<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[_] TRANSITION REPORT UNDER 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
(State or other jurisdiction of incorporation or organization)
77-0102343
(I.R.S. Employer Identification Number)
1515 CENTRE POINTE DRIVE
MILPITAS, CA 95035
(Address of principal executive offices)
Registrant's telephone number, including area code:
(408) 942-4000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [_]
The number of share outstanding of each of the issuer's classes of common stock,
as of the latest practicable date:
COMMON STOCK, $0.001 PAR VALUE
(Class)
4,328,970
(Outstanding at April 16, 1997)
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
dba
DTC DATA TECHNOLOGY
For the quarter ended March 31, 1997
INDEX
Page Number
-----------
INTRODUCTION PHOTONICS CORPORATION
Introduction 2
The Market 2
The Competition 2
The Strategy 3
Products 3
Intellectual Property 4
Employees 4
Sales, Distribution and Customer Service 4
Research & Development 5
Manufacturing 5
Current Developments 5
Private Financing 6
PART I FINANCIAL INFORMATION 7
ITEM 1 Consolidated Interim Financial Statements
Consolidated Balance Sheet as of March 31, 1996 and
December 31, 1996 8
Consolidated Statements of Operation for the Three
months ended March 31, 1997 and March 31, 1996 9
Consolidated Statement of Cash Flows 10
Notes to Consolidated Financial Statements 11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 14
ITEM 2 Changes in Securities 15
ITEM 3 Defaults Upon Senior Securities 15
ITEM 4 Submission of Matters of a Vote of Security Holders 15
ITEM 5 Other Information 15
ITEM 6 Exhibits and Reports on Form 8-K 15
1
<PAGE>
PHOTONICS CORPORATION
Form 10-QSB
INTRODUCTION
This report contains forward-looking statements and the Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of numerous factors, including those set forth below and
elsewhere in this report. The industry in which the Company competes is
characterized by extreme rapid changes in technology and frequent new product
introductions. The company believes that its long term growth will depend
largely on its ability to continue to enhance existing products and to introduce
new products and features that meet the continually changing requirements of
customers. While the Company has invested in new products and processes and
feels confident that it can keep abreast of current technology trends, there can
be no assurance that it can continue to introduce new products and features on a
timely basis or that certain of its products and processes will not be rendered
noncompetitive or obsolete by its competitors.
THE MARKET
DTC dominated the Integrated Device Electronics("IDE") and Enhanced IDE ("EIDE")
controller card market in 1994-1995. During that period DTC developed
comprehensive distribution channels with established name and trademark
recognition. 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 , Enhanced Parallel Port ("EEP") 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 Small Computer System Interface ("SCSI"), developed in the late 1970s, is a
standard by which computers and their peripherals could interface intelligently.
Having the image of high performance, higher connectivity, and the ability of
connecting external peripherals, SCSI controllers have become the controller of
preference for high end personal computers, workstations, and file servers.
The SCSI host adapter (controller) market has been growing about 40% to 50% per
year for the past 5 years to over $1 billion in 1996. The SCSI controller market
is dominated by Adaptec with over 70% of the market, and many other small SCSI
vendors (less than $50 million in SCSI controller sales). All SCSI controller,
though all conforming to and IEEE standard, are vendor unique and are not
compatible with one another and with the de facto standard of Adaptec. SCSI
represents approximately 80% of Adaptec revenues and Adaptec enjoys a 60% gross
margin.
The compatibility issue presents a significant disadvantage for small SCSI
controller vendors. Consequently other SCSI vendors (including DTC) have not
been able to obtain a meaningful market share even at significantly lower price
and margin.
THE COMPETITION
Due to the decline of the market, most of the IDE controller vendors have
dropped out of that business segment. 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
2
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
Company has broader sales channels, 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(as discussed above) that should offer a superior alternative to
Adaptec and other competitors. Besides DTC, which currently markets a family on
non-Adaptec compatible SCSI products, and Adaptec, the current other suppliers
of SCSI products are: Always, DPT, AdvanSys, CMD, Forex, Initio, LDP, Myles,
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. All of them market purportedly technically superior by non-Adaptec
compatible products at a lower price than Adaptec without achieving significant
success.
