FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____. Commission file number ____
PHOTONICS CORPORATION
D/B/A DTC Data Technology
(Exact name of Small Business Issuer as specified in its charter)
California 77-0102343
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
606 Charcot Avenue (408)546-5600
San Jose, California 95131
(Address of Principal Executive Offices) (Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the issuer's Common Stock, $.001 par
value, as of May 1, 1999 was 4,378,529 shares.
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PHOTONICS CORPORATION
INDEX
Page Number
PART I -
Item 1.
Business 3
General 3
Products and the Market 3
Competition 4
Intellectual Property 5
Manufacturing and Suppliers 5
Patents and Licenses 5
Significant Customer 5
Backlog 5
Employees 6
Item 2.
Properties 6
Item 3.
Legal Proceedings 6
Item 4.
Submission of Matters to a Vote of Security Holders 6
PART II
Item 5.
Market Price for Registrant's Common Equity and
Related Stockholder Matters. 7
Item 6 Selected Financial Data. 7
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7a Qualitative and Quantitative Disclosures
About Market Risks 11
Item 8 - Financial Statements 11
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 11
PART III
Item 10. Directors and Executive Officers 11
Item 11 Executive Compensation 13
Item 12 Security Ownership of Management 14
Item 13 Related Transactions, Changes in Securities 15
PART IV
Item 14 Exhibits, and Reports on Form 8-K. 16
SCHEDULE II 16
SCHEDULE III 17
Signature 17
Financial Statements F-1 - F-19
Exhibit 23.1 38
Exhibit 27.1 39
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PART I
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.
Item 1. Business
General
Photonics dba Data Technology resulted from the merger of Photonics
Corporation and DTC Data Technology Corporation in 1996. Shortly after the
merger, the Company decided to focus on the IDE, SCSI, I/O and BIOS upgrade
business of DTC and ceased activities in the infrared Wireless LAN business of
Photonics.
DTC stockholders own a majority of the shares of the combined entity, and the
management and control of the merged Company comes from DTC. The transaction
was accounted for as though DTC was the acquirer. The historical results of
operations of Photonics Corporation dba DTC Data Technology, as reported
herein, are those of DTC Data Technology.
AS DTC has the name recognition and established sales channels, in June of
1996 the Company filed a fictitious name statement with the State of
California and conducts its business as DTC Data Technology. The legal entity
is Photonics Corporation dba DTC Data Technology. For brevity sake the
Company is herein after referred to as DTC or the Company.
Products and the Market
The Company has exited the Infrared Wireless LAN market. The Company then
granted an exclusive (except existing agreements for Apple related products)
license to Moldat Wireless Technologies Ltd. ("Moldat") of Lod, Israel, during
1997. This license has been revoked during 1998 for non-payment of royalties.
The Company markets Input and Output ("I/O"), Integrated Device Electronics
("IDE"), BIOS upgrade, and Small Computer Systems Interface ("SCSI") add on
card products and host adapters for IBM compatible personal computers ("PC").
DTC's products connect between a PC's central processing unit and storage
devices such as floppy and hard disks, CD-ROMs, and other peripheral devices
such as printers, scanners, and digital cameras.
One time, DTC had dominated the IDE and Enhanced IDE ("EIDE") add-on card
market. Today, most new PCs have the IDE function built-in on the mother
board. Sales have changed from mainly OEM to VARs and system integrators
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through distribution and retailers for the upgrade after market.
The PC market has seen a dramatic growth of peripheral devices, such as the
removable storage devices, scanners, and digital cameras, there exists a need
for additional I/O ports, or higher speed I/O ports for the upgrade market for
existing PCs. DTC markets a variety of high performance parallel, and serial
port devices to satisfy this need through the same distribution and retail
channels.
The BIOS upgrade allows older machines to access large disks and be Y2K
compliant. The rapid increase in the size of Hard Disks opened up a BIOS
upgrade market. About 10% of new machines and up to 90%+ machines two or more
years old are not Y2K compliant due to non-compliant BIOS . The Company plans
to introduce a family BIOS upgrade products to address the Y2K issue in 1999.
The SCSI controller, due to its high performance, and high connectivity is
the controller of choice for high-end personal computers, engineering work
stations, Internet and enterprise file servers. The market has been growing
30 to 40% per year for the past 4-5 years to over $1 billion. During 1998,
the low end SCSI market saw the collapse of the scanner market, the high end
experienced the demise of the desk top market due to the low cost PCs.
However, the growth is expected to resume as the SCSI markets for Internet
and Intranet servers continue to grow.
The SCSI controller market is dominated by Adaptec with over 70% of the
market. It pursues a premium pricing strategy with gross margin consistently
around 60%. AS compatibility is a key issue for SCSI add on cards, the
Company intents to re-enter the SCSI market with a family of Adaptec
compatible PCI-SCSI products. When introduced, the Company will be the first
to offer an Adaptec compatible SCSI cards. However, due to financial
limitations, this project has been put on hold in Q4 1998.
The Competition
Many vendors have dropped out of IDE and I/O market. DTC plans to remain in
that market place as long as demand remains viable. Promise and SIIG remain
in the upgrade and I/O add-on markets and compete with the Company's I/O and
IDE family of products. DTC has broad sales channels, strong name recognition
along with access to low cost-manufacturing when compared with either of these
competitors. In the BIOS upgrade market, main competitors are Unicore and
AMI. Both of them have high operating cost and sell through direct channels.
In the SCSI market, Adaptec is the main competitor. The Company's low end
Adaptec compatible products sales declined as the low end SCSI market
declined. DTC currently also markets a family of non-Adaptec compatible PCI-
SCSI (high end). The Company plans to improve the competitiveness of the high
end PCI-SCSI family during 1999.
The markets with which DTC operates are characterized by intense competition,
rapid technological and product changes, changing market requirements,
dependence upon highly skilled personnel, and significant expenditures for
product and marketing development. DTC has a number of present and potential
competitors, many of whom have substantially greater financial, marketing and
other resources than DTC. If DTC's competitors introduce new products which
offer improved performance and/or lower prices, DTC's revenue and income could
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be adversely affected.
DTC believes that the principal competitive factors in the storage controller
market are compatibility, brand recognition, performance, sales support and
competitive pricing. DTC believes it meets these important criteria.
Intellectual Property
Software and proprietary ASIC designs are important ingredients for success in
the controller market. DTC has a large library of copyrighted IDE and SCSI
software drivers and utilities for various operating systems including DOS,
OS/2, UNIX, Novell, Windows 3.1 and Windows 95. DTC, having designed
several SCSI and IDE ASICs, acquired the design right to the ASIC used in
its low end DTC50c18 ISA-SCSI, and was 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 any of
its current or planned IDE, I/O, or SCSI products.
Manufacturers
Substantially all of DTC's products are manufactured by companies located in
the Far East. At the present time over 90% of the Company's products
requirements are produced in China by Broadsino Computer Development, Ltd. Of
Hong Kong.
In order to achieve early market introductions, the Company uses either ASICs
developed or co-developed by DTC, ASIC design subcontractors, and ASIC
vendors, or standard ICs marketed by semiconductor vendors.
Patents and Licenses
The Company holds various patents and intends to apply for additional patents
when it believes it is advantageous to do so. DTC believes, however, that
much of its important technology resides in its proprietary hardware, software
and trade secrets.
Certain technologies have in the past been licensed to DTC from third
parties. Those licenses are generally perpetual, worldwide and, DTC
believes, on commercially reasonable terms.
Significant Customer
During the fiscal year ended December 31, 1998 Ingram-Micro accounted for 21%
of net sales, Smart and Friendly accounted for 11% of net sales and Comp
USA, a retailer, accounting for 14% of net sales.(See Notes to
Financial Statements, note 9). However, since April of 1998,
Comp USA has stopped ordering from the company due to a financial dispute.
Backlog
DTC does not believe that backlog is a meaningful indicator of future sales.
