<PAGE>
_______________________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22514
_______________________________
PHOTONICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0102343
________________________________ _________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 CENTRE POINTE DRIVE
MILPITAS, CA 95035
Issuer's telephone number:
(408) 942-4000
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) if the Act:
Common Stock, $0.001 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities and 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 [_]
Check if there is no disclosure of delinquent fliers pursuant to Item 405 of
Regulation S-B is met contained in this form, and no disclosure will be
contained or to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. [X]
Issuer's revenues for fiscal year 1996: $5,184,000
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of the Common Stock on
12/31/96 as reported on the NASDAQ National Market System, was approximately
$862,621. Shares of Common Stock held by each officer and director and each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed affiliates.
As of December 31, 1996, the Registrant had outstanding 4,323,560 shares of
Common Stock.
_______________________________________________________________________________
<PAGE>
PHOTONICS CORPORATION
DBA
DTC DATA TECHNOLOGY
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX
PAGE NUMBER
-----------
Part I
Item 1 Business 1
General 1
Products and the Market 1
The Competition 2
Intellectual Property 3
Manufacturing and Suppliers 3
Patents and Licenses 3
Significant Customer 3
Backlog 3
Employees 4
Item 2 Properties 4
Item 3 Legal Proceedings 4
Item 4 Submission of Matter to a Vote of Security Holders 4
Part II
Item 5 Market for Common Equity 4
Item 6 Management's Discussion and Analysis 5
Liquidity and Capital Resources 6
Other Matters 7
Item 7 Financial Statements 7
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 7
Part III
Item 9 Director, Executive Officers, Promoters and
Control Person;
Compliance with Section 16a of the Exchange Act 7
Indemnification Agreements 8
Item 10 Executive Compensation 9
Board of Director's Report on Repricing of Options/SARs 10
Item 11 Security Ownership of Certain Beneficial Owners
and Management 10
Item 12 Certain Relationships and Related Transactions 12
Item 13 Exhibits 13
SECTION F
Independent Auditors Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
(see index for Section F)
<PAGE>
PART I
ITEM 1. BUSINESS
--------
GENERAL
- -------
Photonics was incorporated in 1985 to design , develop and market wireless
infrared local area network products (IR-LAN) which would offer unique and cost-
effective connectivity solutions based on diffuse infrared technology.
DTC Data Technology Corporation ("DTC") was founded in 1979 to design, develop
and market intelligent storage controllers and chip sets used primarily in
connection with IBM compatible personal computers.
On June 30, 1995 Photonics suspended operations as sales continued to be
significantly below the Company's plan. On August 31, 1995 Photonics entered
into an Asset Purchase Agreement ("the Agreement") with DTC Data Technology
Corporation , which was effective March 5, 1996. In the Agreement, Photonics was
to acquire all the assets and certain liabilities of DTC in exchange for the
issuance to DTC of shares and rights to shares of common stock representing
77.5% of Photonics outstanding stock.
As the DTC stockholders own a majority of the shares of the combined entity, and
the management and control comes from DTC, the transaction is accounted for as
though DTC was the acquirer. Accordingly, the assets and liabilities of
Photonics Corporation were recorded at fair value. The historical results of
operations of Photonics Corporation dba (DTC Data Technology), as reported
herein, are those of DTC.
As DTC Data Technology has the established name recognition, and established
sales channels, it is the intent of the Company to eventually rename the
company DTC Data Technology Corporation. As the reported history belongs to DTC
Data Technology and the legal entity is known as Photonics Corporation dba DTC
Data Technology, for brevity sake, the company is herein after referred to as
DTC, or the Company.
DTC's fiscal year end has historically been the last day of February, and
Photonics operated on a calendar year. After the acquisition/merger, the Company
adopted Photonics' operating year, it's I.R.S. Employer Identification Number
and it's Securities and Exchange Commission file number. The merged company came
into existence on March 5, 1996 which was the first week in the first month of
DTC Data Technology's new fiscal year. As the combined company adopted DTC's
history as its own, all historical comparisons in this report are based upon
DTC's past fiscal years ending February 29 and the ten (10) month period March
1, 1996 through December 31, 1996.
PRODUCTS AND THE MARKET
The intent, at the time of the Photonics/DTC acquisition, was to continue to
market the Photonics IR-LAN products and find a strategic partner to help in the
development of the next generation of the IR-LAN product.
Marketing Photonics products through DTC's sales channel failed. The search for
a partner which began in the Fourth Quarter of 1996 was successful. The
agreement with Moldat Wireless Technologies Ltd. ("Moldat") of Lod, Israel as an
exclusive (except existing agreements and Apple related products) was signed in
First Quarter 1997. Under this agreement the Company licensed its technology,
products, trademarks and service marks relating to its infrared Local Area
Network business to Moldat for royalty payments. Moldat, (an Infrared LAN
company) will use Photonics 1 Mb technology and products to augment its 10mb
business. The Company continues to focus on it's IDE and Small Computer Systems
Interface ("SCSI") product controllers.
After unsuccessful attempts to market IR-LAN, modem, ISDN and other Personal
Computer ("PC") related peripheral products, the Company decided to return to
its core market of controller business. DTC's storage controllers are
sophisticated electronic devices which control the flow of data between a
microcomputer's central processing unit and peripheral storage devices such as
floppy and hard disks, and increasingly Compact Disk-Read Only Memory ("CD-
ROMs).
1
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DTC dominated the Integrated Device Electronics ("IDE") and Enhanced IDE
("EIDE") controller card market in 1994-1995. Starting in 1995, the IDE
controller market started to decline as Intel entered into the motherboard
business and incorporated the IDE controller function into its motherboard
chipset. Today, the transition from add-on IDE cards to on-board built-in IDE
function is complete. Now, the IDE controller cards are used by Original
Equipment Manufacturers ("OEM") for inclusion with IDE CD-ROM, Tape and other
IDE peripheral devices. System Integrators and Value Added Resellers ("VAR") use
IDE input/output ("I/O") controller cards for maintaining and upgrading existing
systems to EIDE disk interface, high speed serial port (I6550), Enhanced
Parallel Port ("EPP") and Enhanced Capability Parallel Port ("ECP") for high
performance modems, printers and other new peripherals. Sales also have changed
from mainly OEM to VARs and system integrators through distribution and
retailers. The IDE I/O market has settled and stabilized at a much lower level
of approximately $50 million dollars.
The Company plans to broaden its product offering in this IDE I/O market segment
to reverse the decline in sales and restore the Company to profitability. ISA-
IDE and VL-IDE I/O controller products still represent the major portion of the
Company's sales. Recently the Company introduced the ISA BUS EIDE Ultima family
of controller products, and plans to introduce several new serial, parallel port
I/O products in the coming year for the upgrade market.
During the last fiscal year, the Company also decided to re-enter the SCSI
market, and Adaptec compatible SCSI products in particular. While the Company
intends to continue to market IDE I/O products as long as the market exits, it
is the Company's intention to base its future growth on this new line of SCSI
controller cards.
SCSI controller cards are mainly used in corporate Internet, web site file
servers and engineering workstations. Low end SCSI is used for interface with
CD-ROMs, tape and disk backup systems, and scanners. The SCSI market was
estimated to be $1.2 billion dollars in 1996 and has been growing at over 40%
per year for the past 5 years and is forecasted to grow at least 25% per year
until the year 2000. Adaptec dominates the SCSI market. It has over 70% of the
market with a gross profit margin approaching 60%. Alternative high performance
interface technologies, such as SSA and Fibre Channel, are still years away from
general acceptance because of lack of product standards and continuous improving
performance of SCSI controllers. Recently Intel introduced the Universal Serial
Bus (USB) interface, that may compete or even replace the low end SCSI.
In October 1996 the Company introduced a family of low end Adaptec compatible
ISA-SCSI products, which represents 10 - 20% of the total SCSI market, based on
its proprietary DTC 50C18 chip. The customers for low end SCSI are OEM
peripheral suppliers for inclusion with their SCSI product offerings. It is more
cost competitive than the high end market. The Company believes it can compete
and generate a profit.
The Company is in the process of developing a family of high end Adaptec
compatible PCI-SCSI products that would include high performance features that
are not currently found on Adaptec products. It is in this market segment that
the Company believes its future growth lies.
THE COMPETITION
Due to the decline of the market, most of the IDE controller vendors have
dropped out of that business segment. Atronics, Acculogic, CMD, GSI, Promise,
Relialogic, SIIG, and Tyan have stopped marketing the standard IDE I/O products.
Promise and SIIG remain in the upgrade and I/O add-on markets that competes with
the Company's newly introduced Ultima and planned I/O family of products. The
Company has broader sales channel, stronger name recognition, and access to low
cost manufacturing compared with either of these companies..
In the SCSI market, the Company plans to offer a family of Adaptec compatible
SCSI products that should offer a superior alternative to Adaptec and other
competitors. Besides DTC, which currently markets a family of non-Adaptec
compatible SCSI products, and Adaptec, the current other suppliers of SCSI
products are: Always, DPT, AdvanSys, CMD, Forex, Initio, LDP, Mylex, Promise, Q
Logic, SIIG, and Symbios (Other Competitors). While Adaptec has been growing at
40% or more per year, none of the other competitors are prospering financially.
Acculogic, Future Domain, Trantor, and BusLogic have either dropped out of the
market place or have been bought. All of them market purportedly technically
superior but non-Adaptec compatible products at a lower price than Adaptec
without achieving significant success.