THE STRATEGY
The company's strategy is to develop a family of Adaptec compatible SCSI
controller cards with a superior value to the market's current offerings. DTC
has been in the SCSI market since 1990 and has, in the past, developed several
high performance (non-Adaptec compatible) SCSI products. These products, as with
the products of the Other Competitors, have not gained general market
acceptance. There can be no assurances that general market acceptance an be
attained with DTC's proposed Adaptec compatible products, but the Company feels
strongly that there is a significant market segment for a cost effective
compatible product.
The Company plans to broaden its product offering in the IDE I/O market segment
to reverse the decline in sales and restore the Company to profitability ISA-IDE
and VL-IDE I/O 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 will, during the second half of this year, introduce
several new serial, parallel port I/O products for the upgrade market.
During the last fiscal year, the Company decided to re-enter the SCSI market,
and Adaptec compatible SCSI products in particular. 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. This project is in progress and, though the Company intends to
continue to market IDE I/O products as long as the market exists, it is the
Company's intention to base (but not limit) its future growth on this new line
of SCSI controller cards. The Company will continue to monitor technology trends
closely and plans to stay apace or ahead of new technology offerings.
PRODUCTS
The Company will continue to market its IDE and I/O product cards as long as
there is a market for these products. During the quarter ending March 31, 1997
the Company started marketing a low end Adaptec compatible ISA-SCSI product
based on its proprietary DTC50C18 chip. This low-end product is intended to be
marketed to Original Equipment Manufacturers ("OEM") and Value Added Retailers
("VAR") who could "bundle" such a controller card with their SCSI peripherals
such as scanner or CD-ROMs. This low end market, which represents 10% to 20% of
the overall SCSI market, commands low prices and is much more cost competitive
than the high end market. The Company believes it can be cost competitive and
generate a profit with these low end products. As the Company's sales and
marketing strategy was not fully implemented until the end of March and into
April of 1997, the financial results cannot be reflected in the quarter ending
March 31, 1997.
The Company is committed to continuous product improvement and innovation which
the Company believes is necessary for greater market penetration of its
products.
3
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PHOTONICS CORPORATION
FORM 10-QSB
INTELLECTUAL PROPERTY
The Company has studied the intellectual property issues (and performed patent
searches) related to the SCSI products which it intends to market and is unaware
of any patents or intellectual property owned by any other party which would
impede the development or sale of its current or proposed line of Adaptec
compatible SCSI products. However, there can be no absolute assurances that such
legal challenges will not happen.
Software is an important ingredient for success in the controller market. DTC
has a large library of copyrighted IDE and SCSI software drivers and utilities
for various operating systems including DOS, OS/2, UNIX, Novell, Windows 3.1,
and Windows 95. DTC, having designed several SCSI and IDE ASIC's, recently
acquired the design right to the ASIC used in its low end DTC50C18 ISA-SCSI
product, 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. While there have been no legal challenges in the part, there can
be absolute assurances that there will be none in the future.
EMPLOYEES
As of March 31, 1997 DTC employed 21 individuals on a full time basis, 20 of
which were located in the United States and 1 in Hong Kong. Of such employees 5
were engaged in manufacturing and related operations, 5 in development and
engineering, 5 in sales and marketing, and 6 in general management and
administration. This work force was augmented periodically by the employment of
consultants and temporary agency employees. None of DTC's employees are
represented by a labor union and DTC considers its employee its employee
relations to be good.
During the quarter ending March 31, 1997 the Company employed a new Vice
President of Sales and Marketing who has extensive experience in the sales
channels used by the Company. While the Company intends to continue to use its
most effective independent sales representatives, it has employed some highly
experiences territory sales managers to manage, strengthen, and expand the sales
channels.
SALES, DISTRIBUTION AND CUSTOMER SERVICE
The Company currently sells its products through domestic and international
independent distributors, computer retailers and OEMs. In the United States and
Canada, the Company sells to most of the top national distributors in the
computer industry including Ingram Micro, Merisel, Tech Data, Southern
Electronics Corporation and D & H Distributing who in turn distribute the
Company's products to retailers, OEMs and VARs. The Company's current sales
strategy is to increase its sales to OEM's, VARs and retailers.
