UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NUMBER 2
10-KSB
[X] Annual Report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended 12/31/99.
Commission File Number ______________
Photonics Corporation
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(Name of Registrant as Specified In Its Charter)
California 77-0102343
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(State of Incorporation) (IRS Employer Number)
1222 Alderwood Avenue, 408-745-9318
Sunnyvale, California 94089
(Address of principal executive offices) (Issuer's telephone
number)
Securities registered under Section 12(b) of the Act: none
Securities registered under Section 12 (g) of the Act: none
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the 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 ( )
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB.
Yes [X] No ( )
State issuer's revenues for the most recent fiscal year:
The estimated aggregate market value of the voting stock held by non-
affiliates of the registrant as of December 31, 1999 was $ 531,920. The
market value is based upon the average bid price of the Common Stock
of $ 0.14 per share on December 31, 1999.
The Company had 4,396,271 shares of common stock, par value of $ 0.001
per share, outstanding as of December 31, 1999.
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INDEX
Part I
Item 1 Business 5
General 5
Products and the Market 5
The Competition 6
Intellectual Property 6
Manufacturing and Suppliers 6
Patents and Licenses 6
Significant Customer 7
Backlog 7
Employees 7
Item 2
Properties 7
Item 3
Legal Proceedings 7
Item 4
Submission of Matters
to a Vote of Security Holders 8
Part II
Item 5
Market for Common Equity 8
Item 6
Management's Discussion and Analysis 9
Liquidity and Capital Resources 11
Other Matters 12
Item 7
Financial Statements 12
Item 8
Changes in and Disagreements
with Accountants on Accounting
And Financial Disclosures 12
Part III
Item 9
Director, Executive officers,
Promoters and Control Person:
Compliance with Section 16a of
the Exchange Act 12
Indemnification Agreement 13
Item 10
Executive Compensation 13
Board of Director's Report on
Repricing of Options/SARs 14
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Item 11
Security Ownership of Certain
Beneficial Owners and Management 14
Item 12
Certain Relationships and
Related Transactions 15
Item 13
Exhibits and Reports on Form 8K 16
Signature Page 16
Quarter 4 Income Statement Comparison 16
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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.
Part I
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 focused on IDE, SCSI, I/O and BIOS upgrade
business of IBM compatible personal computer.
As DTC is a well-known brand name and has established sales channels,
while the legal name of the company is Photonics Corporation, the
company is doing business as DTC Data Technology. For brevity sake,
the Company is herein after referred to as DTC or the Company.
The acquisition of DTC was consummated on March 5, 1996. The agreement
as ratified by DTC Data Technology Corporation's Shareholders at their
meeting held on February 6, 1996, specifies "The Board of Directors of
DTC would file a Certificate of Dissolution in the state of Delaware
after consummation of the Acquisition. Thereafter, DTC shall continue
for a term of three years or longer". The dissolution is complete, the
conversion of DTC stock to Photonics stock is affected at a conversion
rate 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. The Company started
conversion of DTC Data Technology shares to Photonics shares during
March 2000, handled by Corporate Stock Transfer of Denver, Colorado.
Products and the Market
The Company markets and sells IDE, I/O, BIOS upgrade, and SCSI products
for IBM compatible PCs to Value Added Resellers (VARs), and System
integrators through distribution and retailers for the upgrade after
market.
Integrated Device Electronics ("IDE"), and Input and Output ("I/O")
adapters connect between a PC's central processing unit and the storage
devices such as floppy and hard disks, CD-drives and other peripheral
devices such as printers, scanners, and digital cameras. The IDE I/O
add on card business has declined to less than $50 million dollars per
year as newer PCs have these functions built in on the mother boards
and seldom need additional add on cards.
The BIOS upgrade allows older machines to access large disks and/or be
Y2K compliant. While the Y2K market was strong for 1999, it died
after the New Year 2000.
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Small Computer System Interface (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 is about $1 billion and is
dominated by Adaptec with over 70% of the market share. After a flat
year in 1998, this market resumes its growth at double digit rate.
During first half of 1999, the company introduced several new PCI I/O
products, and a family of Y2K BIOS compliant upgrade products by adding
Y2K BIOS firmware to the older products. However, due to financial
difficulties, no new products were introduced in the second half of
1999, and those new products introduced were not adequately supported.
The Competition
As the IDE I/O market declined, many vendors have dropped out of this
market. Due to lack of R&D funds, DTC plans to remain in that market
place until an alternative market is available. Promise and SIIG compete
with the Company's I/O and IDE family of products. In the BIOS upgrade
market, main competitors are Unicore and AMI. In the SCSI market,
Adaptec is the main competitor. The Company's low end Adaptec
compatible products sales has declined and level off during 1999. Due
to financial difficulties, DTC introduced no new high end SCSI products
during 1999.