2
<PAGE>
The markets in which DTC operates are characterized by intense competition,
rapid technological and product changes, changing market requirements,
dependence upon highly skilled personnel, and significant expenditures for
product and marketing development. DTC has a number of present and potential
competitors, many of whom have substantially greater financial, marketing and
other resources than DTC. If DTC's competitors introduce new products which
offer improved performance and/or lower prices, DTC's revenue and income could
be adversely affected.
DTC believes that the principal competitive factors in the storage controller
market are compatibility, brand recognition, performance, sales support and
competitive pricing. DTC believes it meets these important criteria.
INTELLECTUAL PROPERTY
Software and proprietary ASIC designs are important ingredients 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 right to the ASIC used in its
low end DTC50C18 ISA-SCSI, and is in the process of designing a PCI-SCSI ASIC.
The Company has studied the intellectual property issues and performed patent
searches related to the IDE, I/O and SCSI products which it is marketing, and
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 IDE, I/O or
SCSI products.
MANUFACTURING AND SUPPLIERS
Substantially all of DTC's printed circuit boards are manufactured by companies
located in the Far East. At the present time, approximately 70% of the Company's
storage controller requirements are produced in China.
In order to achieve early market introductions, the Company uses either ASICs
co-developed by DTC design engineers, subcontracted ASIC designers, and ASIC
vendors engineers or standard ICs marketed by semiconductor vendors.
PATENTS AND LICENSES
The Company holds various patents and intends to apply for additional patents
when it believes it is advantageous to do so. DTC believes, however, that much
of its important technology resides in proprietary software and trade secrets.
Certain technologies are licensed to DTC from third parties. Those licenses are
generally perpetual, worldwide and, DTC believes, on commercially reasonable
terms.
Similarly, DTC licenses its controller technology for which it receives
royalties. Total royalty income for the year ending December 31, 1996 was
$38,000.
As a result of the merger with Photonics, the Company has a number of key IR-LAN
patents and has licensed, and will continue to license, them to others for
royalties.
Royalty income from the licensing of Photonics technology is estimated to be a
minimum of $100,000 for the calendar year of 1997.
SIGNIFICANT CUSTOMER
No customer accounted for more than 10% of revenues in fiscal year ending
2/29/96. During the 10 months ending December 31, 1996 Ingram-Micro, a
distributor, accounted for 13.1% of net revenues.
BACKLOG
DTC does not believe that backlog is a meaningful indicator of future sales. It
is common industry practice for purchasers of DTCs products to issue purchase
orders on a month to month basis rather than to contract for delivery
3
<PAGE>
of products over an extended period of time. DTC's sales are primarily made
pursuant to purchase orders and contracts which are consistent with common
industry practice, and may be canceled or modified by customers to provide for
delivery at a later date with little or no penalties.
EMPLOYEES
As of December 31, 1996 DTC employed 18 individuals on a full-time basis, all of
which were located in the United States. Of such employees 3 were engaged in
manufacturing and related operations, 6 in development and engineering, 5 in
sales and marketing, and 4 in general management and administration. This work
force was augmented periodically by the employment of consultants and temporary
agency employees. None of DTCs employees are represented by a labor union and
DTC considers its employee relations to be good.
ITEM 2. PROPERTIES
----------
The Company's principal executive and administrative office is located in a
23,000 square foot facility in Milpitas, California. The current monthly rental
of the facility is approximately $14,000. A facility in San Jose, California and
vacated by Photonics Corporation, is under sub-lease and is not a liability to
the Company.
ITEM 3. LEGAL PROCEEDINGS
-----------------
In January 1994 Ms. Phyllis Azah, a former employee of DTC, filed a complaint
in the County of Santa Clara Superior Court, California alleging harassment
and discrimination by DTC and certain of its employees and claiming damages in
the amount of $100 million. While the suit was still in discovery as of
December 31, 1996, it was settled out of court in March 1997 for $13,500. The
first quarterly installment of $4,300 was paid in April 1997. The next of
installments of $4,350 will be paid in June and September of 1997.
The Company believes it is diligent in protecting it's employees, and fair in
its treatment of them, but cannot guarantee that such a claim will not be made
in the future.
From time-to-time DTC is involved in routine litigation as part of its normal
course of business. Management believes the Company carries adequate product
liability insurance and these matters can be resolved without material adverse
effect on DTC's overall financial position, results of operations and cash
flows.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY
- --------------------------------
The Company's Common Stock trades on the NASDAQ over the counter market under
the symbol: PHTX. For the original Photonics Corporation and under the symbol
DTEC for pre merger DTC Data Technology Corporation whose prices were quoted on
the non-NASDAQ over the counter market.
<TABLE>
<CAPTION>
PHOTONICS High Low DTC High Low
FISCAL YR. END 12/31/94 FISCAL YR. END 2/29/94
<S> <C> <C> <C> <C> <C>
First quarter 7 3/4 3 1/2 First quarter .22 .22
Second quarter 5 2 5/8 Second quarter .22 .16
Third quarter 4 3/8 2 3/4 Third quarter .25 .11
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Fourth quarter 3 1/4 1 1/2 Fourth quarter .09 .09
FISCAL YR. END 12/31/95 FISCAL YR. END 2/28/95
First quarter 2 3/8 5/8 First quarter .16 .02
Second quarter 1 1/8 1/4 Second quarter .20 .03
Third quarter 1/2 5/16 Third quarter .25 .11
Fourth quarter 1/4 1/8 Fourth quarter .50 .11
AFTER 3/6/96 MERGER FISCAL YR. END 2/29/96
Second quarter (6/30) 1 1/4 1/2 First quarter (5/30) .50 .19
Third quarter (9/30) 1 1/4 Second quarter (8/31) .38 .13
Fourth quarter (12/31) 7/8 3/8 Third quarter (11/30) .19 .16
Fourth quarter (2/28) .218 .062
</TABLE>
Neither Photonics Corporation or DTC Data Technology has historically paid cash
dividends. The Company currently intends to retain all future earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
The following discussion relates to the historic operations of DTC prior to the
acquisition by Photonics.
The statements made concerning expected company performance and product
commercialization are forward-looking statements and as such are made pursuant
to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The company's 1995 10K contains detailed risk factors that may contribute
to the actual results for 1996 and beyond which could materially differ from
forward-looking statements made by the Company.
The Company's revenues for the ten (10) month period ending 12-31-96, when
annualized, decreased 45% from the fiscal period ending 2/29/96. The Company
believes that the decline of the IDE market and lack of sufficient working
capital were the principle causes of the revenue decline. The net revenues for
the 10 month period ending 12/31/96 were $5.184 million. On an annualized basis
this would be $6.221 million. The Company's sales forecast for the calendar year
1997 is between $7 and $8 million dollars. The Company believes its reentry into
the SCSI market, its projected increase in working capital during Fiscal 97, the
addition of a new Vice President of Sales & Marketing, coupled with a sharper
focus on the market place, will lead to increased revenues and restore the
Company to profitability.
The gross margin, after deduction of cost of revenues, showed significant
improvement going from 10% at year end 2/29/96 to 21% for year ending 12/31/96.
A sign of the Company's commitment to Research and Development is the increase
in R & D expense from 7% of revenues for the year ended 2/29/96 to 14% of
revenues for the ten months ended 12/31/96. The expenditure for year ending
12/31/96 on an annualized basis would be $853,000 compared to $835,000 in the
last reporting period. The Company expects to make some significant expenditures
during the coming year of 1997 to develop it's high end SCSI line.
Selling, general and administrative expenses were $2.307 million dollars for the
10 months ending December 31, 1996 which would annualize at $2.768 million as
opposed to $3.248 million for the 12 months ending February 29, 1996 which
equals a 15% reduction in cost. The reduction is the result of cost containment
measures taken during the year of 1996 and the Company expects to have no
appreciable increase in these expenses during 1997.
There was no gain or loss on disposal of assets or divestiture of business units
for the 10 months ending December 31, 1996.
During the third quarter of the calendar year 1996, the company resolved three
claims that resulted in approximately $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
5
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claims made by the taxing authority of the Republic of Taiwan. All creditors
(including the Republic of Taiwan), 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 to the liquidation of Qume
LTD, in the United Kingdom. A settlement was reach 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. In 1991
the Company, then known as Qume Corporation, received a $371,000 payroll tax
refund. According to Section 6532 of the Internal Revenue Code, any claim for
an Erroneous Refund must be presented within two years of preparation. The
two years have more than lapsed.
The Company is reporting a loss from operations of $1.932 million dollars which
would annualize at $2.318 million versus a loss for the Fiscal year ending
2/29/96 of $2.986. The Company's ability to improve the gross margin can be
credited for the reduction in the operating loss.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $41 thousand dollars or 28%. This
decrease was primarily due to uses of cash to help reduce accounts payable which
decreased from $1.644 million to $1.309 or 20%. Other factors reducing the
accounts payable were concentrated effort to reduce expenses.
On November 14, 1994 DTC arranged a private line of credit from CMC/TOPAZ
Industries, Inc. As of December 31, 1996 the balance owing was $391 thousand
dollars. The intent of the companies is to convert this debt to equity during
the second quarter of 1997.
As of December 31, 1995 DTC owed $1.728 million dollars to DTC Technology
Corporation. 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 Photonics Corporation, together with DTC Data Technology
Corporation, announced they had executed an agreement under which Photonics
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 would advance 80%
of qualified receivables and have a secured interest in the general assets of
the Company. NBFI would discount the invoice 1% for the first 10 days,
thereafter the carrying charge for the advance was calculated at 1/15% per day
on outstanding balances. This equated to an effective rate for a typical company
receivable of 28% per annum. As of December 31, 1996 the outstanding balance
owed to NBFI was $44 ,000. Subsequently, the Company decided it could more
efficiently collect it's own receivables at less cost and terminated the
agreement with NBFI.