It is common industry practice for purchasers of DTC's products to issue
purchase orders on a month to month basis rather than contract for delivery of
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products over an extended period of time. DTC's sales are primarily made
pursuant to purchase orders and contracts which are consistent with common
industry practice, and may be canceled or modified by customers to provide for
delivery at a later date with little or no penalties.
Employees
As of December 31, 1998 DTC employed 20 individuals, 19 who were on a full-
time basis and 1 who were considered part time or temporary employees.
Nineteen of these employees were located in the United States. None of DTC's
employees are represented by a labor union and DTC considers its employee
relations to be good.
Item 2 - The Company's principal executive and administrative office has moved
from Milpitas, Ca. to a 14,000 square foot facility in San Jose, California in
July 1998 which the Company believes are adequate for the Company's current
plans. The current monthly rental, including common area maintenance, is
approximately $15,000. This lease runs through the year 2003.
Item 3 - Legal Proceedings
During Sept. 1998, Dynasales, a former sales representative of the Company
filed claim against the Company for past commissions. The Company agreed to
pay a total amount equal to approximately $14 thousand dollars. Dynasales
agreed to suspend its legal proceedings.
At the end of Dec. 31, 1998, there is no further legal action pending,
However, due to the financial status of the Company not being able to meet the
back payment to vendors, several of them threatened to file suit against
the Company.
The Company believes it is diligent in protecting it's employees, and fair in
its treatment of them, but cannot guarantee that such a claim will not be
made in the future.
From time-to-time DTC is involved in routine litigation as part of is normal
course of business. Management believes the Company carries adequate product
liability insurance and these matters can be resolved without material adverse
effect on DTC's overall financial position, results of operations and cash
flows.
Item 4 - Submission of Matters to a Vote of Security Holders.
An annual Shareholder's meeting was held on May 22, 1998 at the Corporate
Office located at 1515 Centre Pointe Dr., Milpitas, California 95035.
No matters were submitted during the fourth quarter of 1998 to a vote of
security holders through the solicitation of proxies or otherwise
There are no matters pending which will require the vote of the security
holders.
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PART II
Item 5 - Market Price for Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock trades on the Over The Counter Bulletin Board
("OTCBB") under the symbol: PHOX for the original Photonics Corporation and
under the symbol DTEC for the pre-merger DTC Data Technology Corporation.
Such prices necessarily reflect inter dealer prices, without retail markup,
mark down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
PHOTONICS High Low DTEC High Low
<S> <C> <C> <C> <C> <C>
After 3/6/96 Merger Fiscal YE 2/29/96
Second Quarter(6/30/96) 1.25 .25 First Qtr (5/30.95) .50 .19
Third Quarter(9/3096) 1.00 .25 Second Qtr (8/31/95) .38 .13
Fourth Quarter(12/31/96) 0.875 .375 Third Qtr (11/30/95) .19 .16
Fourth Qtr.(2/29/96) .218 .062
Fiscal YE 12/31/97 Fiscal YE 12/31/97
First Quarter 0.875 .375 .0625 .05
Second Quarter .4375 .25 .12 .05
Third Quarter .4375 .125 .09 .027
Fourth Quarter .375 .0625 .0547 .02
Fiscal YE 12/31/98 Fiscal YE 12/31/98
First Quarter .75 .25 .05 .03
Second Quarter .75 .50 .12 .04
Third Quarter 1.125 .50 .125 .04
Fourth Quarter .625 .25 .05 .03
</TABLE>
Neither Photonics Corporation nor DTC Data Technology has historically paid
cash dividends on its common stock. As of December 31, 1998, the Company had
preferred dividends in arrears greater than 12 months due of $211,000. These
dividends in arrears will be settled via the issuance of common stock. The
Company currently intends to retain all future earnings for use in its
business and does not anticipate paying any cash dividends in the
foreseeable future.
Item 6 - Selected Financial Data.
The following table sets forth certain selected financial data with respect
to the Company and is qualified in its entirety by reference to the financial
statements filed herewith:
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BALANCE SHEET DATA
<TABLE>
[MULTIPLIER] 1,000
<CAPTION>
12/31/98 12/31/97 12/31/96 2/29/96
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Assets 852 2,807 2,113 2,443
Total Liabilities 4,018 3,495 4,437 7,078
Long Term Debt 0 477 0 0
Stockholders Equity (3,291) (813) (2,449) (4,770)
STATEMENT OF OPERATIONS
<CAPTION>
For the period 01/01/98 01/01/97 03/01/96 03/31/95
12/31/98 -12/31/97 -12/31/96 -02/29/96
Sales 3,484 5,662 5,184 11,310
Loss from Operations (2,608) ( 759) (1,932) (2,986)
Net Income (Loss) (2,706) (459) 876 (2,581)
Basic and diluted
income(loss) per share (.62) ( .11) .19 (.89)
</TABLE>
Item 7 - 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 1997 10-KSB contains detailed risk factors that may
contribute to the actual results for 1998 and beyond which could materially
differ from forward-looking statements made by the Company.
The Company's revenues in fiscal 1998 decreased to $3.484 million or 38%
under 1997 revenues of $5.622 million. The Company suffered a major setback
in the second quarter due to an unexpectedly large promotional expense
associated with a rebate program of a major retailer. Afterwards, the
Company no longer has adequate cash to purchase needed inventory for sales
or meet the cash needs to pay all the vendors. The sales of the Company
declined quarter by quarter as the result.
The gross margin was 15% for 1998, a decrease from 38% of 1997. This
decrease is due to the Company having a smaller percentage of sales to the
retail channel (higher margin), and smaller sales being spread over the
Company's fixed manufacturing expenses, and the Company failed to introduce
new products.
Product development expenses were $376 thousand or 11% of the total sales
during the current year compared with $438 thousand or 8% of fiscal year of
1997. Because of the financial difficulties, the SCSI R&D program was put on
hold for lack of funds. The R&D efforts for additional I/O devices and Y2K
BIOS upgrades were continuing and should result in new products introduction
in 1999. The Company remains firmly committed to new product development and
believes this is essential for revitalizing the Company.
Selling, general and administrative expenses were $2.461 million, or 71% of
the net sales for the year 1998 compared to $2.456 million reported in 1997.
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The slight decrease is due to the fact that the Company moved to a smaller
building in July of 1998, reduced the administrative and marketing and sales
staff, and an across board 10% reduction of salaries of senior management, but
offset by the higher than expected promotional cost with the rebate program.
Interest expenses in 1997 were $389 compared with $98 thousand of 1997. Per
agreement with Coast Business Credit ("Coast"), interest is approximately $10
thousand per month as it is based on a minimum $1 million line of credit. At
the end of year, Coast has informed the Company that the Company is no longer
in compliance with the basic covenants with the loan agreement, but will give
the Company an extension for resolving this violation.
The management realized the need for an equity infusion or a merger
acquisition partner to reverse the financial status of the Company. In the
third quarter, the Company received a letter of intent to merge with Broadsino
Company Development Ltd., of Hong Kong, the Company's major supplier.
Broadsino had sales approximately $45 million dollar sales in 1998 and $1.5
million dollars of after tax profit and with a net asset of $6 million
dollars.
During the fourth quarter, the Board of Directors of both companies approved
the merger. The Company will issue approximately 6 million shares of
Preferred A in exchange for all the shares of Broadsino shares. However, the
major bank of Broadsino objected the merger, and the merger is delayed. At
the time of writing, both companies are still seeking ways to merge.
The Company's net loss (before foreign taxes) for fiscal 1998 was $2,706
thousand compared to $459 thousand of 1997. There was no gain or
loss on disposal of assets or divestiture of business units for the fiscal
year ending December 31, 1998.
Year 2000
Many computer systems experience problems handling dates in and beyond the
year 2000. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. To the
Company's best knowledge, the Company does not anticipate any internal Year
2000 issues from its own information system, 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 customers' 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 efforts of remedy,
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, thought 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
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operations and financial results. As the Company identifies the non-compliant
vendors and service providers, it will then determine appropriate contingency
plans. During the second quarter of 1999, the Company intends to develop
contingency plans to address potential Year 2000 induced failures. Because the
Company has no control over third party assessment and remediation efforts,
the Company expects to focus most of its contingency planning on externally
caused disruptions. In addition, the Company will develop its plans on its
belief that the consequences of Year 2000 induced failures will be local
in nature. However, the potential impact and related costs are not known at
this time.