The Company's customer service and technical support organization is located in
Milpitas, California and provides customers with software driver updates,
upgrade programs and warranty service. The technical support personnel assist
end users and distributors via telephone, fax-back facsimile services, a 24 hour
bulletin board service and an Internet Web site (WWW.datatechnology.com).
As is common practice in the personal computer industry, the Company frequently
grants distributors limited rights to return unsold inventories of the Company's
products in exchange for new purchases, as well as price protection and
marketing development funds. While the Company reserves funds each month to
cover these programs, there can be no absolute
4
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
assurances that the Company's current allowances will be sufficient to not have
a material adverse effect on future operating results.
RESEARCH AND DEVELOPMENT
The Company believes that continued investment in research and development is
critical to successful new product introductions, which address market needs, on
a timely and cost effective basis. DTC's knowledge and expertise in SCSI
predates the founding of Adaptec and the Company has completed similar SCSI
projects in the past.
The Company has completed the development of its low end Adaptec compatible
ISA-SCSI line of products and the official product launch is taking place early
in the second quarter of 1997. For the high end PCI-SCSI product family, the
Company has completed the architectural and product specification for the
Application Specific Integrated Circuit ("ASIC") and has contracted with an
outside engineering firm for the design of the ASIC under the supervision of the
Company's engineers This will allow the Company to focus on its own SCSI
expertise and leverage the ASIC knowledge of the contracted design firm thereby
reducing the cost and time to market.
MANUFACTURING
Over the years the Company has developed business relationships with various
contract board manufacturers in the Far East which currently supply DTC with
highly cost competitive finished product. It is the Company's intention to
continue utilizing these sources of production. Not having to invest in capital
equipment and/or purchase sizable raw material inventories and being able to
take advantage of the lower cost of labor and overhead utilized by such contract
manufacturers, the Company believes that it will be able to conserve its cash
position, allow the Company greater operational flexibility and keep the Company
focused on its areas of expertise. There can, however, be no absolute assurance
that these manufacturing sources will remain available to DTC.
At the present time approximately 70% of the Company's storage controller
requirements are provided by manufacturing facilities operated by Broadsino
Computer Development, Ltd. Of Hong Kong. Broadsino is the beneficial owner of
591,412 shares of the Company's common stock and 300,000 shares of the Company's
Preferred A stock to be issued in May 1997.
CURRENT DEVELOPMENTS
The company has completed the development of a family of low end compatible
Adaptec ISA-SCSI controller cards based on its proprietary DTC50C18 chip. The
products have been released to manufacturing and the product will be launched
nationally during May of 1997. Management believes that the introduction of the
Adaptec compatible product line paves the way for the future introduction of the
high end line of PCI-SCSI products as discussed above.
The Company has made significant personnel changes during this quarter. A former
Chief Financial Officer of the Company, JoAn E. Hughes, was rehired as Chief
Financial Officer on February 24, 1997. Michael Del Vecchio was hired as the
Vice President of Sales and Marketing on February 10, 1997. They were both
confirmed as Officers of the Corporation by the Board of Directors at its
regularly scheduled board meeting on April 28, 1997.
The Vice President has hired two Territory Sales Managers. One is based on the
east coast to cover all territory east of the Mississippi plus Central and Latin
America. One is based in the mid-west to cover all territory west of the
Mississippi plus Canada.
5
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
The Company was able to enhance its working capital position during the quarter
as is explained below under Private Financing.
PRIVATE FINANCING
The Company had previously reported it was in negotiations with an investment
banker to raise funds in a private placement that would consist of the Company's
Series A Convertible Preferred Stock ("Preferred Stock"). The offering was to be
made on a "best efforts, all or none" basis. The negotiations with that
particular investment banker did not result in any private placement. The
Company was, however, successful in raising over Two Million Dollars based upon
its own efforts. Preferred Stock is in the process of being issued. The
Preferred Stock, as was previously stated, 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, 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, combinations or the like) for twenty consecutive trading days and the
Company has a currently effective registration statement on file with the
Securities and Exchange Commission covering the underlying Common Stock to be
issued upon conversion. At the time of its sale, the Preferred Stock, and Common
Stock issuable upon conversion thereof, is not 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 targeted only sophisticated investors who meet the
edification of accredited investor as set forth in Rule 501 of Regulation D
under the Act.