As of December 31, 1996 the Company had received funds totaling $600,000 which
represent subscriptions for the Series A Convertible Preferred Stock to be
offered in a private placement. 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.
Subsequent to the year-end closing, the Company has received additional
subscriptions and will close this round of private financing in the very near
future.
6
<PAGE>
The Company's Series A Convertible Preferred Stock ("Preferred Stock") 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 a liquidation preference and voting rights. At the option of the
Company, the Preferred Stock will be 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, or combinations of 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 has targeted only sophisticated investors who meet the definition of
accredited investor as set forth in Rule 501 of Regulation D under the Act.
There are no letter of credit, financing arrangements, indentures or other such
credit agreements with restrictive covenants that will effect the Company.
OTHER MATTERS
Inflation did not have a significant impact upon the results of operations of
the Company during the two fiscal years ended February 29, 1996 and December 31,
1996.
ITEM 7. FINANCIAL STATEMENTS
---------------------
The financial statements and supplementary data to be provided pursuant to this
Item 7 are in pages f-1 through f-23 of the report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Effective December 2, 1996 Meredith, Cardoza & Lanz, LLP were formally instated
as the Company's independent auditing firm. This was necessitated by the
termination of KPMG Peat Marwick, LLP .
DTC Data Technology Corporation had appointed Meredith, Cardoza & Lanz, LLP as
its independent auditing firm on April 2, 1996 due to the termination of
Coopers, Lybrand LLP.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
------------------------------------------------------------------------
WITH SECTION 16A OF THE EXCHANGE ACT
------------------------------------
The following table sets forth certain information with respect to the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------- --- -----------------------------------------------
<S> <C> <C>
David S. Lee 59 Chairman of the Board and Director
James T. Koo 55 President, Chief Executive Officer and Director
JoAn E. Hughes 63 Chief Financial Officer
Ki Ching Yeung 35 Vice President and Director
Robert P. Dilworth 54 Director
Gary N. Hughes 58 Director
</TABLE>
7
<PAGE>
During the year ending December 31, 1996 Anthony Sun and Robert C. Wilson
resigned from the Board of Directors. According to the Company's by-laws, the
Board of Directors must have a minimum of five (5) directors. As this criteria
was met, the Board voted to postpone the appointment of any replacement members.
During the fiscal year ending December 31, 1996 W. Morris Chubb was the Chief
Financial Officer. On February 28, 1997 Mr. Chubb terminated from the Company.
Ms. Hughes was appointed to the post of Chief Financial Officer effective
February 24, 1997.
The following is certain information regarding the persons listed in the table
above:
Mr. Lee has been a member of the Board of DTC since 1986 and the Chairman of the
Board since 1987. From 1985 to 1993 he was the President and Chief Executive
Officer of DTC. Currently, Mr. Lee is also the Chairman of the Board of Cortelco
Systems Holding Corporation, a company in the telecommunications business. Mr.
Lee is also a member of the Board of Directors of CMC Industries, Inc., Plexsys
International Corporation, Linear Technology Corporation, Synnex Information
Technologies, Inc., California Chamber of Commerce, National Committee on United
States-China Relations, Inc. and the Tech Museum of Innovation. In addition, Mr.
Lee is a member of the Board of Regents for the University of California.
Mr. Koo has served as the President and member of the Board of DTC since 1994.
From 1992 to 1994 he was a Vice President of Qume Corporation and General
Manager of DTC Data Technology, then a wholly-owned subsidiary of Qume
Corporation. Prior to joining DTC, Mr. Koo was with Mosel Vitelic, a developer
and manufacturer of memory integrated circuits, from 1984 until April 1992.
There he held several positions including Senior Vice President of Engineering,
Operations, Marketing and Sales of Taiwan Operations, and Vice President for the
Static Random Access Memory (SRAM) group.
Ms. Hughes was appointed Chief Financial Office on February 24, 1997. Prior to
that she was retired from June 1992 though February 1997. Ms. Hughes came to
Data Technology Corporation in April of 1984 as the Controller. After the
acquisition of Qume Corporation in June of 1988, Ms. Hughes was appointed
Director of Internal Audit. In 1991 Ms. Hughes was appointed Chief Financial
Officer of DTC Data Technology Corporation, a wholly-owned subsidiary of Qume
Corporation.
Mr. Yeung has been a member of the Board of Directors and has served as Vice
President of DTC since November 1994. Since November 1994 Mr. Yeung has served
as President of Data Technology Hong Kong Limited. Since January 1992 Mr. Yeung
has served as President of Broadsino Development Ltd., Great Concept Development
Ltd., Action Well Development Ltd., First Alpha Ltd., and Unique Computer GmbH.
From 1982 to 1992 he was the President of Unicorn Electronic Company Ltd., a
manufacturer of electronic components.
Mr. Dilworth has served as a director of DTC since 1987. He is the President and
Chief Executive Office of Metricom, Inc., a manufacturer of RF pocket radio
communications networks and electronic meters. Prior to joining Metricom, from
1985 to 1987 Mr. Dilworth served as President of Zenith Data Systems, a
microcomputer supplier and a wholly-owned subsidiary of Zenith Electronics
Corporation. Mr. Dilworth is also a director of VLSI Technology, Inc.
Mr. Hughes has been President, Chief Executive Officer, and a member of the
Board of Directors of Photonics since October 1990. From February 1985 to
September 1990, Mr. Hughes co-founded and served as President and Chief
Executive Officer of Precision Image Corporation, an electrostatic plotter
company. From 1977 to 1980, he served as President of Memorex Canada Limited.
From 1970 to 1976, Mr. Hughes held executive positions in operations, sales and
corporate development for Systems Dimensions Ltd., a computer services company.
Prior to that time, Mr. Hughes worked for ten years with IBM Canada where he
held technical and sales management positions.
Mr. Chubb, formerly the Chief Financial Officer, terminated February 28, 1997.
From September 1995 through February 28, 1997 he had been the Chief Financial
Officer of the Company. From August 1994 to September 1995 Mr. Chubb held
various consulting positions. Prior to that from 1987 to August 1994 Mr. Chubb
was with Luxtron Corporation, a designer and manufacturer of fiber optic
equipment used to measure and monitor various physical parameters.
8
<PAGE>
INDEMNIFICATION AGREEMENTS
The Company's Articles of Incorporation and Bylaws provide for indemnification
of the officers and directors of the Company to the full extent permitted by
law. The General Corporation Law of the State of California permits a
corporation to limit, under certain circumstances, a director's liability for
monetary damages in actions brought by or in the right of the corporation. The
Company's Articles of Incorporation also provide for the elimination of the
liability of directors for monetary damages to the full extent permitted by law.
The Company has entered into agreements to indemnify its directors and officers
in addition to the indemnification provided for in the Articles of Incorporation
and Bylaws. These agreements provide that the Company will indemnify its
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred in any action or proceeding,
including an action by or in the right of the Company, on account of services
rendered as a director or officer of the Company, as a director or officer of
any subsidiary of the Company, or as a director officer of any other enterprise
to which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and officers. The Company carries director
and officers' insurance. At present, there is no pending litigation or
proceeding involving a director, officer, or employee of the Company as to which
indemnification is sought, nor is the Company aware of any threatened litigation
or proceeding that may result in claims for indemnification.
The Company understands that the staff of the SEC is of the opinion that
statutory, charter, and contractual provisions as those described above have no
effect on claims arising under the federal securities laws. The Company is not
aware of any material threatened or ongoing litigation or proceeding which may
result in a claim for such indemnification
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Executive officers having cash compensation in excess of $100,000 paid or
accrued for services rendered during the years ending December 31, 1996 and
February 29, 1996 are as follows:
<TABLE>
<CAPTION>
Long Term Compensation
Compensation Stock Option All Other
Name and Year Salary(3) Bonus Award(1) Compensation(2)
Principal Position Ending ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Gary N. Hughes, Pres. 12/31/96 0 0 0 0
CEO & Director 02/28/96 118,671 0 0 0
James T. Koo , Pres. 12/31/96 93,472 0 62,612 2,000
CEO & Director 02/29/96 139,196 0 - -
</TABLE>
1. In fiscal year 1996 the Board of Directors and Shareholders in concert with
the acquisition purchase between DTC Data Technology Corporation and
Photonics Corporation, approved a reverse split at an exchange rate of
0.147853 for all outstanding DTC Data Technology Corporation stock to become
Photonics stock. Mr. Koo's previous option for 170,000 DTC Data Technology
Corporation shares became 25,134 shares of Photonics stock. Subsequently, the
Board of Directors approved an additional option of 37,478 shares of
Photonics common stock.
2. Mr. Koo was a participant in the DTC 401(k) shared saving plan. $2,000 was
contributed by DTC under this contribution plan on his behalf.
9
<PAGE>
3. As stipulated elsewhere in this document, the reporting period ending
12/31/96 is for ten (10) months period then ended. The reporting period
ending 2/29/96 is for a full twelve (12) month year. The compensation
reported above is adjusted to reflect actual compensation paid or granted
within the respective reporting periods.