Intellectual Property
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. One time up to 90% of the Company's products
requirements were produced in China by Broadsino Computer Development,
Ltd. Of Hong Kong. However, Broadsino filed for bankruptcy during
1999. Company had found an alternative source, ActionMedia, that was
formed by a former managing director of Broadsino, K. C. Yeung, who was
also a former board member and officer of the Company.
Patents and Licenses
The Company holds various patents. DTC believes, however, that much of
its important technology resides in its proprietary hardware, software
and trade secrets. Due to lack of funds, the Company let several
patents expired after failing to sell them and did not have the funds
to maintain them.
Certain technologies are licensed to DTC from third parties. Those
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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 approximately 47% of net sales with D&H Distribution accounted for
approximately 21% of net sales. However, Ingram Micro has indicated its
intention to terminate its relationship with the Company due to low level
of sales of the Company's products. Ingram-Micro has, subsequent
to the original filing of the Company's 10-K Annual Report, terminated
the relationship.
Backlog
DTC does not believe that its 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 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, 1999 DTC employed 2 full time employees. One of the
employees works in the warehouse, shipping and receiving area, and the
second employee performs the necessary task of book keeping and other
office work. James T. Koo, the former CEO works as a non-paid
consultant for orderly winding down the business and selling of the
Company as well as technical support of the current products sold.
Item 2. Properties
To reduce expenses, the Company has moved from a 15,000 square foot
facility in San Jose, Ca. to a 2,200 square foot building in Sunnyvale,
California in Aug 1998. Most office furniture and non-immediately
sellable inventories were sold off. The current monthly rental,
including common area maintenance, is approximately $2,800.
Item 3. Legal Proceedings
During 1999, two former employees filed claims against the company
involving claims whereby the company did not have the money to pay the
vacation pay earned, when they were laid off. One of the two employees
also filed sexual harassment and discrimination charges against the
Company. Company has settled both cases by paying their vacation pay
and a month salary penalty in March 2000.
Insight Electronics Distribution, Danka Financial, Bay Alarm, and
Innovative Vanguard, are former vendors and a sales representative of
the Company, all have filed legal claims against the Company. Due to
financial difficulties, the Company did not have the legal resources to
defend itself. Several of these cases are pending, while two (Bay
Alarm and Innovative Vanguard) default judgments have been issued
against the Company.
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At the end of Dec. 31, 1998, there was no further legal action pending,
however, due to the fact that the Company was not able to meet the back
payment to vendors, additional suits may be filed against the Company.
However, all vendors and other debt holders are being negotiated with
at the present time.
Because the Company no longer carries director and officers insurance,
all directors and officers have resigned as of June 1999, except the
Corporate Secretary.
Item 4. Submission of Matter to a Vote of Security Holders
No matters were submitted during the year of 1999 to a vote of security
holders through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Common Equity
The Company's Common Stock trades on the Over The Counter Bulletin
Board ("OTCBB") under the symbol: PHOX for Photonics Corporation and
under the symbol DTEC for the pre-merger DTC Data Technology
Corporation. DTC Data Technology was legally dissolved as a Delaware
corporation in March 1999. Its stock symbol has been taken over by a
new company, Delano Technology in Feb. 2000. The Company is converting
all the DTC shares to Photonics shares in March 2000.
<TABLE>
<CAPTION>
Fiscal Yr. End 12/31/97 HIGH LOW
<S> <C> <C>
First Quarter .875 .050
Second Quarter .4375 .050
Third Quarter .4375 .027
Fourth Quarter .375 .020
Fiscal Yr. End 12/31/98
First Quarter .75 .03
Second Quarter .75 .04
Third Quarter 1.125 .04
Fourth Quarter .625 .03
Fiscal Yr. End 12/31/99
First Quarter .3125 .03
Second Quarter .25 .03
Third Quarter .25 .03
Fourth Quarter .25 .03
</TABLE>
The Company has not historically paid cash dividends. The Company does
not anticipate paying any cash dividends in the foreseeable future. As
of December 31, 1999, the Company had preferred dividends in arrears
greater than 12 months due of $443,414. These dividends in arrears are
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expected to be settled via the issuance of common stock. The Company
currently does not anticipate paying any cash dividends in the
foreseeable future.
Item 6. Management's Discussion and Analysis
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 1999 decreased to $0.72 million, a 77%
decline from 1998 revenues of $3.484 million. Massive inventory write
off resulted from the Company's move to a much smaller headquarter space
during the year. This move negatively impacted the Gross Margin and
made it meaningless for detailed discussion.
Due to lack R&D in a rapidly changing market of Personal Computer, the
Company's products quickly become non-competitive or obsolete.
Approximately 34% ($0.263 million) sales during 1999 were derived from
Company's Y2K solutions for PCs. The sales for these products stopped
after January 1, 2000.
