<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 SEPTEMBER 30, 1998
[ ] 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)
606 CHARCOT AVENUE
SAN JOSE, CA 95131
(Address of principal executive offices)
Registrant's telephone number, including area code:
(408) 546-5600
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)
4,396,272
(Outstanding at September 30, 1998)
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
DBA
DTC DATA TECHNOLOGY
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
INTRODUCTION PHOTONICS CORPORATION
Introduction 2
General 2
The Market 2
The Competition 3
The Strategy 3
Products 3
Intellectual Property 4
Employees 4
Sales, Distribution and Customer Service 4
Research & Development 5
Manufacturing 5
Current Developments 5
PART I FINANCIAL INFORMATION 7
ITEM 1 Interim Financial Statements
Consolidated Balance Sheet as of September 30, 1998
and December 31, 1997 8
Consolidated Statements of Operation for the three
months and nine months ended September 30, 1998 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
</TABLE>
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 dba DTC Data Technology resulted from the merger of Photonics
Corporation and DTC Data Technology Corporation in 1996. After the merger, the
combined entity decided to focus on the core business of DTC and ceased
activities in the Infrared Wireless LAN business of Photonics.
As DTC has the name recognition and established sales channels, it is the intent
of the Company to eventually rename the company DTC Data Technology Corporation.
Meanwhile, the legal entity is known as Photonics Corporation dba DTC Data
Technology. For brevity sake, the company is hereinafter referred to as DTC or
the Company.
THE MARKET
The Company currently is in the Integrated Drive Electronics ("IDE"), Small
Computer System Interface ("SCSI"), and Input/Output ("I/O") controller card
market. DTC dominated the IDE and Enhanced IDE ("EIDE") market in 1994-1995.
During that period, DTC developed comprehensive distribution channels with
established name and trademark recognition. Starting in 1995, the trend was to
incorporate the IDE controller function into a 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 only 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 I/O controllers and
I/O cards for maintaining and upgrading existing systems. Sales have changed
from mainly OEM to VAR and system integrators through distribution and
retailers. The IDE and I/O markets have settled and stabilized at a much lower
level of approximately $50 million dollars.
The SCSI is the 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 controllers of preference for high-end personal
computers, workstations and file servers.
2
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
The SCSI host adapter (controller) market has been growing about 40% to 50% per
year for the past 5 years to over $1 billion. The SCSI controller market is
dominated by Adaptec with over 70% of the market and many other small SCSI
vendors. However, the recent trend of inexpensive desktop computers has impacted
the sales of expensive add on cards including SCSI cards.
Compatibility is a key issue for SCSI add-on cards. All SCSI products are
vendor unique today. This 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 Ultima, Ultima Pro,
Parallel Express and planned I/O family of products. The Company has broader
sales channels, stronger name recognition, and better access to low cost
manufacturing compared with either of these companies.
In the SCSI market, the dominant competitor is Adaptec, Inc. While there are a
number of smaller SCSI controller card manufacturers, they have all failed to
achieve a meaningful market share, offering vendor unique, non compatible
products.
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. The Company
believes that there is a significant market segment for cost effective
compatible SCSI products.
The Company will continue to market its IDE and I/O product cards as long as
there is a market for these products. The Company is broadening its product
offering in the IDE and I/O market segments to maintain our sales channels and
generate funds for continued operations.
The Company is committed to continuous product improvement and innovation, which
the Company believes is necessary for greater market penetration and
profitability.
PRODUCTS
Since the first quarter of 1997, the Company started marketing their low-end
Adaptec compatible Industry Standard Architecture ("ISA") SCSI product based on
its proprietary DTC50C18 chip. This product was, and continues to be, marketed
to OEM and VAR who "bundle" this controller card with their SCSI peripherals
such as scanner or CD-ROMs. This 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 has proved it can be cost competitive and
generate a profit with these low-end products.
3
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
The Company is currently developing high-end Adaptec compatible Peripheral
Component Interconnect ("PCI") SCSI controller cards and plans to introduce
several new PCI I/O products during the coming quarter. Additionally, the
Company will continue to market its steady business in the IDE and I/O product
lines.
INTELLECTUAL PROPERTY
The Company has registered the trademark/logo "DTC" in the United States and
several foreign countries and has protected the use of this name by others in
the market place.
The Company has studied the intellectual property issues (and performed patent
searches) related to the SCSI, IDE and I/O 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. The
Company 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. The Company, having designed several SCSI and IDE
ASICs, 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.