Aggregated Option Escercises in Last Fiscal Year
------------------------------------------------
and FY-End Option Values
------------------------
<TABLE>
<CAPTION>
Securities Value of
Underlying Unexercised In-the
Shares Unexercised Options Money Options at
Acquired on Value at FY-end # FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name # ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Gary N. Hughes none 0 / 0 0 / 0 0 / 0
James T. Koo none 0 / 0 0 / 62,612 0 / 0
</TABLE>
BOARD OF DIRECTOR'S REPORT ON REPRICING OF OPTIONS/SARS
On April 22, 1996 the Company's Board of Directors granted all optionees,
including executive officers, under the Company's 1988 Stock Option Plan (the
"1988 Stock Option Plan") the opportunity to exchange their current higher-
priced options for new stock options with an exercise price set at the then
current fair market value of the Company's Common Stock, which was $o.1550 per
share. In addition, while most of the other terms of the new stock options
remained the same as those previously granted under the 1988 Stock Option Plan,
such new options provided for a five (5) year expiration date and were not
exercisable until April 22, 1997.
The Board of Directors granted optionees this 30-day opportunity of exchange
and reprice their stock options to further the principal purpose of the
Company's 1988 Stock Option Plan which were to provide and equity incentive to
remain in the employment of the Company and to work diligently in its best
interests. Because many employees then held options exercisable at prices
significantly above the then current market price of the Company's Common Stock,
the Board of Directors determined that the purpose of the 1988 Stock Option Plan
would not be achieved and that it was critical to the best interest of the
Company and its shareholders that the Company retain the service of such
employees.
The table below provides the specified information concerning all repricing of
option/SARs during the last ten (10) completed fiscal years of DTC awarded to
Executive Officers. The options and exercise prices represented in the table
reflect the 0.147853 reverse split which became effective March 5, 1996.
Ten Year Option / SAR Repricings
--------------------------------
<TABLE>
<CAPTION>
Number Market Price Exercise Length of
Securities of Stock at Price New Original
Date of Underlying Time of at Time of Exercise Option Term
Name Repricing Options Repricing($) Repricing($) Price($) at date of
Repriced ($) Repricing*
<S> <C> <C> <C> <C> <C> <C>
James Koo 04/22/97 17,742 $0.1550 $1.6909 $0.1550 8yrs 5mos
President 04/22/97 7,393 $0.1550 $1.6909 $0.1550 8yrs 5mos
Morris Chubb 01/22/97 14,785 $0.1550 $1.6909 $0.1550 9yrs 7mos
</TABLE>
10
<PAGE>
* Options were originally issued with 48 month vesting and 10 year expiration.
Repriced options retain 48 month vest and expire in 5 years.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth the shares of the Company's Common Stock
beneficially owned at December 31, 1996, by (i) each person who is known by the
Company to be the beneficial owner of more than five percent of the Common
Stock, (ii) by each of the directors, (iii) by each of the executive officers
listed in the Summary Compensation Table for 1996, and (iv) by all directors and
officers as a group. The options, warrants and stock represented in this table
reflect the 1 for 5 reverse split of Photonics stock which became effective
February 9, 1996 prior to the finalization of the merger.
The acquisition of DTC was consummated on March 5, 1996. The agreement, as
ratified by DTC Data Technology Corporation's Shareholders at their meeting
held on February 6, 1996, specifies "The Board of Directors of DTC would file a
Certificate of Dissolution in the state of Delaware after consummation of the
Acquisition. Thereafter, DTC shall continue for a term of three year or
longer...." After the dissolution is complete, the conversion of DTC stock to
Photonics stock will be affected at a conversion rate currently estimated to be
at a multiplier of 0.147853. All calculations of beneficial ownership,
exercise and conversion of all outstanding options, warrants and other right to
purchase shares of common stock uses this multiplier as though the dissolution
had in fact occurred.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Beneficial Owner Owned (1) of Class
- -------------------------------------------- --------------- ---------
<S> <C> <C>
DTC Technology Corporation
2F 542-2 Chung Cheng Road
Hsin-Tien, Taiwan 779,621(6) 18.0%
Republic of China , China
Broadsino Computer Development, Ltd., Ltd 591,412(7) 13.7%
Room 1101,1103, and 1104 Star Center
443-451 Castle Peak Road
Kwal Chung NT, Hong Kong
David S. Lee, Chairman of the Board 439,044(8) 10.2%
c/o Photonics dba DTC Data Technology
1515 Centre Pointe Drive
Milpitas, Ca. 95035
James T. Koo, President 199,661(9) 4.6%
c/o Photonics dba DTC Data Technology
1515 Centre Pointe Drive
Milpitas, Ca. 95035
Robert P. Dilworth, Director 13,500 *
All Officers and Directors as a group
(4 persons) 652,205 15.1%
</TABLE>
* Denotes less than 1%
1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by footnote,
and subject to community property laws where applicable, the persons named in
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
2) Percentage calculations are based upon the 4,323,560 outstanding share of
Common Stock, as of December 31,
11
<PAGE>
1996.
3) On August 31, 1995 the Company, together with DTC, announced that they had
executed an agreement under which Photonics would acquire all the assets and
certain liabilities of DTC in exchange for the issuance to DTC of share
and/or rights to shares of common stock representing 77.5% of Photonics
outstanding stock. The transaction was consummated on March 5, 1996. The
transaction was treated as a purchase for accounting purposes. Since DTC
stockholders owned a majority of the shares in the combined entity and
retained management and board control, the transaction was accounted for as
though DTC was the acquirer, though Photonics was the surviving legal entity.
4) On March 6, 1996, the Company's Board of Directors declared a 0.147853 to 1
reverse stock split. All reference to number of shares, and to per share
information, have been adjusted to reflect the reverse stock split
retroactive basis.
5) On July 8, 1994 DTC entered into an agreement with DTC Technology Corporation
(DTC Taiwan) and Compac International Company (Compac) (a subsidiary of DTC
Taiwan) whereby DTC disposed of its interest in DTC Taiwan assigned its
interest in certain receivables, sold shares of its common stock and issued a
convertible promissory note in consideration for the settlement of amounts
owed by DTC to DTC Taiwan of approximately $12.4 million. The $2 million
subordinated convertible promissory note bore interest at 8% per annum and
was payable in monthly minimum installments and convertible into nonvoting
cumulative convertible redeemable preferred stock at the conversion price of
$1.00 per share, with the preferred shares being convertible into common
stock. On February 16, 1996, DTC effectively converted the remaining balance
of the promissory note, $1,700,439 into 502,830 shares of common stock
reflected in this table after applying the 0.145873 multiplier. The complete
transaction is further discussed in Notes to Consolidated Financial
Statements numbers 2 and 13.
6) On February 28, 1995 , The Company and Broadsino Computer Development Ltd. Of
Hong Kong (Broadsino) consummated an agreement under which DTC authorized the
sale of an aggregate of four million shares of its common stock (1.600,000
shares held in escrow) for the sum of $1.0 million or $0.25 per share. As
consideration for the sale of its common stock, DTC received $300,000 in
cash, $395,000 in inventory and a 9% note receivable of $305,000. In fiscal
1996, the note was fully collected and the shares released from escrow. (See
Notes to Consolidated Financial Statements number 7 for further details)
In conjunction with the private placement of the Company's Series A
Convertible Preferred Stock (discussed on page 7 under Liquidity and Capital
Resources) Broadsino has pledged to purchase 300,000 shares at $1.00 per
share during fiscal 1997.
7) In conjunction with the private placement of the Company's Series A
Convertible Preferred Stock (discussed on page 7 under Liquidity and Capital
Resources) Mr. Lee has pledged to purchase 574,407 shares at 1.00 per share
during fiscal 1997 Of this amount Mr. Lee had contributed $100,000 in the
form of a bridge loan duringIn addition, Mr. Lee is owed $10,493 dollars in
interest and expenses that will be converted to equity and is included in the
number of shares stated above.
8) In conjunction with the private placement of the Company's Series A
Convertible Preferred Stock (discussed on page 7 under Liquidity and Capital
Resources) Mr. Koo has pledged to purchase 245,641 shares at $1.00 per share
during fiscal 1997. In addition, Mr. Koo is owed $18,659 in interest and that
will be converted to equity and is included in the number of shares stated
above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
A member of the Board of Directors and representative of Broadsino (See Item 11,
note 7) is President of the Company's prime subcontractor for the production of
the Company's storage controller, which meets approximately 70% of the Company's
requirements.
12
<PAGE>
The Company's agreement, signed in 1994, to use DTC Technology, Taiwan as its
favored manufacturer for a minimum twelve month period expired. The Company does
Continue to make purchases from DTC Taiwan when they are price competitive.
The Company entered into an agreement with CMC California, Inc. (CMC), a company
owned by a major shareholder and Chairman of the Board of Directors where CMC
assumed and paid specific vendor invoices of the related party who is the
Company's prime subcontractor. This note payable bears interest at 12 % ,
balance due on demand. At December 31, 1996 the Company owed approximately
$391,000 to CMC. In conjunction with the Company's Private Placement Financing,
this debt will be converted to equity. The Company's Series A Convertible
Preferred Stock will be issued at the time this round of financing closes. (See
Item 6, Liquidity and Capital Resources)
During 1996 the Company entered into debt agreements with the Chairman of the
Board of Directors and the President of the Company for $100,000 and $202,000
respectively. This debt will be converted to preferred stock at the time this
round of financing closes.