Also because lack of funds for needed inventory for sales, customer
orders have not been filled. Combined with lower overall sales, Ingram
Micro and Merisel, two largest customers of the Company representing
approximately 47% and 9% of Company's 1999 sales, have informed the
Company of their intention to terminate their relationship with the
Company. Other small customers also left the Company due to obsolete
products and slow or non-delivery.
Due to continued loss, failure to find additional funds, the Company
decided to cease its operations and laid off most of its employees in
June 1999. The Company has retained Mr. James T. Koo, the former CEO,
as a non-paid consultant to an orderly shut down and sell the business.
Effective June 23, 1999, Registrant's board of directors and officers,
except Board Secretary, resigned.
The Registrant has been following this procedure rather than filing for
Chapter 7 in order to maximize return to creditors. Should creditors
not go along with the procedure and individually attempt to seize
assets through writs of attachments or like devices the Registrant
would intend to file for Chapter 7, which Registrant believes, would
cause all creditors to receive less.
Since July, Coast Business Credit ("Coast"), the secured asset lender
has requested all customers of Company to send payments directly to
Coast, and then it advances needed operating expenses to the Company.
The Registrant had approximately $ 531,817 of Accounts Receivable,
approximately $22,760 of secured bank debt at the end of Oct. However,
in November 1999, Coast questioned the quality, and determined the
Accounts Receivable of the Company will not be able to pay back the
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bank debt, and had decided to stop advance to the Company unless a
personal guarantee was in place. Consultant James T. Koo had to
provided needed personal guarantee for the funds advanced the Company.
This loan was finally paid off on Nov. 31, 1999. However, in Feb.
2000, Coast claimed the auditing fee and the legal expenses involved in
the personal guarantee exceeded the $3,000 withholdings by $1,200 and
refused to remove the UCC claim. This claim has been settled.
In July, a potential buyer of the Company was identified if all
creditors would accept $0.15 for every dollar owed. However the
Company failed to obtain an affirmative answer from a major creditor,
CompUSA. After three months of waiting, several creditors have since
resumed legal claims against the Company.
Starting November 1999, the Company decided to seek a buyer for the
Company after Chapter 11 reorganization. In December, an offshore
potential buyer had been identified who has offered $200,000 for the
Company, included in this the legal expenses needed for reorganization,
Mr. Koo to stay on for an unspecified time and an investment of $50,000
or more.
During February 2000, days before the Company plans to file Chapter 11,
the Company was contacted by and reached an initial, non-binding
agreement to acquire RealEstate4Sale.com(RE4S). Subject to
shareholders approval, when the acquisition is completed, RE4S
shareholders will own 85% of the Company on a fully diluted basis,
including conversion of a majority of the Company's debt to stock
through a convertible debenture. Other major terms and conditions
including all the former Board Member, officers, and major shareholders
will agree to hold their stock holdings for a minimum period of six
months, and more than 85% (value of the debt) of the current debt
holders will accept a discount payment of .45 shares of Company's
common stock for each $1.00 debt. And the management of the Company will
sell off the DTC business with the proceeds benefiting Debt Holders of the
Company.
RealEstate4Sale.com started in May of 1999. It is an Internet based
company focusing on business-to-business commercial real-estate
listings and related business advertising.
James Vaughn, Chairman of RE4S, Thomas Bailey, President, CEO of RE4S,
Joseph F. Langston, VP, CFO, and director of RE4S, J. Doyle, Director
of RE4S together with James T, Koo, the former CEO of Photonics will be
recommended for forming the new Board of Directors of the Company after
the acquisition. The current executive officers of RE4S to expected to
assume the executive officer positions of the Company.
As part of this acquisition agreement, to allow the merged company
to focus on Internet and real-estate business, at the request of RE4S, Mr.
James T. Koo purchased the remaining DTC business with all associated
tangible and intangible assets and current liabilities for $75,000 in cash
paid to the Company plus the assumption of certain liabilities. The sale
was effective as of December 31, 1999, and provides the Company with
funds for legal and auditing fees relating to the acquisition of RE4S.
The Company is still actively soliciting other offers.
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To avoid any failure resulting from a major creditor not accepting the
conversion of debt to common shares and at the request of RE4S, Mr.
James T. Koo agreed to indemnify the Company, conditioned upon and
following the acquisition of RE4S, for cash claims from existing
creditors of the Company above $500,000 for a period of one year.
The indemnity is limited to an amount equal to and is secured only by
Mr. Koo's holdings of stock in the Company. Such holdings total over
500,000 shares. In exchange for the indemnity, Mr. Koo will receive
approximately 193,000 shares of addition common stock of the Company as
part of the acquisition transaction.