Liquidity and Capital Resources
Liquidity and capital resources of the Company significantly worsened during
1998. At the Company's 1998 level of revenue, margin, and expenses, it
incurred a substantial cash drain from the operations. For the year, the
cash outflow from operating activities was $364 thousand, which is $748
thousand less than that of 1997. To help partially fund its operation,
the Company obtained a revolving accounts receivable line of credit
from Coast in April, 1998. The Company is able to borrow up to 70% of
certain receivables. All customer remittances are routed to Coast and the
Company is subject to daily reporting. Coast has filed a UCC claim on all
Company's accounts receivables and assets. 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 through Mar. 31,
1999. There can be no assurance the Company will be successful in obtaining
an alternative source of financing to replace Coast. The Company's source
of working capital during the year has been, in addition to the credit line
from Coast, its accounts payable and the sale of 100,000 shares of Series A
Convertible Preferred Stock at $1.00 per share.
The Company's accounts payable has increased from $1,426,000 as of the year
ended Dec. 31, 1997 to $1,450,000 as of Dec. 31, 1998. Accounts payable to
Action Well (a subsidiary of Broadsino) is included in Due to related parties
in both years. The majority of these accounts payable are over 90 days old
and a substantial number of them are over 180 days. The Company has been and
continues to be threatened with litigation by some of its trade creditors.
The Company plans a major reduction in work force if the sales do not
recover, and plans to retain a financial advisor and an investment banking
firm to help the Company to raise the needed capital in the form of a
bridge loan for completing the merger. The Company further plans to ask
vendors for forbearance for the past due payments until the Company has
raised the needed equity. With reduced expenses, and introduction of new
I/O and Y2K products, the Company hopes it can achieve breakeven
financially if the market condition is favorable. However, the Company
cannot assure it can find an investment banker willing to raise the capital
for the Company, the vendors will agree to forbear with the Company, new
products will be successful in the market place, or the sales of the new
products can make the Company achieve breakeven financially.
The Company has a shareholders' deficiency of $3.29 million and its current
liabilities exceed its current assets by $3.20 million. The Company needs
to raise capital in the near term or be faced with selling itself or
bankruptcy. The Company's best prospect for raising cash in the next few
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months is the prior described bridge loan and merger with Broadsino. No
assurance can be given either one will occur.
The Company's independent certified public accountants modified their
opinion to include an explanatory paragraph relative to a going concern
uncertainty.
At December 31, 1998 there were 2,328,136 share of Series A Convertible
Preferred Stock issued. The Company's Series A Convertible Preferred Stock
("Preferred Stock") carries a 10% cumulative dividend, payable twelve months
in arrears in the form of Common Stock. The Preferred Stock is convertible
at any time at the option of the holder into an equal number of shares of
the Company's Common Stock and will also have a liquidation preference
and voting rights. At the option of the Company, the Preferred Stock will
be subject to mandatory conversion into an equal number of shares of the
Company's Common Stock provided that the closing bid price for the
Company's Common Stock equals or exceeds $2.50 per share (as adjusted for
any subsequent stock dividends, splits, or combinations of the like) for
twenty consecutive trading days and the Company has a currently effective
registration statement on file with the Securities and Exchange Commission
covering the underlying Common Stock to be issued upon conversion. At the
time of its sale, the Preferred Stock, and Common Stock issuable upon
conversion thereof, is not and will not be, registered under the Securities
Act of 1933, as amended (the "Act") and may not be offered or sold in the
United States absent registration or an applicable exemption from the
registration requirements. This offering has targeted only sophisticated
investors who meet the definition of accredited investors as set for in
Rule 501 of Regulation D under the Act.
Except the UCC filing by Coast described above, there are no other letters of
credit, financing arrangements, indentures or other such credit agreements
with restrictive covenants that will effect the Company.
Other Matters
Inflation did not have a significant impact upon the results of operations of
the Company during the two fiscal years ended December 31, 1997 and December
31, 1998. The Asian financial crisis impacted the Company negatively as the
vendor credits from Asia, where the Company obtains most of its products for
sale, are more difficult to obtain.
Item 7a. Qualitative and Quantitative Disclosures about Market Risks
See Item 7 regarding Combined Liquidity and Capital Resources -- see pages
10-11.
Item 8 - Financial Statements
The independent auditors' reports, financial statements and financial
statement schedules listed in the accompanying index are filed as part of
this report. See Index to Financial Statements and Financial Statement
Schedules on page F-1.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no disagreements between the Registrant and its independent
accountants on any matter of accounting principles or practices or financial
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statement disclosure.
PART III
Item 10 - Directors and Executive Officers
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
Name Age Position with the Company
David S. Lee 61 Chairman of the Board and Director
James T. Koo 57 President, CEO and Director
Wen-Wai Huang 39 Acting Chief Financial Officer
Ki Ching Yeung 37 Vice President and Director
Robert Dilworth 56 Director
John Miao 46 Director
During the year ending December 31, 1998 JoAn Hughes retired from the Company
as Chief Financial Officer. Wen-Wai Huang has been appointed as the acting
Chief Financial Officer. In March 1999, John Miao resigned from the Board of
Directors. No replacement is planned at this time. The plan is to amend the
bylaws of the Company to reduce the minimum number of Board of Director from
five to four.
The following is certain information regarding the persons listed in the table
above:
Mr. Lee has been a member of the Board of DTC since 1986 and the Chairman of
the Board since 1987. From 1985 to 1993 he was the President and Chief
Executive Officer of DTC. Currently, Mr. Lee is also the Chairman of the
Board of Cortelco Systems Holding Corporation, a company in the
telecommunications business. Mr. Is also a member of the Board of Directors
of CMC Industries, Inc., Plexsys International Corporation, Linear Technology
Corporation, Synnex Information Technologies, Inc., California Chamber of
Commerce, National Committee on United States-China Relations, Inc. and the
Tech Museum of Innovation. In addition, Mr. Lee is a member of the Board of
Regents for the University of California.
Mr. Koo has served as the President and member of the Board of DTC since 1994.
From 1992 to 1994 he was a Vice President of Qume Corporation and General
Manager of DTC Data Technology Corporation, then a wholly owned subsidiary
of Qume Corporation. Prior to joining DTC, Mr. Koo was with Mosel Vitelic,
a developer and manufacturer of memory integrated circuits, from 1984 until
April 1992. There he held several positions including Senior Vice President
of Engineering, Operations, Marketing and Sales of Tai wan Operations, and
Vice President for the Static Random Access Memory ("SRAM") group.
Ms. Huang was appointed as Acting Chief Financial Officer in Dec. 1998. Prior
joining the Company, Ms. Huang was Senior Accounting manager of Akon, Inc.
and Cardexpert Technology Inc. in 1998, and 1997 respectively. For years
1990 to 1997, Ms. Huang was CFO, and Controller of Focus Information Systems,
Inc.
Mr. Yeung has been a member of the Board of Directors, has served as Vice
President of DTC and President of Data Technology Hong Kong Limited since
November of 1994. Since January of 1992 Mr. Yeung has served as President of
Broadsino Development Ltd., Great Concept Development Ltd., Actionwell
Development Ltd., First Alpha Ltd., and Unique Computer GmbH. From 1982 to
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1992 he was the President of Unicorn Electronic Company Ltd., a manufacturer
of electronic components.
Mr. Dilworth has served as a director of DTC since 1987. He is with VLSI
technology. Prior to that he was the President and Chief Executive Officer
of Metricom, Inc., a manufacturer of RF pocket radio communications networks
and electronic meters. Prior to joining Metricom, from 1985 to 1987 Mr.
Dilworth served as President of Zenith Data Systems, a microcomputer
supplier and a wholly owned subsidiary of Zenith Electronics Corporation.