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K
--------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged to Charged Balance
at Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Feb. 29, 1996
- -------------
Allowances for
Doubtful Accts. $ 232,000 $177,000 - $155,000 $ 254,000
Inventory Resv. $ 320,000 $886,000 - - $1,206,000
Dec. 31, 1996
- -------------
Allowances for
Doubtful Accts. $ 245,000 $114,000 $61,000 - $ 420,000
Inventory Resv. $1,206,000 - - $ 20,000 $1,186,000
</TABLE>
No 8-K filed
13
<PAGE>
SIGNATURE
Pursuant To the requirements of Section 3 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHOTONICS CORPORATION DBA DTC DATA TECHNOLOGY
4-14-97 /s/ JoAn E. Hughes
DATE:_____________ BY: ________________________________________
JoAn E. Hughes
Chief Financial Officer
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES
Consolidated Financial Statements Page
- --------------------------------- ----
Independent Auditors' Report f-2
Consolidated Balance Sheets, December 31, 1996
and February 29, 1996 f-3
Consolidated Statements of Income, ten months
ended December 31, 1996 and fiscal year ended
February 29, 1996 f-4
Consolidated Statements of Shareholders' Equity, ten
months ended December 31, 1996 and fiscal year
ended February 29, 1996 f-5
Consolidated Statements of Cash Flows, ten months
ended December 31, 1996 and fiscal year ended
February 29, 1996 f-6
Notes to Consolidated Financial Statements f-7
Consolidated Financial Statement Schedules
- ------------------------------------------
Schedule II - Valuation and Qualifying Accounts 13
Exhibit 11 - Computation of Earnings per Common Share 13
f-1
<PAGE>
[LETTERHEAD OF MEREDITH, CARDOZO & LANZ LLP, CERTIFIED PUBLIC ACCOUNTANTS]
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders
Photonics Corporation (d/b/a DTC Data Technology)
We have audited the consolidated financial statements of Photonics Corporation
(d/b/a DTC Data Technology) and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Photonics
Corporation (d/b/a DTC Data Technology) and subsidiaries as of December 31, 1996
and February 29, 1996, and the results of their operations and their cash flows
for the ten months ended December 31, 1996 and the fiscal year ended February
29, 1996, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that Photonics
Corporation (d/b/a DTC Data Technology) will continue as a going concern.. As
discussed in Note 1 to the financial statements, the Company's recurring losses
from operations and net capital deficiency raise substantial doubt about the
entity's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
reporting asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
/s/ Meredith, Cardozo & Lanz, LLP
San Jose, California
March 27, 1997
f-2
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND FEBRUARY 29, 1996
ASSETS
------
(Note 6)
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 104,000 $ 145,000
Accounts receivable, net of allowance for doubtful accounts of $420,000 and $254,000,
respectively 849,000 1,479,000
Inventories (Note 3) 950,000 694,000
Prepaid and other current assets 84,000 78,000
---------- ----------
Total current assets 1,987,000 2,396,000
Property and equipment, net (Note 4) 112,000 37,000
Other assets 14,000 --
---------- ----------
$2,113,000 $2,433,000
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities:
Accounts payable $ 1,309,000 $ 1,644,000
Due to related parties (Note 9) 2,130,000 1,342,000
Accrued liabilities (Note 10) 924,000 2,292,000
Current portion long term debt 74,000 --
----------- ------------
Total current liabilities 4,437,000 5,278,000
Deferred foreign taxes (Notes 5 and 14) -- 1,800,000
----------- ------------
Total liabilities 4,437,000 7,078,000
----------- ------------
Minority interest in subsidiaries 125,000 125,000
Commitments and contingent liabilities (Notes 6 and 11)
Shareholders deficiency:
Preferred Stock (Note 15) -- --
Common stock, $.001 par value (Note 7), authorized 20,000,000 shares; issued 4,323,560 and
3,193,717 shares at December 31, 1996 and February 29, 1996, respectively 44,075,000 42,632,000
Treasury stock -- (476,000)
Capital subscription 26,000 500,000
Accumulated deficit (46,704,000) (47,580,000)
Cumulative translation adjustment 154,000 154,000
----------- ------------
Total stockholders' deficiency (2,449,000) (4,770,000)
----------- -----------
$ 2,113,000 $ 2,433,000
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
f-3
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TEN MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------- -------------
<S> <C> <C>
Net revenues (Note 8) $ 5,184,000 $11,310,000
Cost of revenues (Note 9) 4,099,000 10,213,000
----------- -----------
Gross profit 1,085,000 1,097,000
Operating expenses:
Product development 710,000 835,000
Selling, general and administrative 2,307,000 3,248,000
----------- -----------
Total operating expenses 3,017,000 4,083,000
----------- -----------
Loss from operations (1,932,000) (2,986,000)
Other income (expense):
Interest income 9,000 --
Interest expense (97,000) (235,000)
Other income 24,000 402,000
Other expense (28,000) (31,000)
----------- -----------
(92,000) 136,000
----------- -----------
Loss before income taxes (2,024,000) (2,850,000)
Income taxes (Note 5) 1,000 1,000
----------- -----------
Loss before extraordinary item (2,025,000) (2,851,000)
Extraordinary item, net of tax (Note 14) 2,901,000 --
----------- -----------
Net income (loss) $ 876,000 $(2,581,000)
=========== ===========
Net loss per share $ 0.19 $ (0.89)
========== ==========
Shares used in per share calculation 4,522,439 2,882,654
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
f-4
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED DECEMBER 31, 1996 AND
THE FISCAL YEAR ENDED FEBRUARY 29, 1996
(Dollars in thousand)
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
COMMON STOCK FROM TREASURY STOCK CUMULATIVE
----------------- STOCK --------------- CAPITAL ACCUMULATED TRANSLATION
SHARES AMOUNT HOLDER SHARES AMOUNT SUBSCRIPTION DEFICIT ADJUSTMENT TOTAL
-------- ------ --------- ------ ------ ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of February 28,
1995 2,677,103 $40,913 $(305) 704,023 $(458) $ 300 $(44,724) $149 $(4,125)
Issuance of common stock
under employee benefit
plans 13,784 19 -- -- -- -- -- -- 19
Issuance of common stock to
DTC Technology Corporation
canceling note payable
(Note 7) 502,830 1,700 -- -- -- -- -- -- 1,700
Purchase of treasury stock -- -- -- 76,000 (18) -- -- -- (18)
Receipt on note receivable -- -- 305 -- -- -- -- -- 305
Capital subscription -- -- -- -- -- 200 -- -- 200
Translation adjustment -- -- -- -- -- -- -- 5 5
Net loss -- -- -- -- -- -- (2,856) -- (2,856)
-------- ------ --------- ------- ------ ------------- ----------- ----------- -------
Balances as of February 29,
1996 3,193,717 42,632 -- 780,023 (476) 500 (47,580) 154 (4,770)
Issuance of common stock
under employee benefit
plans 2,383 3 -- -- -- -- -- -- 3
Retirement of treasury stock (115,329) (476) -- (780,023 476 -- -- -- --
Capital subscriptions, net 354,847 600 -- -- -- (474) -- -- 126
Photonics stock outstanding 887,942 1,316 -- -- -- -- -- -- 1,316
Net loss -- -- -- -- -- -- 876 -- 876
-------- ------ --------- ------- ------ ------------- ----------- ----------- -------
Balances as of December 31,
1996 4,323,560 $44,075 $ -- -- $ -- $ 26 $(46,704) $154 $(2,449)
========= ======= ======== ======= ====== ============= =========== =========== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
f-5
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED FEBRUARY 29, 1996
(NOTE 13)
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ 876,000 $(2,851,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Issuance of common stock under employee benefit plans 3,000 19,000
Depreciation and amortization 149,000 78,000
Provision for doubtful accounts 166,000 22,000
Effect of adjustments to valuation allowances (Note 14) (2,901,000) --
Changes in operating assets and liabilities:
Accounts receivable 469,000 1,448,000
Inventories (90,000) 146,000
Prepaid and other current assets 39,000 21,000
Accounts payable (335,000) 681,000
Due to related parties (205,000) 201,000
Accrued liabilities (463,000) 149,000
------------ -----------
Net cash (used in) operating activities (2,292,000) (86,000)
Cash flows from investing activities:
Purchase of property and equipment (44,000) (63,000)
------------ -----------
Net cash (used in) investing activities (44,000) (63,000)
Cash flows from financing activities:
Capital subscription 126,000 200,000
Repayments under bank lines (140,000)
Repayments of long-term liabilities (155,000)
Proceeds from short-term debt 1,067,000 --
Proceeds from notes receivable shareholder 305,000
Issuance of common stock 1,102,000 --
Repurchase of treasury stock -- (18,000)
------------ -----------
Net cash provided by (used in) financing activities 2,295,000 192,000
------------ -----------
Net (decrease) increase in cash and cash equivalents (41,000) 43,000
Cash and cash equivalents, beginning of year 145,000 102,000
------------ -----------
Cash and cash equivalents, end of year $ 104,000 $ 145,000
============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
f-6
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND FEBRUARY 29, 1996
1. Summary of Significant Accounting Policies
------------------------------------------
The Company
-----------
Photonics Corporation, d/b/a DTC Data Technology (the Company) (Photonics),
a California corporation, designs, develops, and markets Integrated Device
Electronics (IDE) and Small Computer Systems Interface (SCSI) disk
controller cards and Input/Output (I/O) product for personal computers. In
June 1995, Photonics suspended the further development and production of
products using its technology, ceased all marketing activities related to
those products and terminated substantially all of its employees. In March
1996, Photonics Corporation acquired DTC Data Technology Corporation (DTC),
a Delaware corporation. Following the merger, the Company formally
discontinued the marketing of all networking products previously sold by
Photonics, with DTC being the surviving business unit.
