.
On August 31, 1995, the Company, together with DTC, announced
that they had executed an agreement under which the Company
would acquire all the assets and certain liabilities of DTC in
exchange for the issuance to DTC of shares and/or rights to
shares of common stock representing 77.5% of Photonics
outstanding common stock (the "Acquisition"). The Acquisition
became effective March 5, 1996. The transaction was treated as a
purchase for accounting purposes and DTC is considered the
acquirer. Accordingly, the assets and liabilities of Photonics
Corporation were recorded at fair value, and the historical
results of operations of the combined entity are those of DTC.
On June 14, 1996, the Company signed an agreement with National
Business Finance, Inc., of Denver, Colorado ("NBFI"), which
would allow the Company to factor receivables acceptable to
NBFI. Pursuant to the agreement, NBFI will advance 80% of
qualified receivables and will discount the invoice 1% for the
first 10 days. Thereafter the carrying charge for the advance is
calculated at 1/15% per day on outstanding balances. This
equates to an effective rate for the typical Photonics
receivable of <plus-minus> 28% per annum. As of September 30,
1996, the Company's outstanding balance to NBFI was $103,000.
NBFI has a secured interest in the general assets of the
Company.
As of September 30, 1996, the Company had received funds
totaling $502,000 which represent subscriptions for the Series A
Convertible Preferred Stock to be offered in a private
placement. For the discussion on the proposed private placement
see the Private Financing section of the Introduction of this
filing. The Company has issued interest bearing notes secured by
a lien on general assets of the Company, which is subordinated
to certain other debt, to those who have tendered the
aforementioned subscriptions.
1
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PHOTONICS CORPORATION
FORM 10-QSB
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings -
Not Applicable
ITEM 2 Changes in Securities -
Not Applicable
ITEM 3 Defaults Upon Senior Securities -
Not Applicable
ITEM 4 Submission of Matters of a Vote of Security Holders -
Not Applicable
ITEM 5 Other Information -
Not Applicable
ITEM 6 Exhibits and Reports on Form 8-K -
Exhibits
11.1 Statement of Computation of Earnings per Share
27.1 Financial Data Schedule
1
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
SIGNATURE
In accordance with the requirements of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOTONICS CORPORATION
Date: 14 NOVEMBER 1996 By: /S/ W. MORRIS CHUBB
W. MORRIS CHUBB
CHIEF FINANCIAL OFFICER
1
<TABLE>
EXHIBIT 11.1
PHOTONICS CORPORATION
NET EARNINGS PER SHARE COMPUTATIONS
(unaudited)
(All amounts in thousands except for per share data)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
Weughted average shares outstanding
Common Stock 4,332 2,681 4,044 2,581
Common Stock equivalents
- options and warrants 493 n/a 412 n/a
Total weighted average
shares outstanding 4,825 2,681 4,456 2,581
Net income 2,328 (2,034) 1,441 (2,192)
Net income per share 0.48 -0.76 0.32 -0.85
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 145
<SECURITIES> 0
<RECEIVABLES> 1198
<ALLOWANCES> 0
<INVENTORY> 1105
<CURRENT-ASSETS> 2666
<PP&E> 3609
<DEPRECIATION> 3459
<TOTAL-ASSETS> 2830
<CURRENT-LIABILITIES> 4250
<BONDS> 0
0
0
<COMMON> 44579
<OTHER-SE> (46124)
<TOTAL-LIABILITY-AND-EQUITY> 2830
<SALES> 5360
<TOTAL-REVENUES> 5360
<CGS> 4052
<TOTAL-COSTS> 4052
<OTHER-EXPENSES> 528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1442
<INCOME-TAX> 1
<INCOME-CONTINUING> 1441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1441
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