Mr. Dilworth is also a director of VLSI Technology, Inc.
Mr. Miao has served as a director since July of 1997. In 1981 as founder and
President, Mr. Miao established US operations and management team of American
Mitac Corporation in San Jose, California. Mr. Miao was active in the
capacity until 1989. Mr. Miao is currently President of BOC Leinhwa
Industrial Gases Co., Ltd. in Taiwan and President of Hantech Venture Capital
Corporation in Taiwan.
Indemnification Agreement
The Company's Articles of Incorporation and Bylaws provide for indemnification
of the officers and directors of the Company to the full extent permitted by
law. The General Corporation Law of the State of California permits a
corporation to limit under certain circumstances, a director's liability for
monetary damages in actions brought by or in the right of the corporation.
The Company's Articles of Incorporation also provide for the elimination of
the liability of directors for monetary damages to the full extent permitted
by law.
The Company has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Articles of
Incorporation and Bylaws. These agreements provide that the Company will
indemnify its directors and officers for certain expenses (including
attorneys' fees), judgments, fines, and settlement amounts incurred in any
action or proceeding, including an action by or in the right of the Company,
on account of services rendered as a director or officer of the Company, as a
director or officer of any subsidiary of the Company, or as a director officer
of any other enterprise to which the person provides services at the request
of the Company. The Company believes that these provisions and agreements
are necessary to attract and retain qualified persons as directors and
officers. The Company carries director and officers' insurance. At
present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company as to which indemnification is sought,
nor is the Company aware of any threatened litigation or proceeding that
may result in claims for indemnification.
The Company understands that the staff of the SEC is of the opinion that
statutory, charter, and contractual provisions as those described above have
no effect on claims arising under the federal securities laws. The Company
is not aware of any material threatened or ongoing litigation or proceeding
which may result in a claim for such indemnification.
Item 11 - Executive Compensation
Executive officers having cash compensation in excess of $100,000 paid or
accrued for services rendered during the years ending December 31,1998 and
December 31, 1997 are as follows:
-13-
<PAGE>
Compensation Long Term Compensation
Name and Year Salary Bonus Stock Option All Other
Principal Position Ending $ (3) $ Award $
(2)
Shares (1)
James T. Koo,Pres. 12/31/98 124,744 5,000 2,000
CEO & Director 12/31/97 141,015 30,000 2,000
12/31/96 93,472 62,212 2,000
1. In fiscal 1998 an option to purchase 5,000 shares of Photonics was awarded
to Mr. Koo and to each of the Directors who had served on the Board for a full
year. These options were granted in appreciation of the time and effort
afforded to the Company by the Directors who serve without remuneration.
2. Mr. Koo was a participant in the DTC 401(k) shared savings plan. The
Company, as provided for in the 'employer match' provision of the plan,
contributed $2,000.
3. The salary compensation reflected a temporary 10% salary reduction
instituted during the year. Starting Nov. 8, 1998, Mr. Koo has been working
without pay due to financial difficulties of the Company.
Aggregated Option Exercises in Last Fiscal Year
And FY-End Option Values
<TABLE>
<S> <C> <C> <C> <C>
Securities Value of
Underlying Unexercised in the
Unexercised Options Money Options
Value At FY End # at FY end $
Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
- -----------------------------------------------------------------------------
James T. Koo 0 43,210/36,660 $5,000/$3,000
- -----------------------------------------------------------------------------
No options were exercised by any of the Company's executive officers.
Board of Director's Report on Repricing of Options/SARs
There was no repricing of options/SARs during the year ended Dec. 31, 1998.
Item 12 - Security Ownership of Management
The following table sets forth the shares of the Company's Common Stock
beneficially owned at December 31, 1998, by (I) each person who is known by
the Company to be the beneficial owner of more than five percent of the
Common Stock, (ii) by each of the directors, (iii) by each of the executive
officers listed in the Summary Compensation Table for 1997, and (iv) by all
directors and officers as a group. The options, warrants and common and
preferred stock represented in this table reflect the 1 for 5 reverse split
of Photonics stock with became effective February 9, 1996 prior to the
finalization of the merger.
The acquisition of DTC was consummated on March 5, 1996. The agreement as
ratified by DTC Data Technology Corporation's Shareholders at their meeting
held on February 6, 1996, specifies "The Board of Directors of DTC would file
-14-
<PAGE>
a Certificate of Dissolution in the state of Delaware after consummation of
the Acquisition. Thereafter, DTC shall continue for a term of three years or
longer...". After the dissolution is complete, the conversion of DTC stock to
Photonics stock will be affected at a conversion rate, which is at a
multiplier of 0.147853. All calculations of beneficial ownership, exercise
and conversion of all outstanding options, warrants and other right to
purchase shares of common or preferred stock uses this multiplier as though
the dissolution had in fact occurred.
Shares
Beneficially Note # Percent
Beneficial Owner Owned (1) Owned
David S. Lee 1,168,483 16.9%
Chairman of the Board
c/o Photonics/DTC Data Technology
606 Charcot Ave.
San Jose, CA 95131
Broadsino Computer 916,412 (6) 13.2%
Development, Ltd.
K.C. Yeung
Room 1101, 1103 and 1104 Star Center
443-451 Castle Peak Road
Kwai Chung NT, Hong Kong
Domex Technology 779,612 (5) 11.3%
Corporation
No. 2, Technology Rd. 1,
Science-Based Industrial Park
Hsinchu, Taiwan, ROC
James T. Koo 616,734 (8) 8.9%
President
c/o Photonics/DTC Data Technology
606 Charcot Ave.
San Jose, CA 95131
Robert P. Dilworth 50,373 *
Director
John Miao, Director 155,000 (9) 2.2%
All Officers and 2,917,002 (5 persons) 52.5%
Directors as a group
* Denotes less than 1%
1. Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common and Preferred Stock and options or warrants
to purchase stock.
-15-
<PAGE>
2. Percentage calculations are based upon December 31, 1998 figures
of 4,336,186 shares of Common Stock, 2,328,136 shares of Preferred stock
and 243,709 options to purchase stock, pursuant to the Company's 1997 Stock Option Plan, held by the beneficial owners.
Item 13. Related Transactions, Changes in Securities.
A member of the Board of Directors and President of Broadsino (See Item 11,
note 6) is also President of the Company's prime subcontractor for the
production of the Company's storage controllers, which meets approximately 90%
of the Company's product requirements.
The Company entered into an agreement with CMC Industries ("CMCI"), a company
owned by DTC's largest shareholder and Chairman of the Board, wherein CMCI
assumed and paid specific vendor invoices of the related party who is the
Company's prime sub-contractor. This note bore interest at 12% per annum,
balance due upon demand. At December 31, 1996 the Company owed a total in
principle and interest of $431,894. In conjunction with the private
placement of the Company's Series A Convertible Preferred Stock, this debt
was converted to said stock at $1.00 per share.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The index to the audited financial statements and financial statement
schedules is included on page F-1 of this report. The financial statements
are included herein at pages F-3 through F-18. The following financial
statement schedules are included herein at page 16.
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Exhibit 23.1 Consent of Independent Auditors
Exhibit 27.1 Financial Data Schedule
Schedule II - Valuation and Qualifying Accounts
Balance Charged to Charged Balance
At Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
- -----------------------------------------------------------------------------
December 31, 1997
Allowances for:
Doubtful Accounts $ 420,000 0 26,000 219,000 $227,000
Inventory Reserve $1,186,000 0 100,000 421,000 $865,000
December 31, 1998
Allowances for:
Doubtful Accounts $ 227,000 0 0 88,000 $139,000
Inventory Reserve $ 865,000 125,000 0 192,000 $798,000
- -----------------------------------------------------------------------------
See accompanying notes to financial statements
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements 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
By:/s/ Wen-Wai Huang
Chief Financial Officer
Date: May 17, 1999
-17-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES
</TABLE>
<TABLE>
<CAPTION>
Consolidated Financial Statements Page
------------------------------ ----
<S> <C>
Report of Independent Certified Public Accountants F-2
Report of Independent Certified Public Accountants
(Relating to 1997 Financial Statement Numbers) F-2A
Consolidated Financial Statements
Balance Sheets F-3, F-4
Statements of Operations F-5
Statements of Shareholders' Deficiency F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-19
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders of
Photonics Corporation (dba DTC Data Technology)
We have audited the accompanying consolidated balance sheets of Photonics
Corporation (dba DTC Data Technology) and subsidiaries as of December 31,
1998 and the related statements of operations, shareholders deficiency
and cash flows for the year then ended. In connection with our audit of
the consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audit.