DTC was founded in 1979 as an independent designer, developer and marketer
of intelligent storage controllers and chip sets used primarily in
connection with IBM-compatible personal computers. DTC designs proprietary
integrated circuits for use in its storage controllers and chip sets. These
circuits are fabricated by semiconductor manufacturers based on DTC's
specifications. Final assembly and test of controller boards are performed
by approved vendors both in the United States and abroad.
Basis of Presentation
---------------------
The consolidated financial statements of the Company have been prepared
assuming that the Company will continue as a going concern. The liquidity
of the Company has been adversely affected by recurring losses resulting in
an accumulated deficit and a capital deficiency at December 31, 1996. Over
the past five years, the Company has sold portions of its business (Note 2)
considered to be outside the scope of its strategic focus in order to
supplement working capital resources and reduce dependence on bank
financing.
Management believes that these steps, as well as outside investment
participation and improved results of operations, will provide the Company
with the opportunity to achieve its objectives. There is, however, no
assurance that the steps taken or programs in place will meet all of the
Company's needs or that it will continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(continued)
f-7
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries after elimination of
intercompany accounts and transactions.
As of December 31, 1996 and February 29, 1996, the minority interest
represents the minority stockholders' proportionate share of the equity of
the subsidiaries, Qume Taiwan and Data Technology Hong Kong Ltd., which was
0.6% and 1%, respectively.
Purchase Accounting
-------------------
The acquisition of DTC by Photonics has been treated as a "purchase" for
accounting purposes. Since DTC stockholders own a majority of the shares
of the combined company and DTC retained management and board control, the
acquisition was accounted for as though DTC were the acquiror.
Accordingly, the assets and liabilities of Photonics were recorded at fair
value and the historical results of operations of the combined company are
those of DTC.
Foreign Currency Translation
----------------------------
Certain entities located outside the United States use the local currency
as their functional currency. Assets and liabilities are translated at
exchange rates in effect at the balance sheet date, while revenues and
costs are translated at monthly average exchange rates. Translation gains
and losses are accumulated as a separate component of stockholders'
deficiency.
For foreign entities operating in U.S. dollars, net nonmonetary assets are
translated at historical exchange rates, and net monetary assets are
translated at current exchange rates. Translation gains and losses are
included in the determination of the results of operations.
The Company incurred foreign exchange losses of approximately $5,000 for
the year ended February 29, 1996. The Company did not incur losses for the
ten months ended December 31, 1996. These amounts are reflected in other
income in the accompanying consolidated statements of operations.
Cash Equivalents
----------------
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(continued)
f-8
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market (net realizable value).
Equipment and Leasehold Improvements
------------------------------------
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment and leasehold improvements is calculated on the straight-line
method over the estimated useful lives of the assets, generally three to
seven years. Assets held under capital leases are amortized on a straight-
line basis over the shorter of the lease term or the estimated useful life
of the asset.
Revenue Recognition
-------------------
Revenue is generally recognized upon shipment of product. Sales to
distributors are made pursuant to agreements which provide the distributors
certain rights of return and price protection on unsold merchandise.
Revenues from such sales are recognized upon shipment, with a provision for
estimated returns and allowances recorded at that time.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109,
deferred tax liabilities or assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered. Deferred income taxes as of December 31, 1996 and February 29,
1996, primarily result from certain expenses that are not currently
deductible for tax purposes.
Net Income (Loss) Per Common Share
----------------------------------
Net income (loss) per common share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding for each
year. Common equivalent shares, principally stock options, are included in
the per share calculation when the effect of their inclusion would be
dilutive.
(continued)
f-9
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Long-lived Assets
-----------------
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," which requires that long-lived assets and
certain identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The new standard is
effective for fiscal years beginning after December 15, 1995. Upon adoption
in the first fiscal quarter of 1996, there was no significant effect upon
the Company's financial position or consolidated results of operations.
Stock-Based Incentive Program
-----------------------------
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which encourages entities to recognize compensation costs
for stock-based employee compensation plans using the fair value based
method of accounting defined in SFAS No. 123, but allows for the continued
use of the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company adopted SFAS No. 123 in the first quarter
of fiscal 1996, and elected to continue to use the intrinsic value based
method of accounting prescribed by APB Opinion No. 25 supplemented by SFAS
No. 123's required footnote disclosures. Adoption of SFAS No. 123 did not
have a significant effect upon the Company's financial position or
consolidated results of operations.
Reclassifications
-----------------
Certain amounts in the February 29, 1996 financial statements have been
reclassified to conform with the December 31, 1996 presentation.
(continued)
f-10
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
Reverse Stock Split
-------------------
On March 6, 1996, the Company's Board of Directors declared a 0.1478531 to
1 reverse stock split. All references to number of shares, except shares
authorized, and to per share information, in the consolidated financial
statements have been adjusted to reflect the reverse stock split on a
retroactive basis.
2. Divestitures and Sale of Assets and Liabilities
-----------------------------------------------
DTC Data Technology
-------------------
On August 31, 1995, the Company, together with DTC, announced that they had
executed an agreement under which Photonics 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 stock. The transaction was treated as a purchase for
accounting purposes. Since DTC stockholders owned a majority of the shares
in the combined entity and retained management and board control, the
transaction was accounted for as though DTC was the acquirer, though
Photonics was the surviving legal entity.
DTC Technology Corporation
--------------------------
On July 8, 1994, DTC entered into an agreement, with DTC Technology
Corporation (DTC Taiwan) and Compac International Company (Compac) (a
subsidiary of DTC Taiwan) whereby DTC disposed of its interest in DTC
Taiwan, assigned its interest in certain receivables, sold shares of its
common stock and issued a convertible promissory note in consideration for
the settlement of amounts owed by DTC to DTC Taiwan of approximately $12.4
million.
DTC Taiwan forgave DTC's intercompany payable of approximately $12.4
million for the following considerations as specified in the agreement:
<TABLE>
<CAPTION>
<S> <C> <C>
Transfer of all the Company's interest (56%) in DTC Taiwan $ 6,000,000
Assignment of the note receivable from Silver Star Developments, Ltd. 1,000,000
Assignment of value for Wyse Holdback 2,500,000
Issuance of DTC's common stock 893,000
Issuance of subordinate convertible promissory note 2,000,000
----------
Total consideration for amounts owed to DTC Taiwan $ 12,393,000
==========
</TABLE>
(continued)
f-11
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Divestitures and Sale of Assets and Liabilities - continued
----------------------------------------------------------
DTC assigned $1 million of it $1.6 million note receivable from Silver Star
Development Limited to DTC Taiwan and assigned $2.5 million of its right to
the Wyse Holdback, which is net of $1.2 million of the Wyse Holdback
pledged to the Bank of New York. DTC also issued 1,372,070 shares of it's
common stock to DTC Taiwan valued in the agreement at $893,000 and a
subordinated convertible promissory note for $2 million. DTC recorded a
$1.6 million loss on in fiscal 1994 from the divestiture of DTC Taiwan,
which represents the difference between the book value of the net assets of
DTC Taiwan ($7.6 million) and the $6.0 million consideration specified in
the agreement (Note 13).
The $2 million subordinated convertible promissory note bore interest at 8%
per annum and was payable in monthly minimum installments and convertible
into nonvoting cumulative convertible redeemable preferred stock at the
conversion price of $1.00 per share, with the preferred shares being
convertible into common stock. On February 16, 1996, DTC effectively
converted the remaining balance of the promissory note, $1,700,439 into
502,830 shares of common stock.
3. Inventories
-----------
<TABLE>
<CAPTION>
A summary of inventories follows:
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Raw materials $ 118,000 $ 165,000
Work-in-process 357,000 105,000
Finished goods 475,000 424,000
------------ ------------
$ 950,000 $ 694,000
============ ============
</TABLE>
4. Property and Equipment
----------------------
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Equipment $ 2,312,000 $ 2,173,000
Furniture and fixtures 277,000 471,000
Leasehold improvements 94,000 95,000
------------ ------------
2,683,000 2,739,000
Less accumulated depreciation and amortization 2,571,000 2,702,000
------------ ------------
$ 112,000 $ 37,000
============ ============
</TABLE>
f-12
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income Taxes
------------
Income tax expense for the ten months ended December 31, 1996 and for
the fiscal year ended February 29, 1996 was $1,000 for each period.
$
Deferred tax assets (liabilities) comprises the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Depreciation $ 240,000 $ 206,000
Reserves not currently deductible 561,000 496,000
Accrued liabilities 329,000 722,000
Net operating losses 29,493,000 29,373,000
Tax credit carryovers 1,288,000 1,288,000
Valuation allowance (31,911,000) (32,085,000)
----------- ------------
Net deferred tax asset $ -- $ --
=========== ============
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax principally as a result of federal and state net operating losses for
which a full valuation allowance has been provided.
At December 31, 1996, the Company had approximately $83 million of regular
net operating losses to offset future federal income tax. These
carryforwards expire in the years 2002 through 2011. In addition the
Company has approximately $1.2 million of federal tax credits expiring 1997
through 2004.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating loss and tax credit carry forwards in the
event of an "ownership change" as defined by the Internal Revenue Code. If
the Company has an "ownership" change as defined by the Internal Revenue
Code, the Company's ability to utilize the Federal and California net
operating losses could be reduced (Note 15).
Deferred foreign taxes as of February 29, 1996, represent estimated amounts
due to a foreign country based upon capital stock transactions between DTC
Taiwan and the DTC. This liability (Note 14) was not acquired from DTC as
part of the acquisition (Note 2) by Photonics.