Since this acquisition agreement is superior to the offer from the
offshore buyer, the company has stopped purchase discussions with him,
and the Chapter 11 filing; but has been actively pursuing the
acquisition of RE4S. However, no assurance can be given that the
acquisition will complete. Failure to consummate this acquisition, the
only alternative for the Company will be filing Chapter 7 for
liquidation. The Company estimates after paying off the priority
employee payroll and vacation debt, the unsecured debt holder will
receive less than two cents ($0.02) for every dollar of debt. No
assurance can be given that there will be funds generated to pay any
person. Registrant does not expect its shareholders to obtain any
monies if it is required to file liquidation.
The proposed acquisition, sale of DTC, election of directors and other
matters will be in a forth coming proxy for shareholders approval in a
shareholder's meeting.
Subsequent Events
On May 31, 2000, Photonics Corporation and RealEsate4Sale.com, Inc. terminated
the agreement with RealEstate4Sale.com pursuant to the terms and conditions of
the February 3, 2000 agreement.
The Company is currently negotiating a definitive agreement (the
"Agreement"), which management believes will be finalized, to merge with
the successor company to RealEstate4Sale.com, Inc., REpipeline.com, Inc.
("REP-T") subject to the fulfillment of the following conditions:
(i) Photonics must have has received confirmation from eighty-five percent
(85%) of the debt holders of record as of December 31, 1999 to convert
their respective debt into common stock of Photonics at a ratio of .45
shares of Photonics common stock for each $ 1 dollar of debt, such debt to
be a negotiated amount with each creditor. This condition has been
fulfilled by the Company. A representative of REP-T has accepted these
approvals and exceptions, as noted in Exhibit A attached to the Agreement.
As part of this condition, there exists an understanding between the parties
that any non-converted debt of Photonics, including any litigation resulting
therefrom will be borne by the Trust account as further described in the
Agreement.
(ii) All Photonics Preferred Stock has converted into common stock of
Photonics on a 1 to 1 ratio. This condition has also been fulfilled by the
Company. The dividends that remain unpaid for the fiscal year ends of 1998
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and 1999 will be paid in the form of common stock of the Company at a price
of $1 per share of Photonics common stock.
(iii) James Koo will set up a trust account (the "Trust Account") for the
purpose of indemnifying REP-T against creditors of Photonics that had
unpaid debt as of December 31, 1999 that totaled greater than $500,000.
The Trust Account will have a term of one year and will be funded with his
holdings of Photonics shares. In addition, this account will own shares of
Photonics allocated to accounts payable and debt holders of Photonics which
did not previous elect to convert, or were subject to litigation that was
unresolved at the time of the acquisition. During the term of the Trust
Account, the shares in the Trust Account can be sold pursuant to
instructions by Mr. James Koo, or his designated agent; but no
distributions can be made out of the account until released or approved by
the Board of REP-T.
(iv) Photonics shareholders must ratify the transfer of the assets and
business of the division of Photonics, DTC Data Technology, to Sunnyvale
Technology Corporation and the subsequent sale of 90% of Sunnyvale
Technology Corporation to James T. Koo for $75,000 plus certain assumed
liabilities as of December 31, 1999.
(v) Photonics issue a sufficient number of newly issued common shares to
provide such issuance (85% of total issued shares after full dilution) for
the acquisition of all outstanding shares of REP-T, Inc.
(vi) Both parties agree to abide by all local, state, federal and
securities laws in relationship to the pending acquisition.
(vii) REpipeline to provide all required legal & securities work to effect
such acquisition and meet all state, federal and securities filing
requirements.
(viii) Photonics to provide a copy of the last audit of financials and
other necessary documents and expenses of this merger at their expense.
(ix) Photonics initiate required filings, documents and notices to hold a
shareholders' meeting to elect Directors, of which Photonics will recommend
3 Directors to be specified by REP-T, Inc.
(x) The proxy notice of shareholder meeting shall be sent within 5 days of
the SEC approving such proxy statement.
(xi) The effective date of acquisition shall be the date of the
shareholders meeting, subject to shareholder approval of such acquisition.
(xii) REpipeline is authorized to handle all public statements as same are
to be approved by the President or Chief Financial Officer or Attorney or
duly authorized person of each respective company. All news releases are
to conform to all local, state, federal and securities guidelines.
Year 2000
The Company did not suffer any internal Year 2000 issues from its own
information system, databases, programs and communication equipment.
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Additionally, it is our belief that the Company's hardware and software
are Year 2000 compliant.
The Company has not suffered any adverse effects on the Company's
operations for the year 2000 readiness of key distributors, suppliers,
customers, vendors and financial service organizations.
The Company introduced a line of new products of PC based Y2K BIOS
upgrade during 1999. The sales of this product dropped significantly
since the first of the year 2000.
There can be no assurance, however, that there will not be a delay in,
or increased costs associated issues related to Year 2000 still unknown
to the Company at this time, and potential impact and related costs are
unknown at this time.
