<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 JUNE 30, 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 shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
COMMON STOCK, $0.001 PAR VALUE
(Class)
4,436,405
(outstanding at July 28, 1997)
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
DBA
DTC DATA TECHNOLOGY
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Page Number
-----------
INTRODUCTION PHOTONICS CORPORATION
Introduction 2
General 2
The Market 2
The Competition 3
The Strategy 3
Products 4
Intellectual Property 4
Employees 5
Sales, Distribution and Customer Service 5
Research & Development 5
Manufacturing 5
Current Developments 6
PART I FINANCIAL INFORMATION 7
ITEM 1 Consolidated Interim Financial Statements
Consolidated Balance Sheet as of June 30, 1997 and
December 31, 1996 8
Consolidated Statements of Operations for the Three months
and six months ending June 30, 1997 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 14
ITEM 3 Defaults Upon Senior Securities 15
ITEM 4 Submission of Matters to 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.
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. Photonics entered into a
purchase agreement with DTC, which was effective March 5, 1996. In the
Agreement, Photonics acquired assets and liabilities 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
the operation of Photonics Corporation 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 Company caused a fictitious name
statement to be recorded with the state of California on June 11, 1996, and as
the reported history belongs to DTC Data Technology 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.
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.
The Company's sales also have
2
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PHOTONICS CORPORATION
FORM 10-QSB
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
controllers, though all conforming to an 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 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 has previously reported its plans to offer a
family of Adaptec compatible SCSI products that would 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. All of them market
purportedly technically superior but non-Adaptec compatible products at a lower
price than Adaptec without achieving significant success.
In May of 1997 the Company introduced its first two Adaptec compatible low-end
SCSI products. These products appear to be well received in the market place. As
they have been on the market less than six weeks, it is too soon to claim total
success.
THE STRATEGY
The Company's strategy is to develop a complete 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
can be attained with DTC's current and 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
3
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
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 has introduced
its low-end Adaptec compatible SCSI product and 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 half-year ending June 30, 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. The Company is also selling its
low-end Adaptec compatible SCSI product into the distribution channels. As the
Company's sales and marketing strategy is still in the process of
implementation, the financial results will not be fully reflected until later in
1997.
The Company is committed to continuous product improvement and innovation, which
the Company believes is necessary for greater market penetration of its
products.
INTELLECTUAL PROPERTY
The Company has studied the intellectual property issues (and performed patent
searches) related to the SCSI products which it intends to market and is unaware
of any patents or intellectual property owned by any other party which would
impede the development or sale of its 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 past, there
can be absolute assurances that there will be none in the future.
EMPLOYEES
As of June 30, 1997 DTC employed 24 individuals on a full time basis, 23 of
which were located in the United States and 1 in Hong Kong. Of such employees
5 were engaged in manufacturing
4
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
and related operations, 5 in development and engineering, 7 in sales and
marketing, and 7 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 relations to be good.
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 what it deems to be
adequate funds each month to cover these programs, there can be no absolute
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 has taken place. 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.
5
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
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. (See beneficial ownership listing in Part ll, item 2, page
14)
CURRENT DEVELOPMENTS
As herein explained, 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
was 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 called a Shareholder's Meeting which took place on June 2, 1997 at
the Corporate Office located at 1515 Centre Pointe Drive, Milpitas, California
at 10:00 a.m. Please refer to Part II, item 4, page 14 for details.