6. Commitments
-----------
Facility Leases
---------------
The Company leases its facilities under noncancelable lease agreements
expiring through 1998. The facility leases require the Company to pay
certain maintenance and operating
(continued)
f-13
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments - continued
-----------------------
expenses such as taxes, insurance, and utilities. Rent expense related to
these operating leases was $178,000, and $166,000 for the ten months ended
December 31, 1996, and the year ended February 29, 1996, respectively.
Future minimum lease payments required under the operating leases for 1997
and 1998 are $168,000 and $103,000, respectively.
Accounts Receivable Financing
-----------------------------
During 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
would advance 80% of qualified receivables and have a secured interest in
the general assets of the Company. NBFI would also discount the invoice 1%
for the first 10 days, and thereafter the carrying charge for the advance
would be calculated at 1/15% per day on outstanding balances. This equated
to an effective rate for a typical Company receivable of 28% per annum. As
of December 31, 1996, the outstanding balance owed to NBFI was $44,000.
7. Capital Stock
-------------
Common Stock
------------
During the year ended February 29, 1996, DTC issued 502,830 shares of DTC
common stock in a transaction that converted debt to equity (Note 2).
During the ten months ended December 31, 1996, the Company retired 115,329
shares of common stock held under the laws of the State of Delaware. The
Company also issued a total of 354,847 shares of the Company's common stock
in private placement transactions with shareholders exempt from
registration under the Securities Act, which generated net proceeds of
approximately $600,000 of which approximately $100,000 and $500,000 was
received during the ten months ended December 31, 1996, and the year ended
February 29, 1996, respectively.
Stock Warrants
--------------
As of December 31, 1996, the Company had outstanding warrants for 20,000
shares of common stock, exercisable through November 1998 at $38.75 per
share, relating to bridge loan financing obtained prior to the Company's
initial public offering. Also outstanding was a warrant issued to the
underwriter to purchase 26,250 shares of common stock at $54.00 per share
through November 1998.
(continued)
f-14
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock - continued
-------------------------
Stock Option Plans
------------------
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans had
been determined in accordance with the fair value based method prescribed
in FASB Statement 123. The Company estimates the fair value of the stock
options at the grant date by using the Black-Scholes option pricing-model
with the following weighted average assumptions used for grants in 1995 and
1996 for the Photonics and DTC plans, respectively: dividend yield of 0, 0;
expected volatility of 33%, 136% and 47%, 119%; risk-free interest rates of
6.4 and 6.6 percent; and expected lives of 10 years and 5 to 10 years for
the plan options.
Under the accounting provisions of FASB Statement 123, the Company's net
income (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ -------------
<S> <C> <C>
Net income (loss):
As reported $ 876,000 $ (2,851,000)
============ ============
Pro forma $ 847,000 $ (2,876,000)
============ ============
Primary earnings (loss) per share:
As reported $ 0.18 $ (0.84)
============ ============
Pro forma $ 0.18 $ (0.74)
============ ============
</TABLE>
Employee Stock Option Plan
--------------------------
The Company has a stock option plan (the Plan) that allows for the issuance
of incentive and nonqualified stock options to employee and consultants of
the Company. Options granted under the Plan are generally for periods not
to exceed 10 years and generally must be at prices not less than 100% and
85%, for incentive and non-qualified stock options, respectively, of the
estimated fair value of the stock on the date of grant as determined by the
Board of Directors. Options granted to shareholders who own greater than
10% of the outstanding stock are established at the estimated fair value of
the stock on the date of grant.
(continued)
f-15
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock - continued
-------------------------
A summary of the status of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted-Average
--------------------------------------
Share Exercise Exercise Fair Value Remaining
Options Price Price at Grant Life
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 971,857 $0.71-$7.38 $3.79 8.32 years
Granted 943,441 $0.81-$1.50 $0.85 $0.12
Canceled (1,360,366) $0.71-$7.38 $4.99
----------
Balance at December 31, 1995 554,932 $0.71-$0.84 $0.80 6.28 years
Granted 115,291 $0.16 $0.16 $0.10
Canceled (557,571) $0.16-$4.20 $0.80
----------
Balance at December 31, 1996 112,652 $0.16 $0.16 2.77 years
==========
</TABLE>
There were no options exercisable as of December 31, 1996.
DTC - Nonemployee Director Stock Option Plan
--------------------------------------------
The 1988 Nonemployee Director Stock Option Plan (the Director Plan),
implemented by DTC, provides for the automatic grant of nonqualified
options under specified circumstances to nonemployee directors and
authorizes the issuance of up to 400,000 shares of the Company's common
stock. The per share price of the options granted under the Director's
Plan must be equal to the fair market value of the Company's common stock
on the date of grant. These options generally vest over four years and
expire ten years from the date of grant.
Under the terms of the asset purchase agreement between Photonics and DTC
(Note 2), Photonics assumed each option under the same terms and conditions
set forth in the DTC 1988 Nonemployee Director Stock Option Plan. However,
Photonics did not exchange those options of the nonemployee directors for
Photonics options. Additionally, if those options are canceled or
forfeited and reissued, Photonics is not obligated to issue shares of
Photonics stock for the reissued shares.
A summary of the status of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted-Average
--------------------------------------
Share Exercise Exercise Fair Value Remaining
Options Price Price at Grant Life
-------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1995 138,790 $0.09-$0.25 $0.23 6.79 years
Granted -- -- $ -- $ --
Canceled -- -- $ --
-------
Balance at February 29, 1996 138,790 $0.09-$0.25 $0.23 5.79 years
Granted 2,956 $0.16 $0.16 $0.08
Canceled (122,091) $0.09-$1.69 $1.11
-------
Balance at December 31, 1996 19,655 $0.16-$1.69 $1.41 3.23 years
=======
</TABLE>
(continued)
f-16
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock - continued
-------------------------
The number of options exercisable and their weighted-average exercise
prices at December 31, 1996 was 19,034 at $1.45.
DTC - Employee Stock Option Plan
--------------------------------
DTC has an incentive, nonqualified stock option plan (the Plan), which
provides for the granting of stock options to employees (including officers
and directors) at prices not less than the 100% of the fair market value of
the Company's stock at the grant date. Options generally vest over a four
year period at the rate of 25% after one year and two percent each month
thereafter, and expire in ten years. The Company has reserved 5,000,000
shares of its common stock for issuance under the Plan.
Under the terms of the asset purchase agreement between Photonics and DTC
(Note 2), Photonics assumed each option under the same terms and conditions
set forth in the DTC Employee Stock Option Plan. However, Photonics did
not exchange those options of the nonemployee directors for Photonics
options. Additionally, if those options are canceled or forfeited and
reissued, Photonics is not obligated to issue shares of Photonics stock for
the reissued shares.
A summary of the status of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted-Average
--------------------------------------
Share Exercise Exercise Fair Value Remaining
Options Price Price at Grant Life
---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1995 887,875 $0.25 $0.25 6.42 years
Granted 275,000 $0.16-$0.22 $0.18 $0.04
Canceled (154,535) $0.22-$0.25 $0.25
---------
Balance at February 29, 1996 1,008,340 $0.25 $0.23 6.50 years
Granted 102,308 $0.16 $0.16 $0.08
Canceled (982,205) $0.16-$4.20 $1.54
---------
Balance at December 31, 1996 128,443 $0.16-$1.69 $0.47 2.63 years
=========
</TABLE>
The number of options exercisable and their weighted-average exercise
prices at December 31, 1996 was 85,844 at $0.62.
Shares Savings Plan
-------------------
The Company maintains a Shared Savings Plan (the SSP) covering
substantially all of its U.S. employees. The SSP allows employees to defer
from 2% to 12% of their compensation to the maximum amount permitted by
law. Employee and Company contributions are considered tax
(continued)
f-17
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock - continued
-------------------------
deferred under Section 401(k) of the Internal Revenue Code. Under the
terms of the SSP, the Company will contribute, on a quarterly basis, shares
of its common stock to each employee's account equal in value to 40% of the
employee's contributions, limited, however to $2,000 or 6% of compensation
per calendar year, whichever is less. The Company's contributions vest at
the rate of 25% for each full year of service, as defined, but become 100%
vested upon normal retirement, disability or death. Contributions of the
Company's common stock to the SSP were as follows:
Shares
Contributed Market
to the SSP Value
---------- -------
Year ended February 29, 1996 13,784 $19,000
====== =======
Ten months ended December 31, 1996 2,382 $ 3,000
====== =======
Investment by Broadsino Computer Development Ltd. of Hong Kong
--------------------------------------------------------------
On February 28 ,1995, the Company and Broadsino Computer Development Ltd.
of Hong Kong (Broadsino) consummated an agreement under which DTC
authorized the sale of an aggregate of four million shares of its common
stock (1,600,000 shares held in escrow) for the sum of $1.0 million or
$0.25 per share. As consideration for the sale of its common stock, DTC
received $300,000 in cash, $395,000 in inventory and a 9% note receivable
of $305,000. In fiscal 1996, the note was fully collected and the shares
released from escrow.
A condition of the above agreement required the Chairman, President and
other members of the Company's management to purchase a minimum of
$500,000, up to $1,000,000, of the Company's common stock at $0.25 per
share. As of February 29, 1996, the Chairman and President had invested
$500,000, which is reflected as a capital subscription in the stockholders'
deficiency section of the consolidated balance sheet, however the related
shares were not issued until March of 1996.
8. Major Customers and Export Sales
--------------------------------
The operations of the Company are in one industry segment and include
primarily the design, development, manufacture and sales of controller
boards. The Company's customers consist primarily of original equipment
manufacturers, value-added resellers, value-added distributors, system
integrators and dealers in this industry.