Liquidity and Capital Resources
The Company has working capital of $.075 million and its current
liabilities exceed its current assets by $4.3 million. During the first
quarter of 1999, the Company retained Hagerty Steward, an investment
banking firm, and Donald Yu, a financial adviser to raise capital and
arrange a new loan for the Company. Both attempts failed. Liquidity
and capital resources of the Company became non-existent at December
31, 1999. It is management's opinion that unless the above discussed
acquisition is completed; the only alternative will be for the
Company to file either Chapter 11 for reorganization or Chapter 7
liquidation.
Other Matters
To reduce cost, the Company decided to change Company's independent
public auditor from BDO Seidman to Hein and Associates, LLC of Dallas
Texas. Subsequent to the filing of the Company's 10-K Annual Report,
the Company decided to change it's independent public auditor from
Hein and Associates, LLC to Turner Stone & Associates, Dallas, Texas.
The Company filed and 8-K with the SEC relating to this change on
June 6, 2000.
On Aug. 1, 1999, to reduce operating the expenses, the Company moved to
smaller quarters at 1222 Alderwood Av., Sunnyvale, CA. 94089. The
Company is no longer able to maintain the old mainframe based MIS
system and installed a PC based MIS system for the Company's
financials. This together with change of financial personnel, and
document filing system may cause auditing difficulties at the year-end.
The Asian financial crisis impacted the Company negatively as two major
vendors of the Company went bankrupt in Asia, including Actionwell,
which supplied 90% of Company's products and provided major share of
business credit to the Company. Managing Director of Actionwell, K. C.
Yeung was a board member and officer of the Company.
Item 2.1 Financial Statements
The financial statements and supplementary data provided pursuant to
this Item are included herewith in pages F-1 through F-19.
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Item 8. Changes in and Disagreements with Accountants of Accounting
and Financial Disclosures.
No Change
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16a of the Exchange Act
The following table sets forth certain information with respect to the
executive officers and directors of the Company. All board member and
officers of the Company resigned on June 23, 1999. Before resignation,
the Board appointed Mr. James T. Koo, the former CEO of the Company to
an orderly shut down and sell the Company.
Name Age
Position with the Company
James T. Koo 59 Managing Consultant
Mr. Koo is an unpaid consultant of the Company. He 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, Marketing and
Sales of Taiwan Operations, and other management positions.
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 light 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.
However, as all the Board of Directors and Officers of the Company have
resigned, the Company no longer carries director and officers'
insurance. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Company as to which
indemnification is sought, nor is the Company aware of any threatened
litigation or proceeding that may result in claims for indemnification.
The Company understands that the staff of the SEC is of the opinion
that statutory, charter, and contractual provisions as those described
above have no effect on claims arising under the federal securities
laws. The Company is not aware of any material threatened or ongoing
litigation or proceeding, which may result in a claim for such
indemnification
Item 10. Executive Compensation
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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, 1999 are as follows:
Compensation Long Term Compensation
Name and Year Salary Bonus Stock Option All Other
Prin. Position Ending $ (3) $ Award $ (2)
Shares (1)
James T. Koo, 12/31/99 0 0 0 0
Pres,CEO,Dir. 12/31/98 124,744 0 5,000 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. As of December 31, 1999,
all outstanding options of Mr. Koo have expired.
2. Mr. Koo was a participant in the DTC 401(k) shared savings plan
during 1998. 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 1998. Starting Nov. 8, 1998, Mr. Koo has
been working without pay due to financial difficulties of the
Company.
4. Company Executive Officers exercised no stock options during 1999.
5. Board of Director's Report on Repricing of Options/SARs
Item 10. There was no repricing of options/SARs during the year ended Dec.
31, 1999. All outstanding options of the Company, included those granted
to all employees, officers and board directors have expired as of
December 31, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the shares of the Company's Common Stock
beneficially owned on December 31, 1999, 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 former directors,
(iii) by each of the former executive officers listed in the Summary
Compensation Table for 1999, and (iv) by all former directors and
officers as a group. The options, warrants and common and preferred
stock represented in this table reflect the 1 for 7 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
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<PAGE>
DTC would file a Certificate of Dissolution in the state of Delaware
after consummation of the Acquisition. Thereafter, DTC shall continue
for a term of three years or longer". The dissolution is complete, the
conversion of DTC stock to Photonics stock is affected at a conversion
rate 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,
Chairman of the Board 1,106,521 17.5%
c/o Photonics Corporation
1222 Alderwood Avenue,
Sunnyvale, CA 94089
Broadsino Computer
Development, Ltd. (2) 891,412 13.7%
K.C. Yeung
Room 1101, 1103
and 1104 Star Center
443-451 Castle Peak Road
Kwai Chung NT, Hong Kong
Domex Technology
Corporation 779,612 11.7%
No. 2, Technology Rd. 1,
Science-Based Industrial Park
Hsinchu, Taiwan, ROC
James T. Koo, President 536,762 8.1%
c/o Photonics Corporation
1222 Alderwood Avenue,
Sunnyvale, CA 94089
Robert P. Dilworth,
Director 15,491 *
c/o Photonics Corporation
1222 Alderwood Avenue,
Sunnyvale, CA 94089
John Miao, Director 155,000 2.3 %
c/o Photonics Corporation
1222 Alderwood Avenue,
Sunnyvale, CA 94089
All Officers and Directors
as a group (5 persons) 2,710,288 40.6%
* Denotes less than 1%
1. Percentage calculations are based upon 4,396,271 shares of
Common Stock, 2,328,136 shares of Preferred stocks. All
-16-
<PAGE>
warrants or options have expired as of December 31, 1999.