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's Annual Report on Form 10-KSB 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
<TABLE>
<CAPTION>
PHOTONICS CORPORATION
Consolidated Balance Sheet
(amounts in thousands)
June 30, December 31,
1997 1996
(unaudited) (audited)
----------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 179 $ 104
Accounts Receivable, net 714 849
Inventories, net 793 950
Prepaid expenses and other current assets 405 84
-------- --------
Total current assets 2,091 1,987
Furniture and equipment, net 108 112
Other Assets 14 14
-------- --------
Total Assets $ 2,213 $ 2,113
-------- --------
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Due to Related Parties 1,252 2,130
Accounts payable 1,134 1,309
Accrued liabilities 746 998
-------- --------
Total current liabilities 3,132 4,437
Long term liabilities 0 0
Deferred Taxes 0 0
-------- --------
Total Liabilities 3,132 4,437
SHAREHOLDERS' EQUITY (DEFICIENCY):
Minority interest in subsidiaries 125 125
Common stock 44,113 44,075
Treasury stock 0 0
Capital subscription 2,088 26
Accumulated deficit (47,399) (46,704)
Cumulative translation adjustment 154 154
-------- --------
Total shareholders' equity (deficiency) (919) (2,324)
-------- --------
Total liabilities and shareholders' equity $ 2,213 $ 2,113
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
8
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
<TABLE>
<CAPTION>
PHOTONICS CORPORATION
Consolidated Statements of Operations
(amounts in thousands, except per share data)
Three months ended June 30 Six months ended June 30
1997 1996 1997 1996
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Net Product Sales $ 1,229 $ 1,728 $ 2,470 $ 4,225
Cost of Revenues 799 1,307 1,746 3,194
---------- --------- -------- --------
Gross Profit 430 421 724 1,031
OPERATING EXPENSES:
Research and development 110 250 233 344
Selling, general and admin. 597 660 1,268 1,563
---------- --------- -------- --------
Total operating expense 707 910 1,501 1,907
Income (loss) from operations (277) (489) (777) (876)
OTHER INCOME (EXPENSE):
Interest income 0 0 0 0
Interest expense (1) (18) (22) (10)
Other Income 120 0 165 0
Other expense 0 0 0 0
Total other income (expense) 119 (18) 143 (10)
Provision for taxes 2 1 61 1
Net income (loss) $ (160) $ (508) $ (695) $ (887)
Net income (loss) per share (0.02) (0.12) (0.11) (0.23)
========== ========== ========== ==========
Shares used in per share calculation 6,426,488 4,332,239 6,426,488 3,898,267
========== ========== ========== ==========
</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>
Six months ended June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (695) $ (887)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 72 66
Changes in operating assets and liabilities:
Accounts Receivable 135 88
Inventories 157 (287)
Deposits and prepaid expenses (321) (154)
Accounts payable (175) 34
Notes Payable - current portion 0 312
Due to Related Parties (878) 0
Accrued Liabilities (178) (288)
Net Cash Provided by (used for) Operations $(1,883) $(1,116)
======= =======
Cash flows from Investing Activities:
Sale (Purchase) of Property and Equipment (68) (213)
Net Cash used in Investing Activities $ (68) $ (213)
======= =======
Cash Flows from Financing Activities:
Proceeds from Capital Stock Subscription 2,062 100
Proceeds resulting from the DTC acquisition 0 1,347
Net Borrowings (Repayments) under Bank Lines (44) (28)
Borrowing (repayments of other debt), net (30) 0
Other Equity Transactions, net 38 0
Net Cash provided by (used for) Financing $ 2,026 $ 1,419
======= =======
Net increase (decr.) in Cash and Cash Equivalents 75 90
Cash and Cash Equivalents Beginning of Period 104 31
------- -------
Cash and Cash Equivalents at end of period $ 179 $ 121
======= =======
</TABLE>
10
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 interest represents the minority
stockholders' proportionate share of the subsidiaries, Qume Taiwan and Data
Technology Hong Kong Ltd., 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 shares 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 less reserves.
<TABLE>
<CAPTION>
Inventories consist of the following:
June 30, 1997 December 31, 1996
(unaudited) (audited)
------------------ ------------------
<S> <C> <C>
Raw Materials and Purchased Parts $ 93 $118
Work-in-process 229 357
Finished Goods 470 475
---- ----
$793 $950
==== ====
</TABLE>
11
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PHOTONICS CORPORATION
FORM 10-QSB
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.
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
(unaudited) (audited)
-------------- ------------------
<S> <C> <C>
Machinery and Equipment $1,892 $2,312
Furniture and Fixtures 277 277
Leasehold Improvements 94 94
------ ------
$2,263 $2,683
Less Accumulated depreciation and amortization $2,155 $2,571
------ ------
$ 108 $ 112
</TABLE>
5. EXPENSE RECLASSIFICATION
The year-to-date June 1997 operating expenses and certain items reported
under Other Expense reflect some minor and non-material reclassification of
categories. These reclassifications have zero effect on net income or
(loss).
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 $1.229 million, a decrease of 29%
from the $1.728 million reported during the second quarter of 1996. The decline
in revenues can be attributed to the continued shrinkage of the IDE controller
card market.
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. The
gross margin for the second quarter of 1997 was 35% as compared to 24% for the
second quarter 1996. This reflects the fact that DTC's products being offered
to the current market are a newer enhanced generation of products that while
still being competitively priced are not being sold at a loss.
Product development expenses were approximately $110 thousand or 9% of net
revenues during the current quarter compared to approximately $250 thousand or
14% of net revenues during the first quarter of 1996. The decrease is
attributable to the Company's completion of the development of its low-end
Adaptec compatible SCSI line. The Company does expect to make some significant
expenditures during the second half year of 1997 to develop its high-end SCSI
line.