The consolidated financial statements of Photonics Corporation and
subsidiaries as of December 31, 1997 and for the year then ended, were
audited by Meredith, Cardozo, Lanz & Chiu LLP, whose practice has been
combined with our Firm and whose report dated February 6, 1998 included
an explanatory paragraph that described conditions that raised substantial
doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. . An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Photonics Corporation (dba DTC Data Technology) and subsidiaries as of
December 31, 1998, and the results of their operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Also in our opinion, the related consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Photonics Corporation (dba DTC Data Technology) will continue
as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has incurred recurring losses from operations and as
of December 31,1998 has a net capital deficiency and negative working capital.
Additionally, as of December 31, 1998, the Company was in default on its
operating line of credit. These factors raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the
amount and classification of liabilities that might result from the outcome
of this uncertainty.
San Jose, California, April 21, 1999 F-2
<PAGE>
MEREDITH, CARDOZO, LANZ & CHIU LLP
----------------------------------
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders
Photonics Corporation (dba DTC Data Technology)
We have audited the consolidated financial statements of Photonics Corporation
(dba DTC Data Technology) and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedules as listed in the
accompanying index. These consolidated financial statements and consolidated
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Photonics Corporation (dba DTC Data Technology) and subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their cash flows for
the fiscal year ended December 31, 1997 and the ten months ended December 31,
1996, in conformity with generally accepted accounting principles. Also in our
opinion, the related consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that Photonics Corporation (dba DTC Data Technology) will continue as a going
concern.. As discussed in Note 1 to the financial statements, the Company's
recurring losses from operations and net capital deficiency raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Meredith, Cardozo, Lanz & Chiu LLP
San Jose, California
February 6, 1998
-F-2A-
<PAGE>
PHOTONICS CORPORATION
(DBA DTC DATA TECHNOLOGY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- -------
<S> <C> <C>
ASSETS (Note 5)
Current assets:
Cash and cash equivalents $ 42,000 5,000
Available-for-sale securities (Note 2) -- 171,000
Due from related parties (Note 10 & 16) 52,000 159,000
Accounts receivable, net of allowance for doubtful
accounts of $139,000 and $227,000,
respectively (Note 14) 313,000 939,000
Other receivables -- 289,000
Inventories (Note 3) 350,000 920,000
Prepaid expenses and other current assets 59,000 58,000
--------- ---------
Total current assets 816,000 2,541,000
Property and equipment, net (Note 4) 21,000 35,000
Other assets 15,000 231,000
--------- ---------
$ 852,000 2,807,000
========= =========
</TABLE>
F-3
<PAGE>
PHOTONICS CORPORATION
(DBA DTC DATA TECHNOLOGY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
December 31, 1998 1997
--------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS DEFICIENCY
Current liabilities:
Line of credit (Note 5) $ 147,000 --
Accounts payable 1,450,000 1,426,000
Due to related parties (Notes 10 & 16) 2,049,000 1,105,000
Accrued expenses (Note 11) 372,000 441,000
Other current liabilities -- 46,000
----------- ---------
Total current liabilities 4,018,000 3,018,000
Due to related parties (Notes 10 & 16) -- 477,000
----------- --------
Total liabilities 4,018,000 3,495,000
----------- --------
Minority interest in subsidiaries 125,000 125,000
Commitments and contingent liabilities
(Notes 7, 8, 13 and 16)
Shareholders' deficiency (Note 8):
Preferred stock, $1.00 par and liquidation value,
3,600,000 shares authorized; 2,328,136 and
2,106,009 shares issued as of December 31, 1998
and 1997, respectively, dividends in arrears of
$211,000 in 1998 2,328,000 2,106,000
Common stock, $.001 par value, 20,000,000 shares
authorized; 4,378,529 and 4,346,406 issued as of
December 31, 1998 and 1997, respectively 44,085,000 44,079,000
Capital subscription 11,000 11,000
Accumulated deficit (49,869,000)(47,163,000)
Accumulated other comprehensive income 154,000 154,000
----------- ----------
Total shareholders' deficiency (3,291,000) (813,000)
---------- ----------
$ 852,000 2,807,000
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
PHOTONICS CORPORATION
(DBA DTC DATA TECHNOLOGY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
---- ----
<S> <C> <C>
Net revenues (Note 9) $ 3,484,000 5,662,000
Cost of revenues (Notes 10 & 16) 2,952,000 3,487,000
Gross profit 532,000 2,135,000
Operating expenses:
Product development 376,000 438,000
Selling, general and administrative 2,461,000 2,456,000
Impairment of long-lived asset 303,000 --
--------- ----------
Total operating expenses 3,140,000 2,894,000
--------- ----------
Loss from operations (2,608,000) ( 759,000)
Other income (expense):
Interest income 1,000 --
Interest expense (389,000) (98,000)
Gain on sale of available-for-sale
securities (Note 2) 50,000 --
Other income (Note 12) 291,000 552,000
Other expense (50,000) (94,000)
--------- ----------
Total other income (expense ) (97,000) 360,000
--------- ----------
Loss before income taxes (2,705,000) (399,000)
Income taxes (Note 6) 1,000 60,000
--------- ----------
Net Loss (2,706,000) (459,000)
========= ==========
Preferred Stock Dividend (211,000) -
Net Loss Attributed to Common Shareholders (2,917,000) (459,000)
Basic and diluted loss per common share $ (0.67) (0.11)
========= ==========
Weighed average common shares outstanding 4,336,186 4,331,859
========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
PHOTONICS CORPORATION
(dba DTC DATA TECHNOLOGY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
PREF STOCK COM STOCK
----------- ---------- CAP ACCUM
SHARES AMOUNT SHARES AMOUNT SUB DEFICIT (A) (B) TOTAL
----- ----- ----- ---- --- ------ ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) -- $-- 4,323,560 $44,075 $26 $(46,704)$154 $(46,550) $(2,449)
(2) -- -- 22,846 4 - - - -- 4
(3) 2,091,020 2,091 -- - - - - -- 2,091
(4) 14,989 15 -- - (15) - - -- --
(5) -- -- -- - - (459) - (459) (459)
- -----------------------------------------------------------------------------
(6) 2,106,009 2,106 4,346,406 44,079 11 (47,163) 15 (47,009) (813)
(7) -- -- 32,123 6 - -- -- -- 6
(8) 222,127 222 -- - - -- -- -- 222
(9) -- -- -- - - (2,706) -- (2,706) (2,706)
- -----------------------------------------------------------------------------
(10) 2,328,136 $2,328 4,378,529 $44,085 $11 $(49,869)$154 $(46,715) $(3,291)
========= ====== ========= ======= == ======== ==== ======= =======
</TABLE>
KEY TO ABOVE TABLE
(A) Accumulated Other Comprehensive Income
(B) Total Comprehensive Loss
(1) Balances as of 1/1/97
(2) Issuance of common stock under the stock option plans
(3) Issuance of Preferred Stock (Note 8)
(4) Capital subscriptions, net
(5) Net loss
(6) Balances as of 12/31/97
(7) Issuance of common stock under the stock option plans
8) Issuance of preferred stock (Note 8)
(9) Net loss
(10) Balances as of 12/31/98
F-6
<PAGE>
PHOTONICS CORPORATION
(DBA DTC DATA TECHNOLOGY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
(NOTE 15)
<TABLE>
<CAPTION>
For the Years ended December 31, 1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,706,000) (459,000)
Adjustments to reconcile net (loss)
income to net cash used in operating activities:
Gain on sale of available-for-sale securities (50,000) --
Loss on impairment of long-lived asset 303,000 --
Issuance of preferred stock for
forgiveness of debt 122,000 59,000
Depreciation and amortization 14,000 82,000
Net recovery of doubtful accounts (88,000) (193,000)
Changes in operating assets and liabilities:
Accounts receivable 1,003,000 (196,000)
Inventories 570,000 30,000
Prepaid expenses and other current assets (1,000) 36,000
Accounts payable 24,000 259,000
Due to related parties 514,000 (247,000)
Accrued liabilities (69,000) (483,000)
---------- ----------
Net cash used in operating activities (364,000) (1,112,000)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of investment 221,000 57,000
Capital Expenditures (87,000) (222,000)
---------- ----------
Net cash provided by (used in)
investing activities 134,000 (165,000)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit 2,167,000 --
Repayment of line of credit (2,020,000) --
Proceeds from short-term debt 230,000 691,000
Repayments of short-term debt (216,000) (74,000)
Sale of preferred stock 100,000 557,000
Issuance of common stock through
exercise of options 6,000 4,000
---------- ----------
Net cash provided by financing activities 267,000 1,178,000
---------- ----------
Net (decrease) in cash and cash equivalents 37,000 (99,000)
Cash and cash equivalents, beginning of year 5,000 104,000
---------- ----------
Cash and cash equivalents, end of year $ 42,000 5,000
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
1. Summary of Significant Accounting Policies
The Company
Photonics Corporation, dba DTC Data Technology (the Company, Photonics), a
California corporation, designs, develops, and markets Integrated Device
Electronics (IDE) and Small Computer Systems Interface (SCSI) disk controller
cards and Input/Output (I/O) products for personal computers. In June 1995,
Photonics suspended the further development and production of products using
its technology, ceased all marketing activities related to those products and
terminated substantially all of its employees. In March 1996, Photonics
Corporation acquired DTC Data Technology (DTC), a Delaware corporation.