EMPLOYEES
As of September 30, 1998 the Company 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, 6 were engaged in manufacturing and related operations, 4 in
development and engineering, 9 in sales and marketing, and 5 in general
management and administration. None of the Company's employees are represented
by a labor union and the Company 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 OEM. In the United States and
Canada, the Company sells to most of the top national distributors in the
computer who in turn distribute the Company's products to retailers, OEM and
VAR. The Company has significant presence in the retail market. The Company's
current sales strategy is to continue to increase its sales to OEM, VAR and
resellers.
The Company's customer service and technical support organization is located in
San Jose, 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) for
user self-diagnosis and downloads of software updates.
As is common practice in the personal computer industry, the Company frequently
grants distributors limited rights to return unsold
4
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
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 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. The Company's main research and development
focus is to develop a family of Adaptec compatible high-end PCI-SCSI products.
The Company has contracted with an outside engineering firm for the design of
the ASIC high end Adaptec compatible PCI-SCSI 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 the Company
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 the Company.
At the present time approximately 80% 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. The Managing Director of Broadsino is also a member of the
Company's Board of Directors.
CURRENT DEVELOPMENTS
On July 21, 1998 the Company announced that it had signed a letter of intent and
the Board of Director's had approved the merger of Broadsino Computer
Development Ltd. ("Broadsino"), a privately held company in Hong Kong with DTC
Hong Kong, a wholly owned subsidiary of the Company. Under the terms of the
agreement, the Company will issue one share of the Company's Series A
Convertible Preferred ("Preferred") for each U.S. dollar of net asset of
Broadsino, approximately 6 to 7 million U.S. dollars, for all the shares of
Broadsino. It is the Company's intention to become re-listed on an U.S. stock
exchange after the merger. Broadsino is a shareholder of the Company and the
major supplier of product to the Company; the main owner of Broadsino is a
Company director.
5
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
A SEC approved accounting firm is currently auditing Broadsino's financials for
the current and preceding two years and is near completion. Broadsino's fiscal
year ended March 31, 1998, and the audit needs to be completed before the
appropriate proxy statement related to the merger can be made with the SEC. The
merger is expected to be completed in the first quarter of 1999. Broadsino and
the Company are currently in the process of negotiating a more detailed term
sheet regarding the merger; however, no assurances can be given as to whether
the merger will be completed and if so, whether the terms or timetable will be
as described above.
The Company also is attempting to conduct a private placement of an additional 2
million shares of the Company's Series A Convertible Preferred Stock at $1 per
share for operating funds. Of the additional 2 million shares, the Company has
received preliminary commitments for 1 million, including 600 thousand shares
from two Company officers and directors. There can be no assurances that any
Series A Preferred Stock will be sold in this offering or, if any is sold, that
the sales price will be $1 per share.
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 for the
year ended December 31, 1997.
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>
September 30, December 31,
1998 1997
(unaudited) (audited)
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 55 $ 176
Accounts Receivable, net 485 939
Other Receivables 0 448
Inventories, net 968 920
Prepaid expenses and other current assets 125 58
-------- --------
Total current assets 1,633 2,541
Furniture and equipment, net 301 252
Other Assets 15 14
-------- --------
Total Assets $ 1,949 $ 2,807
-------- --------
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Note Payable - AR Credit Line 148 0
Due to Related Parties 1,361 1,582
Accounts payable 2,120 1,426
Accrued liabilities 610 487
-------- --------
Total current liabilities 4,239 3,495
Deferred Taxes 0 0
Total Liabilities 4,239 3,495
Minority interest in subsidiaries 125 125
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock 44,093 44,079
Treasury stock 0 0
Capital subscription 2,176 2,117
Accumulated deficit (48,838) (47,163)
Cumulative translation adjustment 154 154
-------- --------
Total shareholders' equity (deficiency) (2,415) (813)
-------- --------
Total liabilities and shareholders' equity $ 1,949 $ 2,807
-------- --------
</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 Sept 30, Nine months ended Sept 30,
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
------------------ ------------- ------------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net Product Sales $ 562 $ 1,455 $ 3,104 $ 3,925
Cost of Revenues 705 774 2,189 2,520
---------- ---------- ---------- ----------
Gross Profit (143) 681 915 1,405
OPERATING EXPENSES:
Research and development 87 108 283 341
Selling, general and administration 554 626 2,076 1,894
---------- ---------- ---------- ----------
Total operating expense 641 734 2,359 2,235
Income (loss) from operations (784) (53) (1,444) (830)
OTHER INCOME (EXPENSE):
Interest income 0 0 1 0
Interest expense (111) (13) (192) (35)
Other Income 0 76 53 241