As part of the Company's capital subscription receipts, $592,855 in debt was
converted to equity.
There were several related party transactions in the course of the capital
subscription offering. Preferred A Stock, as described above, will be issued to
related parties as per the following table.
NAME RELATIONSHIP NUMBER OF SHARES
---- ------------ ----------------
David S. Lee Chairman of the Board 544,407
James T. Koo President and CEO 245,641
Broadsino Development
c/o K.C. Yeung Director 300,000
Robert Dilworth Director 11,500
6
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PART 1 FINANCIAL INFORMATION
The condensed consolidated interim financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated interim financial
statements be read in conjunction with the consolidated financial statement and
the notes thereto included in the Company Annual Report on Form 10-KSB/A for the
year ended December 31, 1996.
The accompanying consolidated interim financial statements have been prepared,
in all material respects, in conformity with the standards of accounting
measurements set forth in Accounting Principles Board Opinion No. 28 and
reflect, in the opinion of management, all adjustments, which are of a normal
recurring nature, necessary to summarize fairly the financial position and
results of operations for such periods The results of operations for such
interim periods are not necessarily indicative of the results to be expected for
the full year.
7
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
Consolidated Balance Sheet
(amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(unaudited) (audited)
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 141 $ 104
Accounts Receivable, net 630 849
Inventories, net 672 950
Prepaid expenses and other current assets 682 84
-------- --------
Total current assets 2,125 1,987
Furniture and equipment, net 97 112
Other Assets 14 14
-------- --------
Total Assets $ 2,236 $ 2,113
-------- --------
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Due to Related Parties 925 2,130
Accounts payable 1,219 1,309
Accrued liabilities 851 998
Total current liabilities 2,995 4,437
Long term liabilities 0 0
Deferred Taxes 0 0
Total Liabilities 2,995 4,437
Minority interest in subsidiaries 125 125
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock 44,108 44,075
Treasury stock 0 0
Capital subscription 2,093 26
Accumulated deficit 47,239 46,704
Cumulative translation adjustment 154 154
-------- --------
Total shareholders' equity (deficiency) (759) (2,449)
-------- --------
Total liabilities and shareholders' equity $ 2,236 $ 2,113
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
8
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
Consolidated Statements of Operations
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
REVENUES:
Net Product Sales $ 1,241 $ 2,497
Cost of Revenues 947 1,887
----------- -----------
Gross Profit 294 610
OPERATING EXPENSES:
Research and development 186 160
Selling, general and administration 601 837
----------- -----------
Total operating expense 787 997
Income (loss) from operations (493) (387)
OTHER INCOME (EXPENSE):
Interest income 0 0
Interest expense (21) (8)
Other Income 40 0
Other expense 0 0
Total other income (expense) 19 (8)
Provision for taxes 61 0
Net income (loss) $ (535) $ (379)
Net income (loss) per share (0.08) (.11)
=========== ===========
Shares used in per share calculation 6,615,709 3,454,822
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
9
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
Consolidated Statement of Cash Flows
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
1997 1996
--------- ---------
(unaudited)(unaudited)
<S> <C> <C>
Cash flows from Operating activities:
Net income (loss) $ (535) $ (379)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 53 12
Changes in operating assets and liabilities:
Accounts Receivable 219 (9)
Inventories 278 63
Deposits and prepaid expenses (598) (63)
Accounts payable (172) (972)
Due to Related Parties (1,123) 0
Accrued Liabilities (73) 271
Net Cash Provided by (used for) Operations $ (1,951) $ (1,077)
======== ========
Cash flows from Investing Activities:
Sale (Purchase) of Property and Equipment (38) (177)
Net Cash used in Investing Activities $ (38) $ (177)
======== ========
Cash Flows from Financing Activities:
Proceeds from Capital Stock Subscription 2,067 100
Proceeds resulting from the DTC acquisition 0 1,372
Net Borrowings (Repayments) under Bank Lines (44) (27)
Borrowing (repayments of other debt), net (30) 0
Other Equity Transactions, net 33 0
Net Cash provided by (used for) Financing $ 2,026 $ 1,445
======== ========
Net increase (decr.) in Cash and Cash Equivalents 37 191
Cash and Cash Equivalents Beginning of Period 104 31
Cash and Cash Equivalents at end of period $ 141 $ 222
======== ========
</TABLE>
10
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
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 trans- actions. The minority intere st represents
the minority stockholders' proportionate share of the subsidiaries, Qume
Taiwan and Data Technology Hong Kong Let., which was 0.6% and 1%,
respectively.