Following the merger, the Company formally discontinued the marketing of all
networking products previously sold by Photonics, with DTC being the surviving
business unit.
DTC was founded in 1979 as an independent designer, developer and marketer of
intelligent storage controllers and chip sets used primarily in connection
with IBM-compatible personal computers. DTC designs proprietary integrated
circuits for use in its storage controllers and chip sets. These circuits are
fabricated by semiconductor manufacturers based on DTC's specifications. Final
assembly and test of controller boards are performed by approved vendors both
in the United States and abroad.
Basis of Presentation and Going Concern Uncertainty
The consolidated financial statements of the Company have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred recurring losses and as of December 31, 1998 has a working capital
deficit of approximately $3,202,000 and was in default on its operating line
of credit. These conditions, among others, give rise to substantial doubt
about the Company's ability to continue as a going concern. Over the past
five years, the Company has sold portions of its business considered
to be outside the scope of its strategic focus in order to supplement
working capital resources and reduce dependence on bank financing, and is
currently in the process of negotiating a merger which management believes
will ultimately lead to the Company being able to sell additional shares of
its stock. Additionally, the Company has made major reductions in workforce
and plans to retain a financial advisor and an investment banking firm to
help the Company raise capital in he form of a bridge loan for completing
the aforementioned merger.
Management believes that these steps, as well as outside investment
participation and improved results of operations, will provide the Company
with the opportunity to achieve its objectives. There is, however, no
assurance that the steps taken or programs in place will meet all of the
Company's needs or that it will continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries after elimination of inter
company accounts and transactions.
F-8
<PAGE>
As of December 31, 1998 and 1997, the minority interest represents the
minority stockholders' proportionate share of the equity of the subsidiaries,
Qume Taiwan and Data Technology Hong Kong, Ltd., which was 0.6% and 0.6%,
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 shareholders' deficiency.
For foreign entities operating in U.S. dollars, net non-monetary assets are
translated at historical exchange rates, and net monetary assets are
translated at current exchange rates. Translation gains and losses are
included in the determination of the results of operations.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment and leasehold improvements is calculated on the straight-line
method over the estimated useful lives of the assets, generally three to
seven years. Assets held under capital leases are amortized on a straight-
line basis over the shorter of the lease term or the estimated useful life
of the asset.
Revenue Recognition
Revenue is generally recognized upon shipment of product. Sales to
distributors are made pursuant to agreements which provide the distributors
certain rights of return and price protection on unsold merchandise. Revenues
from such sales are recognized upon shipment, with a provision for estimated
returns and allowances recorded at that time.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising costs for the
years ended December 31, 1998 and 1997 were approximately $0 and $74,000,
respectively.
Income Taxes
The Company accounts for corporate income taxes in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109,
deferred tax liabilities or assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered. Deferred income taxes as of December 31, 1998 and 1997, primarily
result from certain expenses that are not currently deductible for tax
purposes.
F-9
<PAGE>
Earnings Per Common Share
The Company has adopted SFAS No. 128, Earnings Per Share, and has restated all
periods. Basic earnings per share is computed using the weighted-average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted-average number of common and common
equivalent shares outstanding during the period.
As a result of the losses incurred in fiscal 1998 and 1997, common
equivalent shares of 2,447,545 in 1998 and 2,226,084 in 1997 were anti-
dilutive and, accordingly, were excluded from the computation of loss per
share for those years.
Short-Term Investments
Short-term investments, consisting of publicly traded preferred and common
stocks, are stated at fair value. The Company has adopted SFAS NO. 115,
Accounting for Certain Investments in Debt and Equity Securities. SFAS No.
115 requires companies to classify investments in debt and equity securities
with readily determinable fair values as "held-to-maturity", "available-for-
sale", or "trading" and established accounting and reporting requirements
for each classification. The Company classifies all short-term investments
as "available-for-sale". Securities classified as available-for-sale are
reported at their fair market value with unrealized gains and losses reported
as a separate component of shareholders' deficiency.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets
The Company periodically reviews its long-lived assets and certain
identifiable intangibles for impairment. When events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company writes the asset down to its net realizable value.
In 1998, the Company determined that $216,000 of intangible assets from the
prior year and $87,000 of current year expenditures for intangible assets, no
longer had economic value to the Company as part of a business plan
restructuring. Accordingly, the Company recognized a one time charge of
$303,000 for the impairment of the related assets.
Stock-Based Incentive Program
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages entities
to recognize compensation cost for stock-based employee compensation plans
using the fair value based method of accounting defined in SFAS No.123, but
allows for the continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has not granted
options since May 1995, and continues to use the accounting prescribed by
F-10
<PAGE>
APB Opinion No. 25. As such, the Company is required to disclose pro forma
net income and earnings per share
as if the fair value based method of accounting has been applied (Note 8).
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates fair value.
Investment securities:
The fair values for marketable debt and equity securities are based on
quoted market prices.
Short-term debt:
The fair value of short-term debt (principally accounts payable)
approximates cost because of the short period of time to maturity.
Long-term and related party debt:
The fair value of long-term debt is estimated based on current interest
rates available to the Company for debt instruments with similar terms
and remaining maturities.
As of December 31, 1998, the fair values of the Company's financial
instruments approximate their historical carrying amounts.
Adoption of New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, Employer's Disclosure about Pensions and Other Postretirement
Benefits, which standardizes the disclosure requirements for pension and
other postretirement benefits. The adoption of SFAS No. 132 did not impact
the Company's current disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard on July 1, 1999 to affect its
financial statements.
F-11
<PAGE>
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
2. Available-For-Sale Securities
As of December 31, 1997, the Company held 22,500 shares of outstanding common
stock of CMC Industries Corporation (Note 10). The Company received the stock
in exchange for a note payable to David Lee, who is Chairman of Board of both
companies. In March 1998, the Company sold the shares for cash proceeds of
$221,000.