(continued)
f-18
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Major Customers and Export Sales - continued
--------------------------------------------
The Company had the following financial information by geographic regions:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Net revenues
Far East $ 10,000 248,000
Europe 188,000 248,000
North America 4,986,000 $ 10,814,000
------------ ------------
$ 5,184,000 $ 11,310,000
============ ============
</TABLE>
For the ten months ended December 31, 1996, one customer accounted for 13%
of net revenues. For the year ended February 29, 1996, no one customer
accounted for more than 10% of net revenues.
9. Related Party Transactions
--------------------------
A member of the board of Directors and representative of Broadsino (Note 7)
is President of the Company's prime subcontractor for the production of the
Company's storage controllers, which meets approximately 70% of the
Company's requirements. For the ten months ended December 31, 1996 and for
the year ended February 29, 1996, the Company purchased approximately
$1,717,000 and $7,081,000 from this prime subcontractor, respectively. At
December 31, 1996 and February 29, 1996, amounts due to this subcontractor
were approximately $1,009,000 and $459,000, respectively.
In connection with the signing of the DTC Taiwan agreement (Note 2), DTC
agreed to place purchase orders to DTC Taiwan for all major product sales
and choose DTC Taiwan as the favored manufacturer for needed products for
sale for a minimum of twelve months. The Company has not assigned any
value to the contract. The Company purchased approximately $42,000 and
$332,000 of products from DTC Taiwan during the ten months ended December
31, 1996 and for the year ended February 29, 1996, respectively. At
December 31, 1996 and February 29, 1996, the Company owed approximately
$85,000 and $32,000, respectively, to DTC Taiwan for its purchases.
(continued)
f-19
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Related Party Transactions
--------------------------
Notes Payable
-------------
During 1996, the Company entered into debt agreements with shareholders for
approximately $602,000. A summary of these debt agreements follows:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ -------------
<S> <C> <C>
Bridge Loan to Shareholder at the rate of 10%; due on demand; convertible to preferred stock $150,000 --
Bridge Loan to Shareholder at the rate of 10%; due on demand; convertible to preferred stock 150,000 --
Bridge Loan to Shareholder at the rate of 12%; due on demand after March 1997;
convertible to preferred stock 100,000 --
Bridge Loan to Shareholder at the rate of 12%; due on demand; convertible to preferred stock 202,000 --
-------- -------
$602,000 --
======== =======
</TABLE>
The Company also entered into an agreement with CMC California, Inc. (CMC),
a company owned by a major shareholder and Chairman of the Board of
Directors where CMC assumed and paid specific vendor invoices of the
related party who is the Company's prime subcontractor. This note payable
bears interest at 12%, balance due on demand. At December 31, 1996, the
Company owed approximately $391,000 to CMC.
10. Accrued Expenses
----------------
A summary of accrued expenses follows:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Accrued allowances for sales to distributors $326,000 213,000
Accrued legal and accounting fees 299,000 577,000
Accrued payroll and related expenses 242,000 249,000
Other accrued expenses 57,000 152,000
Accrued valuation allowances -- 1,101,000
-------- ----------
$924,000 $2,292,000
======== ==========
</TABLE>
f-20
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Litigation
----------
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consulting with legal
counsel, these matters will be resolved without material adverse effect on
the Company's financial position, results of operations or cash flows.
12. Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company places its cash and cash
equivalents with high quality financial institutions and, by policy, limits
the amounts of credit exposure to any one financial institution.
A significant portion of the Company's accounts receivable are derived from
one major class of customer (distributors) with the remainder spread across
many other customers in various electronic industries. The Company
believes any risk of accounting loss is significantly reduced due to
provision being made at the date of the sale for returns and allowances,
diversity of its products, end-customers, geographic sales areas and
insurance on foreign distributor sales. The Company performs credit
evaluations of its customers' financial condition whenever necessary. The
Company generally does not require cash collateral or other security to
support customer receivables.
13. Statements of Cash Flows
------------------------
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Cash paid for interest $ 43,000 268,000
======== =========
Cash paid for income taxes $ 2,000 3,000
======== =========
Noncash investing and financing activities:
Issuance of common stock in payment of note payable $ -- 1,700,000
======== =========
Issue common stock subscribed $600,000 --
======== =========
Acquisition of DTC by Photonics $214,000 --
======== =========
Write-off of fully depreciated assets $931,000 --
======== =========
</TABLE>
f-21
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Adjustments to Valuation Allowances
-----------------------------------
Litigation
----------
In 1993, the Company's subsidiary in the United Kingdom (UK) initiated
voluntary liquidation proceedings. Subsequently, the court-appointed
trustee for the creditors asserted a claim against the Company of
approximately $800,000, which was recorded in the Company's results of
operations and accrued expenses. On December 13, 1995 the Company settled
the claims asserted by the creditors of its liquidated UK subsidiary for
approximately $80,000, payable in eight monthly installments. During the
ten months ended December 31, 1996, the Company paid in full its
settlement claim, receiving a release from the creditors, and recognized a
gain on the settlement of the aforementioned liquidation preceding of
approximately $730,000 which is included in other income in the
consolidated financial statements.
Tax Claims
----------
On July 8, 1994, DTC entered into an agreement with DTC Taiwan, and Compac
for the disposition of DTC's interest in DTC Taiwan (this agreement is
more fully discussed in Note 2). As a result of the disposition of DTC's
interest in DTC Taiwan, the taxing authority of the Republic of Taiwan
asserted a claim against DTC for approximately $1,800,000, which the
Company made provision for.
As part of the acquisition by Photonics (Note 2), on May 13, 1996, DTC gave
notice to all creditors of DTC's dissolution. All creditors with claims
against DTC were required, in the notice, to present their claims by July
12, 1996. As of December 31, 1996, no claim(s) had been made by the
Republic of Taiwan.
In the Photonics acquisition of DTC, Photonics assumed all liabilities of
DTC, except for certain liabilities/claims of DTC arising from the
disposition of DTC Taiwan. As the acquisition of DTC by Photonics has been
treated as a purchase for accounting purposes, the Company recorded income
of approximately $1,800,000 for the relief of debt/valuation allowance,
which is included in other income, associated with the acquisition of
certain liabilities.
Tax Refund
----------
In 1991, DTC received a $371,000 payroll tax refund associated with one of
its subsidiaries. As DTC was uncertain as to the nature of the refund, it
recorded the receipt of cash as a liability and pursued investigating the
matter. Under Section 6532 of the Internal Revenue
(continued)
f-22
<PAGE>
PHOTONICS CORPORATION
(D/B/A DTC DATA TECHNOLOGY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Adjustments to Valuation Allowances - continued
-----------------------------------------------
Code, any claim for an "Erroneous Refund" must be presented by the Internal
Revenue Service within two years of preparation. The statute of
limitations on the tax refund has lapsed, and accordingly, the Company
recorded a $371,000 relief of debt/valuation allowance, which is included
in other income in the accompanying consolidated financial statements.
15. Subsequent Events
-----------------
In December 1996, the Company entered into a Private Placement Memorandum
(PPM) for the Sale of up to 3,600,000 shares of Series A Convertible
Preferred Stock, at $1.00 per share, with minimum lots being 25,000 shares.
The Series A Convertible Preferred Stock will be convertible into common
stock on a 1 for 1 basis, carry a provision for a 10% cumulative dividend,
with dividends in arrears greater than 12 months due being payable in the
form of common stock and will also have a liquidation preference and voting
rights. As of March 27, 1997, the Company has raised $128,000 from
officers under the PPM agreement.
f-23
<PAGE>
EXHIBIT INDEX
Exhibit Number Item
- -------------- ----
11 Computation of Earnings per Share
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1996 1996
------------ ------------
<S> <C> <C>
Weighted Average shares outstanding
common stock 4,323,083 2,727,046
Dilutive effect common stock options 199,356 165,618
Weighted average common and common
share equivalents 4,522,439 2,882,659
Net Income $ 876,000 $(2,581,000)
---------- -----------
Net income per common share equivalent $ 0.19 $ (.89)
---------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 10-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 FEB-29-1996
<PERIOD-START> MAR-01-1996 MAR-01-1995
<PERIOD-END> DEC-31-1996 FEB-29-1996
<CASH> 104,000 145,000
<SECURITIES> 0 0
<RECEIVABLES> 1,269,000 1,732,000
<ALLOWANCES> 420,000 254,000
<INVENTORY> 950,000 694,000
<CURRENT-ASSETS> 1,987,000 2,396,000
<PP&E> 2,683,000 2,739,000
<DEPRECIATION> 2,571,000 2,702,000
<TOTAL-ASSETS> 2,113,000 2,433,000
<CURRENT-LIABILITIES> 4,437,000 5,278,000
<BONDS> 0 0
0 0
0 0
<COMMON> 44,075,000 42,632,000
<OTHER-SE> (46,524,000) (47,402,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,113,000 2,433,000
<SALES> 5,184,000 11,310,000
<TOTAL-REVENUES> 5,184,000 11,310,000
<CGS> 0 0
<TOTAL-COSTS> 4,099,000 10,213,000
<OTHER-EXPENSES> 3,017,000 4,083,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 97,000 235,000
<INCOME-PRETAX> (2,024,000) (2,850,000)
<INCOME-TAX> 1,000 1,000
<INCOME-CONTINUING> (2,025,000) (2,851,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,901,000 0
<CHANGES> 0 0
<NET-INCOME> 876,000 (2,581,000)
<EPS-PRIMARY> .18 (.84)
<EPS-DILUTED> .19 (.89)
</TABLE>