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.
2. Broadsino filed for bankruptcy at the end of 1999. UCO Bank Hong
Kong took over the ownership of both common and preferred shares
previously owned by Broadsino in 2000.
Percentage calculations are based upon 4,396,271 shares of
Common Stock, 2,328,136 shares of Preferred stocks. All
warrants or options have expired as of December 31, 1999.
Item 12. Certain Relationships and Related Transactions
A former member of the Board of Directors and Vice President of DTC
Hong Kong (See Item 11, note 6) is also President of the Company's
prime subcontractor, ActionMedia, for the production of the Company's
storage controllers, which meets approximately 90% of the Company's
product requirements. ActionMedia filed bankruptcy in 1999.
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
$1.00 per share.
Item 13. Exhibits and Reports on Form 8-K
EXHIBIT II
Computation of Earning per Common Share
December 31, December 31,
1999 1998
Weighted Average
Common Shares
Outstanding 4,396,271 4,485,595
Net <loss> income <$ 836,514> $<2,917,000>
Basic <loss> earnings
per common share $ <.19> $ <0.67>
Exhibit 2.1 Plan of Acquisition, Reorganization, etc.
The Company transferred all assets of its operating division,
DTC data technologies, to Sunnyvale Technologies Corporation and
sold 90% of Sunnyvale Technologies Corporation. See Management
Discussion and Analysis above.
-17-
<PAGE>
Exhibit 27.1 Financial Data Schedule
The Company filed a Form 8-K on June 25, 1999 reporting the Company's
decision of cease operation and sale of the Company.
The Company filed a Form 80K on April 12, 2000 reporting a change in
Auditors, Sale of Sunnyvale Technologies and change of location for
The corporate headquarters.
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
/s/ Koo
__________________________________
James T. Koo
Managing Consultant
Dated: June 16, 2000
Sunnyvale, California
-18-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES
<TABLE>
<CAPTION>
Consolidated Financial Statements Page
------------------------------ ----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheet - Assets F-3
Balance Sheet - Liabilities and Stockholder' Deficit 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>
Independent Auditor's Report
Board of Directors
Photonics Corporation
and Subsidiaries
San Jose, California
We have audited the accompanying consolidated balance sheet of Photonics
Corporation and subsidiaries, as of December 31, 1999, and the related
consolidated statements of operations, stockholders' deficit, and cash
flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on
our audit. The consolidated financial statements of Photonics Corporation
as of December 31, 1998 were audited by other auditors whose report dated
April 21, 1999 expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph relating to the
Company's ability to continue as a going concern.
We conducted our audit in accordance with generally auditing standards.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Photonics Corporation and subsidiaries, as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency
that 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.