A summary of available-for-sale securities follows:
1998 1997
- -----------------------------------------------------------------------------
Cost of securities -- $171,000
Unrealized gain (loss) -- -
- -----------------------------------------------------------------------------
Total $ -- $171,000
3. Inventories
A summary of inventories follows:
1998 1997
- -----------------------------------------------------------------------------
Raw materials $ 88,000 $148,000
Work-in-process 62,000 190,000
Finished goods 200,000 582,000
- -----------------------------------------------------------------------------
Total $350,000 $920,000
4. Property and Equipment
A summary of property and equipment follows:
1998 1997
- -----------------------------------------------------------------------------
Equipment $ 2,317,000 $2,317,000
Furniture and fixtures 277,000 277,000
Leasehold improvements 94,000 94,000
Sub total 2,688,000 2,688,000
Less accumulated depreciation and
Amortization 2,667,000 2,653,000
- -----------------------------------------------------------------------------
Total $ 21,000 35,000
5. Line of Credit
In April 1998, the Company obtained a bank line of credit which provides
for borrowings up to $2,000,000, expiring on April 30, 2000. The bank
line is collateralized by the Company's assets, bearing interest at prime
rate plus 3.0% (10.75% as of December 31, 1998) on a minimum daily
loan balance of $1,000,000, with interest rate reductions for meeting
certain tangible net worth criteria. In addition, the agreement contains
restrictive covenants regarding accounts receivable balances and tangible
net worth, as defined, of at least $300,000. The Company was not in
compliance with certain restrictive covenants during fiscal 1998 and as of
December 31, 1998, had not repaid the outstanding balance as of April 21,
1999 and, therefore, was in default under the terms of the line of credit.
As of December 31, 1998, the Company had borrowings outstanding of
$147,000.
F-12
<PAGE>
6. Income Taxes
During 1997, Photonics incurred foreign taxes of approximately $58,000,
relating to income earned during prior years by the Company's subsidiary
in Hong Kong. Income tax expense for the years ended December 31,
1998 and 1997 was $1,000 and $60,000, respectively.
Deferred tax asset (liabilities) comprises the following:
1998 1997
- -----------------------------------------------------------------------------
Depreciation $ 32,000 251,000
Reserves not currently deductible 318,000 371,000
Accrued liabilities 77,000 135,000
Net operating losses 35,357,000 34,275,000
Tax credit carryovers 2,075,000 2,075,000
Valuation allowance (37,859,000)(37,107,000)
- -----------------------------------------------------------------------------
Net deferred taxes $ - $ -
The Company's effective tax rate differs from the statutory federal income
tax principally as a result of Federal and state net operating losses for
which a full valuation allowance has been provided.
As of December 31, 1998, the Company has approximately $101 million
of regular net operating losses to offset future Federal income tax. These
carry-forwards expire in the years 2001 through 2018. In addition, the
Company has approximately $2.1 million of Federal tax credits expiring
1999 through 2010.
The Tax Reform Act of 1986 imposed substantial restrictions of the
utilization of net operating loss and tax credit carry-forwards in the event
of an "ownership change" as defined by the Internal Revenue Code. If the
Company has an "ownership" change as defined by the Internal Revenue
Code, the Company's ability to utilize the Federal and California net
operating losses could be reduced. The Company has not made this
determination as of December 31, 1998.
7. Lease Commitments
The Company leases its facilities under non-cancelable lease agreements
expiring through 2003. The facility leases require the Company to pay
certain maintenance and operating expenses such as taxes, insurance, and
utilities. Rent expense related to these operating leases was $189,000 and
$177,000 for the years ended December 31, 1998 and 1997, respectively.
Future minimum annual lease payments for these leases are as follows:
Year ending December 31.
1999 $182,000
2000 191,000
2001 201,000
2002 211,000
2003 108,000
--------
Total $893,000
F-13
<PAGE>
8. Capital Stock
Preferred Stock
In December 1996, the Company entered into a Private Placement
Memorandum (PPM) for the sale of up to 3,600,000 shares of Series A
Convertible Preferred Stock, at $1.00 per share, with minimum lots being
25,000 shares. The Series A Convertible Preferred Stock is convertible
into common stock on a 1 for 1 basis, carries a provision for a 10%
cumulative dividend, with dividends in arrears greater than 12 months
being payable in the form of common stock, the Series A shares also have
a liquidation preference of $1.00 per share and voting rights. As of
December 31, 1998 and 1997, the Company had issued 2,328,136 and
2,106,009 shares of preferred stock, respectively, under the PPM agreement.
In addition, the preferred stock provides for the mandatory conversion into
an equal number of shares of the Company's common stock, provided that the
stock maintain a closing bid price of $2.50 per share for a period of
twenty consecutive days.
As of December 31, 1998, the Company had dividends in arrears greater
than 12 months due of $211,000. As such, these dividends in arrears will
be settled via the issuance of common stock.
Stock Warrants
As of December 31, 1997, the Company had outstanding warrants for
46,250 shares of common stock, exercisable at prices from $38.75 per
share to $54.00 per share, relating to a bridge loan financing and
underwriting of the Company's initial public offering. In November 1998,
these warrants expired without having been exercised.
Stock Option Plans
During 1997, the Company terminated its Photonics and DTC stock
option plans and rolled them into a new stock option plan (The 1997
Plan). FASB Statement 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding net
income and earnings per share as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair value
based method prescribed in FASB Statement 123. The Company
estimates the fair value of the stock options at the grant date by using the
Black-Scholes option pricing-model with the following weighted-
average assumptions used for grants in 1998 and 1997: dividend yield of
0; expected volatility of 167 and 202 percent; risk-free interest rates of
4.7% and 5.9%; and expected lives of 5 to 10 years for the plan options.
Under the accounting provisions of FASB Statement 123, the Company's
net loss and loss per share would have been changed to the pro forma
amounts indicated below:
1998 1997
- -----------------------------------------------------------------------------
Net loss attributed to common shareholders:
As reported $(2,917,000) $(459,000)
Pro forma $(2,970,000) $(506,000)
Basic and diluted loss per share:
As reported $ (0.67) $ (0.11)
Pro forma $ (0.68) $ (0.12)
- ----------------------------------------------------------------------------
F-14
<PAGE>
1997 Stock Option Plan
The 1997 Plan allows for the issuance of incentive and nonqualified stock
options to employees and consultants of the Company and authorizes the
issuance of up to 840,000 shares of the Company's common stock.
Options granted under the 1997 Plan are generally for periods not to
exceed ten years and generally must be at prices not less than 100% and
85%, for incentive and nonqualified stock options, respectively, of the
estimated fair value of the stock on the date of grant as determined by the
Board of Directors. Options granted to shareholders who own greater than
10% of the outstanding stock are established at the estimated fair value of
the stock on the date of grant.
A summary of the status of the Company's 1997 Plan is as follows:
<TABLE>
<CAPTION>
Weighted-Average
--------------------------------
Share Exercise Exercise Fair Remaining
Options Price Price Value at Life
Grant
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January
1, 1997 - $ - $ - -
Transferred from
other plans 255,575 0.16-1.69 0.40
Granted 320,587 0.19-0.38 0.32 0.28
Canceled (110,400) 0.16-1.69 0.28
Exercised (17,671) 0.16 0.16
- -----------------------------------------------------------------------------
Balance, December
31, 1997 448,091 $ 0.16-1.69 $ 0.38 6.99
Granted 87,500 0.06-0.66 0.52 0.35
Canceled (144,191) 0.16-0.38 0.29
Exercised (32,123) 0.16-0.25 0.17
- -----------------------------------------------------------------------------
Balance, December
31, 1998 359,277 $0.06-1.69 $ 0.47 8.12
- -----------------------------------------------------------------------------
</TABLE>
In addition to the shares exercised above, 5,175 shares were exercised in
1997 from the DTC stock option plan prior to that plan's termination.