Other expense (73) 0 (92) 0
---------- ---------- ---------- ----------
Total other income (expense) (184) 63 (230) 206
Provision for taxes 0 0 1 61
Net income (loss) $ (968) $ 10 $ (1,675) $ (685)
Net income (loss) per share (.14) (.006) (.24) (.107)
========== ========== ========== ==========
Shares used in per
share calculation 6,976,681 6,426,488 6,976,681 6,426,488
========== ========== ========== ==========
</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>
Nine months ended September 30,
1998 1997
(unaudited) (unaudited)
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,675) $ (685)
Adjustments to reconcile net cash
used in operating activities:
Depreciation 11 77
Changes in operating assets and liabilities:
Accounts Receivable 318 (206)
Inventories (75) 205
Deposits and prepaid expenses 521 (380)
Accounts payable 31 62
Due to Related Parties 464 (744)
Accrued Liabilities 169 (179)
Net Cash Provided by (used for) Operations $ (236) $ (1,850)
========== ==========
Cash flows from Investing Activities:
Sale (Purchase) of Property and Equipment (60) (81)
Net Cash used in Investing Activities $ (60) $ (81)
========== ==========
Cash Flows from Financing Activities:
Proceeds from Capital Stock Subscription 67 2,066
Proceeds resulting from the DTC acquisition 0 0
Net Borrowings (Repayments) under Bank Lines 148 (44)
Borrowing (repayments of other debt), net 0 (30)
Other Equity Transactions, net 6 38
Net Cash provided by (used for) Financing $ 221 $ 2,030
========== ==========
Net increase (decr.) in Cash
and Cash Equivalents (75) 99
Cash and Cash Equivalents Beginning of Period 130 104
Cash and Cash Equivalents at end of period $ 55 $ 203
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
10
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(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 transactions. The minority interest represents the minority
stockholders' proportionate share of the subsidiaries, Qume Taiwan and Data
Technology Hong Kong Ltd., which is 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 stockholder 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 ended September 30, 1997 and 1998 the dilutive value of The Company's
Series A Convertible 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:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(unaudited) (audited)
----------- ---------
<S> <C> <C>
Raw Materials and Purchased Parts $ 130 $ 148
Work-in-process 111 190
Finished Goods 727 582
------- -------
$ 968 $ 920
======= =======
</TABLE>
11
<PAGE>
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>
September 30, 1998 December 31, 1997
(unaudited) (audited)
------------------ -----------------
<S> <C> <C>
Machinery and Equipment $ 2,594 $ 2,534
Furniture and Fixtures 277 277
Leasehold Improvements 94 94
-------- --------
$ 2,965 $ 2,905
Less Accumulated depreciation
and amortization $ 2,664 $ 2,653
-------- --------
$ 301 $ 252
======== ========
</TABLE>
12
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
ITEM 2 MANAGEMENT'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.
Net revenues for the current quarter total $562 thousand, a decrease of
approximately 61% from the $1.455 million reported during the third quarter of
1997. Net revenues for the first nine months of this fiscal year total $3.104
million, down from $3.925 million over the first nine months of the 1997 fiscal
year, a decrease of 21% percent. The decrease in revenues for the nine-month
period can all be attributed in part to the decline in third quarter revenues.
The third quarter revenue decline can be attributed to a general decline in
sales throughout the PC industry and SCSI market in general, and to the loss of
orders from a major retail chain customer.
The gross margin in the third quarter of fiscal 1998 was a negative 25%. This
decrease is due to the Company having fewer retail alternatives (higher margin)
for distributing its products, and therefore selling the bulk of its products
through lower margin OEM sales and the Company's fixed manufacturing expenses
being spread over less revenues. In addition, the Company took a $300 thousand
charge to inventory reserves due to various factors. Without this charge
against inventory, the gross margin would be approximately 28%. This adjusted
margin is still a decrease from the 47% reported in the third quarter of 1997.
The gross margins in the first nine months period of 1998 decreased $490
thousand from 36% to 29% from 1997 due to the third quarter decline.
Product development expenses were $87 thousand or 15.5% of net revenues during
the current quarter compared to $108 thousand or 7.4% of net revenues during the
third quarter of 1997 while they were $283 thousand or 9% of net revenues during
the first nine months of 1998 compared to $341 thousand or 8% during the first
nine months of 1997. The Company remains firmly committed to new product
development but strives to do so with efficiency and awareness of the Company's
ongoing cost control program and lower revenues.
Selling, general and administrative expenses were $554 thousand, or
approximately 99% of net sales, during the third quarter of 1998 compared to
$626 thousand reported in the third quarter of 1997, or approximately 43% of net
sales. The decrease in the selling, general and administrative expenses is due
to lower sales commissions as a result of lower revenues and cost-cutting
measures, including a cut in employees. The current quarter includes $51
thousand in moving expenses. Selling, general, and administrative costs for the
first nine months of 1998 were 2,076 or 67% of revenues versus 1,894 or 48% of
revenues for 1997. Nearly the entirety of the change was due to an unexpected
advertisement and promotion cost for a rebate program the Company initiated with
a major retail chain customer.