Certified Public Accountants
June 13, 2000
F-2
PHOTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
Assets
1999 1998
Current assets:
Cash $ - $ 42,000
Accounts receivables, trade net of
allowance for doubtful accounts
of $0 and $82,710, respectively - 313,000
Contract of sale receivable 75,000 -
Due from stockholder - 52,000
Inventories - 350,000
Prepaid expenses and other assets - 59,000
Total current assets 75,000 816,000
Property and equipment, at cost, net of
accumulated depreciation of $0
and $2,667,000, respectively - 21,000
Other assets - 15,000
$ 75,000 $ 852,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
PHOTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
Liabilities and Stockholders' Deficit
1999 1998
Current liabilities:
Accounts payable, trade $2,097,523 $1,450,000
Accrued expenses 361,968
372,000
Due to ADL 497,070
1,115,000
Line of credit -
147,000
Notes payable, stockholder 1,013,000
934,000
Current portion of long-term notes payable - -
Total current liabilities 3,969,561
4,018,000
Long-term debt payable, net of current portion - -
Commitments and contingencies - -
Minority interest in subsidiary -
125,000
Stockholders' deficit:
Preferred stock, $1.00 par and liquidation
value, 6,000,000 shares authorized,
2,328,136 and 2,328,136 issued and
outstanding, respectively, dividends in
arrears of 443,817 and $211,000,
respectively 2,328,136 2,328,000
Common stock, $.001 par value, 20,000,000
shares authorized, 4,396,271 and
4,396,271 shares issued and
outstanding, respectively 4,396 4,396
Paid in capital in excess of par 44,091,604 44,091,604
Accumulated deficit ( 50,318,697) 49,869,000)
Accumulated other comprehensive income - 154,000
( 3,894,561) (
3,291,000)
$ 75,000 852,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PHOTONICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
Revenues, net of returns and allowances $ 750,226 $
3,484,000
Cost of revenues 332,916 2,952,000
Gross profit 417,310
532,000
Operating expenses:
Product development -
376,000
General and administrative 857,648
2,461,000
Impairment of long lived assets -
303,000
857,648
3,140,000
Operating loss ( 440,338) (2,608,000)
Other income (expense):
Interest expense ( 339,770) ( 389,000)
Gain on sale of available
for sale securities -
50,000
Gain on abandonment of
minority interest 125,000
-
Other income 52,611
292,000
Other expenses - (
50,000)
( 162,359)
( 97,000)
Loss before income taxes ( 602,697) (2,705,000)
Federal and state income taxes 1,000
1,000
Net loss $( 603,697) $(2,706,000)
Preferred stock dividends $ 232,817 $
211,000
Net loss available to common stockholders $( 836,514) $(2,917,000)
Loss per share:
Basic $(
.19) $( .67)
Diluted $( .19) $(
.67)
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
</TABLE>
<TABLE>
<CAPTION>
PREF STOCK COM STOCK ADDL ACCUM
----------- ---------- PAID-IN ACCUM OTHER COMP
SHARES AMOUNT SHARES AMOUNT CAP DEFICIT INCOME TOTAL
----- ----- ----- ---- ----- ------ ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) 2106009 2106000 4164148 $ 4396 44085604 (47163000) 154000 (813000)
(2) -- -- 32123 6000 - - 6000
(3) 222127 222000 222000
(4) (2706000) (2706000)
----------------------------------------------------------------------------
(5) 2328136 2328000 4396271 4396 44091604 (49869000) 154000 (3291000)
(6) 136 136
(7) 603697 603697
(8) 154000 (154000)
----------------------------------------------------------------------------
(9) 2328136 2328136 4396271 4396 44091604 (50318697) ($3894561)
</TABLE>
KEY TO ABOVE TABLE
(1) Balance at January 31, 1998
(2) Issuance of common stock under the stock option plans
(3) issuance of preferred stock for cash
(4) Net Income (Loss)
(5) Balance at December 31, 1998
(6) Rounding
(7) Net Income (Loss)
(8) Reclassification adjustment for foreign currency translation
(9) Balance at December 31, 1999
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
PHOTONICS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 AND 1998
1999 1998
Cash flows from operating activities:
Net loss $(603,697) $( 2,706,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of available for sale securities - ( 50,000)
Loss on impairment of long lived assets - 303,000
Issuance of pref stock in exchange for debt 425,950 122,000
Depreciation 6,471
14,000
Net recovery of doubtful accounts - (
88,000)
Advances 52,000
-
Accounts receivable 255,235 1,003,000
Inventories 331,674 570,000
Prepaid expenses and other assets 53,469 (
1,000)
Accounts payable 647,523
24,000
Accrued expenses ( 1,104,032) ( 69,000)
Due to AMI - 514,000
Minority interest 125,000 -
543,290
2,342,000
Cash provided by operations 189,593 (
364,000)
Cash flows from investing activities:
Cash sold to related corporation ( 10,393)
-
Proceeds from sale of investment - 221,000
Purchase of property and equipment 25,544 ( 87,000)
Cash used in investing activities 15,151
134,000
Cash flows from financing activities:
Proceeds from line of credit - 2,167,000
Repayments of line of credit ( 147,000) (2,020,000)
Proceeds from short-term debt - 230,000
Repayments of short-term debt - ( 216,000)
Sale of preferred stock - 100,000
Issuance of common stock from options -
6,000
Shareholder loans proceeds 576,070
-
Cash used in financing activities 429,070
267,000
Net increase (decrease) in cash ( 42,000)
37,000
Cash at beginning of period 42,000
5,000
Cash at end of period $ - $ 42,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> PHOTONICS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and operations
Photonics Corporation, dba DTC Data Technology (the Company, Photonics, DTC), a
California corporation, resulted from merger of Photonics Corp. with DTC Data
Technology in March of 1996. The Company 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.
During the first half of 1999, the Company introduced several new PC
projects and a family of Y2K BIOS compliant upgrade products. However,
due to financial difficulties, no new products were introduced in the
second half of 1999 and the newly introduced products were not adequately
supported. As a result, in June 1999, the board of directors voted to shut
down business operations and attempt to sale the Company or its assets.