F-15
<PAGE>
The options outstanding and currently exercisable by exercise price as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
- ------------------------------------------------------------------------------
Exercise Price (A) (B) (C) (D) (E)
<S> <C> <C> <C> <C> <C>
$0.06 - $0.50 268,611 8.17 $0.27 122,616 $0.24
$0.51 - $1.00 57,500 9.33 $0.66 - $ -
$1.01 - $2.00 33,166 5.58 $1.69 33,166 $1.69
- -------------------------------------------------------------------------------
</TABLE>
KEY TO TABLE
(A) Number Outstanding
(B) Weighted-Average Remaining Contractual Life (Years)
(C) Weighted-Average Exercise Price
(D) Number Exercisable
(E) Weighted-Average Exercise Price
Shared Savings Plan
The Company maintains a Shared Savings Plan (the SSP) covering
substantially all of its U.S. employees. The SSP allows employees to defer
from 2% to 12% of their compensation to the maximum amount permitted
by law. Employee and Company contributions are considered tax deferred
under Section 401(k) of the Internal Revenue Code. Under the terms of
the SSP, the Company will contribute, on a quarterly basis, shares of its
common stock to each employee's account equal in value to 40% of the
employee's contributions, limited, however to $2,000 or 6% of
compensation per calendar year, whichever is less. The Company's
contributions vest at the rate of 25% for each full year of service, as
defined, but become 100% vested upon normal retirement, disability or
death. The Company made no contributions of common stock to the SSP
during the years ended December 31, 1998 and 1997.
9. Major Customers
The operations of the Company are in one industry segment and include
primarily the design, development, manufacture and sales of controller
boards. The Company's customers consist primarily of original equipment
manufacturers, value-added resellers, value-added distributors, system
integrators and dealers in this industry.
For the year ended December 31, 1998, three customers accounted for
21%, 14%, and 11% of net revenues, respectively. As of December 31, 1998,
three customers accounted for 35%, 16%, and 15% of accounts
receivable, respectively.
For the year ended December 31, 1997, three customers accounted for
22%, 15% and 12% of net revenues, respectively. As of December 31,
1997, two customers accounted for 25% and 10% of accounts
receivable, respectively.
10. Related Party Transactions
A member of the Board of Directors is President of the Company's prime
F-16
<PAGE>
subcontractor for the production of the Company's storage controllers,
which meets approximately 90% of the Company's requirements (Note
16). For the years ended December 31, 1998 and 1997, the Company
purchased approximately $1,025,000 and $1,072,000 from this prime
subcontractor, respectively. As of December 31, 1998 and 1997, amounts
due to this subcontractor were approximately $1,115,000 and $678,000,
respectively.
Notes Receivable
In March 1997, the Company received a note from a shareholder for
$300,000 in exchange for preferred stock. As of December 31, 1998 and
1997, the Company, at the direction of the shareholder, had offset
$248,000 and $141,000 of the note against the then $819,000 accounts
payable due to the shareholder.
Notes Payable
During 1996, the Company entered into debt agreements with
shareholders for approximately $602,000. These debt agreements bore
interest from 10% to 12% and were convertible to preferred stock on
demand. During the first quarter of 1997, these loans were converted into
preferred stock.
The Company also entered into an agreement with CMC California, Inc.
(CMC), a company owned by a major shareholder and Chairman of the
Board of Directors where CMC assumed and paid specific vendor
invoices of the related party who is the Company's prime subcontractor.
This note payable bears interest at 12%, with the balance due on demand.
As of December 31, 1996, the Company owed approximately $391,000 to
CMC. During the first quarter of 1997, this amount was converted into
preferred stock.
During 1998 and 1997, the Company entered into debt agreements with
shareholders for approximately $934,000. A summary of these debt
agreements follows:
Years ended December 31, 1998 1997
- -----------------------------------------------------------------------------
Bridge loan to shareholder at the rate of 15%;
due on demand; convertible to preferred stock
at $1.00 per share $450,000 $295,000
Bridge loan to shareholder at the rate of 10%;
due on demand; convertible to preferred stock
at $1.00 per share 229,000 229,000
Bridge loan to shareholder at the rate of 15%;
due on demand; convertible to preferred stock
at $1.00 per share 255,000 350,000
- -----------------------------------------------------------------------------
Total $934,000 $874,000
F-17
<PAGE>
11. Accrued Expenses
A summary of accrued expenses follows:
1998 1997
- -----------------------------------------------------------------------------
Accrued allowances for sales to distributors $147,000 $221,000
Accrued professional fees 87,000 102,000
Accrued payroll and related expenses 102,000 91,000
Other accrued expenses 36,000 27,000
- -----------------------------------------------------------------------------
Total $372,000 $441,000
12. Other Income
A summary of other income follows:
1998 1997
- -----------------------------------------------------------------------------
Debt forgiveness $252,000 $225,000
Royalty income 1,000 189,000
Miscellaneous other income 38,000 138,000
- -----------------------------------------------------------------------------
Total $291,000 $552,000
13. Litigation
The Company is involved in litigation arising in the ordinary course of
business. The Company has been and continues to be threatened with
litigation by some of its trade creditors. In the opinion of management,
after consulting with legal counsel, these matters will be resolved without
material adverse effect on the Company's financial position, results of
operations or cash flows.
14. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company places its cash and cash
equivalents with high quality financial institutions and, by policy, limits
the amounts of credit exposure to any one financial institution.
A significant portion of the Company's accounts receivable are derived
from one major class of customer (distributors) with the remainder spread
across many other customers in various electronics industries. The
Company believes any risk of accounting loss is significantly reduced due
to provision being made at the date of the sale for returns and allowances,
diversity of its products, end-customer, geographic sales areas and
insurance on foreign distributor sales. The Company performs credit
evaluations of its customers' financial condition whenever necessary. The
Company generally does not require cash collateral or other security to
support customer receivables.
F-18
<PAGE>
15. Statements of Cash Flows
Supplemental disclosure of cash flow information:
1998 1997
- -----------------------------------------------------------------------------
Cash paid for interest $156,000 $37,000
Cash paid for income taxes $ 1,000 $60,000
Non cash investing and financing activities:
Issuance of preferred stock in payment of
note payable $ - $993,000
Issuance of preferred stock in payment of
accounts payable $122,000 $241,000
Issuance of preferred stock in exchange for
note receivable $ - $300,000
Issuance of note payable for available-for-
sale securities $ - $229,000
Issuance of note payable in payment of
accounts payable $ - $477,000
Decrease note receivable balance in payment
of accounts payable $107,000 $141,000
Issuance of preferred stock subscribed $ - $15,000
- -----------------------------------------------------------------------------
16. Subsequent Events
The Company has entered into discussions with its prime subcontractor, a
related party, for the possible merger of the two companies. The Company
is anticipating issuing shares of Series A Preferred Stock in exchange for
all the net assets of the related party, estimated to be $6.5 million.
F-19
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated June 3, 1999, with respect
to the consolidated financial statements and schedules of Photonics
Corporation included in this Form 10-K for the year ended December 31, 1998.
BDO Seidman, LLP
Accountants and Consultants
San Jose, California
June 4, 1999
-37
<PAGE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 OF
PHOTONICS CORPORATION, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 42 5
<SECURITIES> 0 171
<RECEIVABLES> 313 939
<ALLOWANCES> 0 0
<INVENTORY> 350 920
<CURRENT-ASSETS> 816 2,541
<PP&E> 2,688 2,688
<DEPRECIATION> 2,667 2,653
<TOTAL-ASSETS> 852 2,807
<CURRENT-LIABILITIES> 4,018 3,018
<BONDS> 0 0
0 0
2,328 2,106
<COMMON> 44,085 44,079
<OTHER-SE> (3,291) (813)
<TOTAL-LIABILITY-AND-EQUITY> 852 2,807
<SALES> 3,484 5,622
<TOTAL-REVENUES> 3,484 5,622
<CGS> 2,952 3,487
<TOTAL-COSTS> 2,952 2,894
<OTHER-EXPENSES> 188 (593)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 389 98
<INCOME-PRETAX> (2,705) ( 399)
<INCOME-TAX> 1 60
<INCOME-CONTINUING> (2,706) ( 459)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,917) ( 459)
<EPS-BASIC> (.67) ( .11)
<EPS-DILUTED> (.67) ( .11)
<PAGE>
</TABLE>