Interest expense in the third quarter of 1998 increased almost $100 thousand
from the third quarter of 1997 or $192 thousand during the first nine months of
1998 compared to $35 thousand during the first nine months of 1997. Per
agreement with Coast Business Credit, interest is approximately $10 thousand per
month as it is based on a $1.0 million line of credit. Additionally, for the
current quarter there were $50 thousand in accrued interest charges due to
Dynatek Electronics Ltd. and interest accrued to James T. Koo, David, S. Lee,
and K.C. Yeung for personal loans extended to the Company.
Other expense in the current quarter includes $62 thousand in out-of-period
adjustments compared to no such adjustments in the third quarter of 1997. The
current quarter comparison is also identical to the nine month comparison. The
bulk of the current charges includes $27 thousand in legal fees for an aborted
private offering during the beginning of 1997 as well as $20 thousand for a
booking error in accounts receivable. Minor adjustments includes $8 thousand to
the California Employment Development Department and $5 thousand in fees to
maintain the Company's 401(k) plan.
Overall, the third quarter and nine-month loss can be attributed to a large
decrease in revenue in the third quarter coupled with lower margins, inventory
provisions, moving costs and high interest expense.
13
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
YEAR 2000
Many computer systems experience problems handling dates in and beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. To our best knowledge, the
Company does not anticipate any internal Year 2000 issues from its own
information systems, databases or programs. Additionally, it is our belief that
the Company's hardware and software are also Year 2000 compliant. There can be
no assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of any changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations or financial condition.
It is unknown how customer spending patterns may be impacted by year 2000
programs. As customers focus on preparing their business for the year 2000 in
the near term, capital budgets may be spent on remediation efforts, potentially
delaying the purchase and implementation of new systems, thereby creating less
demand for the Company's products and services. This could adversely affect the
Company's future revenues, though the impact is not known at this time.
The Company is also assessing and addressing the possible effects on the
Company's operations of the year 2000 readiness of key distributors, suppliers,
customers, vendors and financial services organizations. The Company's reliance
on suppliers and distributors means that their failure to address year 2000
issues could have a material impact on the Company's operations and financial
results. However, the potential impact and related costs are not known at this
time.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. At the Company's current level of revenues,
- -------------------------------
margins, and expenses, it has a substantial cash drain from operations. For the
first nine months of 1998, this cash outflow was almost $1.7 million, which is
$1.0 million more than in 1997 comparable period. To help partially fund its
operations, the company obtained a revolving accounts receivable line of credit
from Coast Business Credit ("Coast") in April, 1998. The Company is able to
borrow 70% of certain receivables. All customer remittances are routed to Coast
and the Company is subject to daily reporting. Additionally, certain debts of
the Company have been subordinated to Coast. The Company defaulted on its
minimum Tangible Net Worth requirement under the line of credit during the third
quarter of 1998. Coast has formally waived this breach of the line of credit
through December 31, 1998.
The Company's accounts payable has increased from $1,426,000 as of the year
ended December 31, 1997, to $2,160,000 as of the end of the current fiscal
quarter. The majority of these accounts payable are over 90 days old and a
substantial number are over 180 days. The Company has been and continues to be
threatened with litigation by some of its trade creditors.
Based on the Company's existing cost structure, and the Company's current and
anticipated revenue streams, the Company cannot estimate that it will break even
on cash flow in the current or next fiscal year. The Company does not expect to
achieve profitability until the Adaptec compatible PCI SCSI controller cards and
PCI I/O products are in production and have obtained a substantial market share.
The Company cannot make any assurances that this level of sales will be
achieved, or that the products will be marketable.
The Company has a negative working capital of $2.3 million and its current
liabilities exceed its current assets by $2.6 million. The Company needs to
raise financing in the near term or be faced with selling itself or bankruptcy.
The Company's best prospect for raising cash in the next six months is the
prior-described merger with Broadsino. No assurances can be given that this
merger will occur.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There were no legal proceedings during the quarter ended September 30, 1998 and
there were none pending.
14
<PAGE>
PHOTONICS CORPORATION
FORM 10-QSB
From time-to-time the Company 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 the Company's overall financial position, results of
operations and cash flows.
ITEM 2 CHANGES IN SECURITIES
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were not any matters requiring a vote of security holders brought forward
during the third quarter.
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
Not Applicable
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: November 13, 1998 BY: /s/ James T. Koo
- ------------------------- -----------------------------------------------
James T. Koo
President & Chief Executive Officer
16