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' equity.
Cash Equivalents
----------------
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
2. EARNINGS (LOSS) PER SHARE
Net income (loss) per common share is computed using the weighted average
number of common and dilutive common equivalent share outstanding for each
accounting period. Common equivalent shares, principally stock options, are
included in the per share calculation when the effect of their inclusion
would be dilutive. For the period ending March 31, 1997, the dilutive value
of The Company's Series A Convertible Preferred Stock ("Preferred Stock")
was included in the loss per share calculation. The value of the Preferred
Stock is represented in the equity section under Capital Subscription.
3. INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value (net realizable value), and include material, labor
and attributable overhead.
Inventories consist of the following:
March 31, 1997 December 31, 1996
(unaudited) (audited)
-------------- -----------------
Raw Materials and Purchased Parts $ 94 $ 118
Work-in-process 220 357
Finished Goods 358 475
-------------- --------------
$ 672 $ 950
============== ==============
4. PROPERTY, PLANT, AND EQUIPMENT
Property and equipment are stated at cost and, other than leasehold
improvements, are depreciated on a straight-line basis over their useful
lives. Leasehold improvements are amortized on a straight line basis over
the lesser of their useful life or remaining term of the related lease.
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PHOTONICS CORPORATION
FORM 10-QSB
Property and equipment consisted of the following (in thousands):
March 31, 1997 December 31, 1996
(unaudited) (audited)
----------- ---------
Machinery and Equipment $2,350 $2,312
Furniture and Fixtures 277 277
Leasehold Improvements 94 94
------ ------
$2,721 $2,683
Less Accumulated depreciation and amortization $2,625 $2,571
------ ------
$ 96 $ 112
====== ======
12
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PHOTONICS CORPORATION
FORM 10-QSB
ITEM 2 MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 10-K and 1996 10-KSB contain detailed risk factors that
may contribute to the actual results in future periods which could materially
differ from forward-looking statements made by the Company.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Financial
Statements and the related notes thereto included in this report. The following
discussion contains forward-looking statements and the Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of numerous factors, including those set forth in the
following discussion and elsewhere in this report.
Net revenues for the current quarter total $1.247 million, a decrease of 50%
from the $2.497 million reported during the first quarter of 1996. The decline
in revenues can be attributed to a shortage in working capital which slowed the
delivery of backlogged product and the transition period between the outgoing
sales team and the incoming team.
The gross margin in the first quarter of fiscal 1997 was approximately 23% which
was not a significant change from the first quarter of fiscal 1996.
Product development expenses were approximately $186 thousand or 14% of net
revenues during the current quarter compared to approximately $160 thousand or
6% of next revenues during the first quarter of 1996. The increase is
attributable to the Company's commitment to the enhancement of the product lines
The Company expects to make some significant expenditures during the year of
1997 to develop its high end SCSI line.
Selling, general and administrative expenses were approximately $601 thousand or
48% of new revenues during the first quarter of 1997 compared to $837 thousand
or 33% of net revenues reported in the first quarter of 1996. Selling costs were
generally higher as a percent of revenues, but also the additional costs of
legal and accounting professional fees connected with the private placement of
the Company's Preferred A Stock are reflected in the increased cost. The Company
has taken steps to contain on going costs and expects a decline the percentage
of costs to revenue over the second half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $141 thousand at March 31, 1997 from $104
thousand at December 31, 1996. This increase was due primarily from invested
capital. The elimination of the expense of factoring the Company's accounts
receivable and the renewed focus on the in-house collection of receivables was
also helpful.
The Company had an agreement with National Business Finance, Inc. of Denver,
Colorado ("NBFI") that allowed the Company to factor receivables acceptable to
NBFI. The costs 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
approximately $44 thousand. Subsequent to the December 31, 1996 year end, the
Company decided it could more efficiently collect it's own receivables at less
cost and terminated the agreement with NBFI. The was no balance owing to NBFI on
March 31, 1997.