Selling, general and administrative expenses were approximately $597 thousand or
48% of revenues during the second quarter of 1997 compared to $660 thousand or
38% of net revenues reported in the second quarter of 1996. Selling costs were
generally higher as a percent of revenues, and also higher in comparison to the
first quarter of 1997. This is due to the Company's refocus on the market place
and implementation of sounder sales strategies. The Company expects these costs
to remain at their current level while expecting revenues to rise. The Company
has taken steps to contain on going general and administrative costs. These
were significantly lower than the second quarter of 1996 and were $51 thousand
lower than the first quarter of 1997. The Company has successfully lowered
general and administrative expense in order to finance its enhanced sales
strategies.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $179 thousand at June 30, 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,
13
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PHOTONICS CORPORATION
FORM 10-QSB
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. There was no balance owing to NBFI on March 31, 1997. The
Company has had significant success during the second quarter in collecting its
receivables in a timely manner.
Management of the Company feels that with the increased capitalization and the
redirection of the Sales Efforts, the financial condition of the company should
significantly improve starting in mid third quarter. The Company has always
realized a summer slow period in sales. This slow period has traditionally
started in June extending well into August. The Company does not expect 1997 to
differ from the historical norm.
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 installment of $4,350 was paid in June 1997 and the final installment will
be paid in 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 noted in the 1/st/ quarter 10-QSB, the Company closed a round of private
financing on March 31, 1997 and issued 2,093,270 shares of its Series A
Convertible Preferred Stock in response to the subscriptions received during its
private placement offering. This created some changes in beneficial ownership.
<TABLE>
<CAPTION>
Shareholder and Number of shares Number of shares Total Ownership
Relationship to Company Of Common Stock Of Preferred Stock Position as a %
- -------------------------------- ---------------- ------------------ -------- ----------
<S> <C> <C> <C> <C>
David S. Lee
Chairman of the Board 443,320 517,407 960,727 15%
James T. Koo
Pres., CEO & Director 199,660 245,812 445,472 7%
</TABLE>
14
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
K. C. Yeung
c/o Broadsino Development Ltd. 591,412 300,000 891,412 14%
Vice Pres. & Director
Robert Dilworth
Director 1,996 11,500 13,496 0%
John Miao
Director 0 150,000 150,000 2%
</TABLE>
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company called a Shareholders Meeting which took place on June 2, 1997 at
the Corporate Office located at 1515 Centre Pointe Drive, Milpitas, California
at 10:00 a.m. The Shareholders were asked to vote on three proposals and any
other matters that could properly come before the meeting.
The Proposals were:
1. To reelect the members of the current Board of Directors to another
term. The nominees were:
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.
These proposals were approved by the shareholders. There were no other matters
brought up for a vote at the meeting.
ITEM 5 OTHER INFORMATION
Gary Hughes was elected to a new term as a member of the Board of Directors at
the annual shareholders meeting. Shortly thereafter, Mr. Hughes resigned from
the Board citing a conflict of interest with a new position he had accepted.
Mr. John Miao was appointed to the Board of Directors to replace Mr. Hughes.
In 1981, as founder and President, Mr. Miao established US operations and
management team of American Mitac Corporation in San Jose, Ca. Mr. Miao was
active in that capacity until 1989. Mr. Miao is currently President of BOC
Lienhwa Industrial Gases Co., Ltd. In Taiwan and President of Hantech Venture
Capital Corporation in Taiwan.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
Exhibit 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: August 5, 1997 BY: /s/JoAn E. Hughes
- --------------------- ----------------------------
JoAn E. Hughes
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,000
<SECURITIES> 170,000
<RECEIVABLES> 1,040,000
<ALLOWANCES> 326,000
<INVENTORY> 793,000
<CURRENT-ASSETS> 2,091,000
<PP&E> 3,682,000
<DEPRECIATION> (3,574,000)
<TOTAL-ASSETS> 2,213,000
<CURRENT-LIABILITIES> 3,132,000
<BONDS> 0
2,088,000
0
<COMMON> 44,586,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,213,000
<SALES> 2,470,000
<TOTAL-REVENUES> 2,470,000
<CGS> 1,472,000
<TOTAL-COSTS> 1,746,000
<OTHER-EXPENSES> 707,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,000
<INCOME-PRETAX> (634,000)
<INCOME-TAX> 61,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (695,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.11)
</TABLE>