13
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PHOTONICS CORPORATION
FORM 10-QSB
As of December 31, 1996 the Company had received funds totaling $600,000 which
represented subscriptions for the Series A Convertible Preferred Stock offered
in a private placement memorandum. The Company had issued interest bearing notes
secured by a lien on general assets of the Company. Subsequent to the December
31, 1996 year end closing, the Company received additional subscriptions plus
agreements to convert Debt to Equity. At the close of the period ending March
31, 1997 the Company had received additional cash, converted the existing notes
to equity and converted debt to equity. Please note the increase in the capital
subscription account listed on the Balance Sheet on page 8. Further discussion
of the issuance of Preferred Stock is also to be noted on pages 5 and 6 under
the caption "Private Financing"
Management of The Company feel that with the increased capitalization and the
redirection of the Sales Efforts, the financial condition of the company should
significantly improve over the second half of 1997.
There are no letters of credit, financing arrangements, indentures or other such
credit agreements with restrictive covenants that will effect the Company.
Inflation did not have any significant impact upon the results of operations of
the Company during the reporting period.
PART II OTHER INFORMATION
ITEM 1 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 of DTC and certain of its employees and claiming damages in the
amount of $100 million. The suit 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 installments of $4,350 each will be paid in June and September of 1997.
The Company believes it is diligent in protecting its employees and fair in its
treatment of them. The Company consistently denied the accusation made but
settled out of court to bring an end to the process.
From time-to-time DTC could be 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 2 CHANGES IN SECURITIES
As discussed under Private Financing on page 5 the Company is issuing 2,093,270
share of its Series A Convertible Preferred Stock in response to the
subscriptions received during its private placement offering.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company intends to call a Shareholders Meeting to take place on June 2, 1997
at the Corporate Office located at 1515 Centre Pointe Drive, Milpitas,
California at 10:00 a.m. The
14
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
Shareholders will be asked to vote on three proposals and any other matters that
may properly come before the meeting.
The Proposal are:
1. To reelect the members of the current Board of Directors to another term.
The nominees are: Robert P. Dilworth, Gary N. Hughes, James T. Koo, David
S. Lee and K.C. Yeung
2. To approve the Photonics Corporation dba DTC Data Technology 1997 stock
option plan and reserve 700,000 shares of common stock for issuance
thereunder.
3. To ratify the selection of Meredith, Cardozo & Lanz LLP as the Company's
independent accountants for fiscal 1997.
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
EX 27 Financial Data Schedule
15
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
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
DATE: May 14, 1997 BY: /s/ JoAn E. Hughes
- --------------------- ---------------------------
JoAn E. Hughes
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Balance Sheet data compares to year end 12-31-96
Income Statement compares Mar. 31, 1997 to Mar. 31, 1996
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 10-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 MAR-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 141,000 104,000
<SECURITIES> 0 0
<RECEIVABLES> 1,008,000 1,269,000
<ALLOWANCES> (378,000) 420,000
<INVENTORY> 1,848,000 950,000
<CURRENT-ASSETS> (1,176,000) 1,987,000
<PP&E> 3,652,000 2,683,000
<DEPRECIATION> 3,652,000 2,571,000
<TOTAL-ASSETS> 3,555,000 2,113,000
<CURRENT-LIABILITIES> 2,995,000 4,437,000
<BONDS> 0 0
2,093,270 0
0 0
<COMMON> 4,522,439 44,075,000
<OTHER-SE> 0 (46,524,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,236,000 2,113,000
<SALES> 1,241,000 5,184,000
<TOTAL-REVENUES> 1,241,000 5,184,000
<CGS> 947,000 0
<TOTAL-COSTS> 0 4,099,000
<OTHER-EXPENSES> 787,000 3,017,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,000 97,000
<INCOME-PRETAX> (474,000) (2,024,000)
<INCOME-TAX> 61,000 1,000
<INCOME-CONTINUING> 0 (2,025,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 2,901,000
<CHANGES> 0 0
<NET-INCOME> (535,000) 876,000
<EPS-PRIMARY> 0 .18
<EPS-DILUTED> (.08) .19
</TABLE>