Principles of consolidation
The accompanying consolidated financial statements include the general
accounts of the Company and its two subsidiaries, Qume Taiwan (QT) and DTC
Hong Kong (DTCHK). Through December 31, 1998, the Company owned a 99.4%
interest in the QT subsidiary with the remaining .6% interest representing
the minority stockholders' proportionate share in the equity of QT. During
early 1999, the Company abandoned its interest in QT. All intercompany
transactions, accounts and balances have been eliminated in the consolidation
and there were no material intervening transactions.
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, 1999 has a working capital
deficit of approximately $3,900,000 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 ceased operations and sold all assets
for cash to prepare for a pending merger/acquisition.
Management believes that these steps, as well as outside investment
participation, will provide the Company with the opportunity to achieve its
objectives of obtaining certain value for the creditors and shareholders
alike. There is, however, no assurance that the steps taken or programs in
place will meet all of the Company's needs to consummate the pending
F-8
<PAGE>
merger/acquisition 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.
Management 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash flows
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents. None of the Company's cash is
restricted.
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.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation of property and equipment is being provided by the straight-line
method over estimated useful lives of three to seven years. Assets held
under capital lease obligations are amortized by the straight-line method
over the shorter of the lease term or the estimated useful life of the
assets, generally three to seven years. For the years ended December 31,
1999 and 1998, depreciation expense totaled $17,015 and $14,000,
respectively.
At December 31, 1999 (prior to the DTC sale (Note 14)) and 1998, property and
equipment was comprised of the following.
1999 1998
Equipment $ 2,317,000 $ 2,317,000
Furniture and fixtures 277,000 277,000
Leasehold improvements 94,000 94,000
2,688,000
2,688,000
Less accumulated
Depreciation ( 2,684,015) ( 2,667,000)
$ 3,985 $ 21,000
F-9
<PAGE>
Inventories
Inventories are stated at the lower of cost or net realizable value (market)
and consists of raw materials, work in process and finished goods that have
not been shipped to customers. The cost of inventory is determined using the
first-in, first-out method. At December 31, 1999 (prior to the DTC sale
(Note 14)) and 1998, inventory consisted of the following components.
1999 1998
Raw materials $ 5,327 $ 88,000
Work-in-process - 62,000
Finished goods 12,999 200,000
$ 18,326 $ 350,000
Foreign currency translation
The Company's foreign subsidiaries located outside the United States use
the local currency as its functional currency. Assets and liabilities are
translated at exchange rates in effect at the balance sheet date, while
revenues and costs are translated at monthly average exchange rates.
Translation gains and losses are accumulated as a separate component of
stockholders' deficit. 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.
Loss per share
Basic loss per share amounts are computed using the weighted-average number
of common stock shares outstanding during the periods. Diluted loss per
share amounts are computed using the weighted-average number of common and
common equivalent shares outstanding during the periods.
As a result of the losses incurred in 1999 and 1998, common equivalent shares
relating to the convertible preferred stock (Note 3) of 2,328,136 in 1999 and
2,447,545 in 1998 were antidilutive 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
stock, 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
F-10
<PAGE>
reported as a separate component of stockholders' deficit.
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. The Company incurred
no substantial impairment of Long-lived assets charge during 1999.
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 method of accounting, as defined therein, but allows for
the continued use of the intrinsic value 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 1998,
and continues to use the accounting prescribed by APB Opinion No. 25. As
such, the Company is required to disclose pro forma net income and loss per
share amounts as if the fair value method of accounting has been applied
(Note 8).
2. 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
hedge asset or liability that are attributable to the hedge 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.
The Company has not entered into derivatives contracts either to hedge
existing risks or for speculative purposes. Accordingly, the adoption of
this new standard on July 1999 did not affect its financial statements.
F-11
<PAGE>
3. 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, and carries a provision for a 10% cumulative dividend, with
dividends in arrears greater than 12 months being payable in the form of
common stock at the equivalent rate of $1.00 per common share. The Series A
shares also have a liquidation preference of $1.00 per share and voting
rights. As of December 31, 1999 and 1998, the Company had issued 2,328,136
and 2,328,136 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, 1999 and 1998, the Company had dividends in arrears
greater than 12 months due of $443,817 and $211,000, respectively. As such,
these dividends in arrears will be paid through the issuance of common stock.
4. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
As of January 1, 1998, the Company held 22,500 shares of outstanding common
stock of CMC Industries Corporation at a cost of $171,000 (Note 10). The
Company received the stock in exchange for a note payable to David Lee, who
was Chairman of Board of both companies. In March 1998, the Company sold the
shares for cash proceeds of $221,000.
5. SHORT AND LONG-TERM DEBT
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% (approximately 11.25% and 10.75% as of December 31, 1999 and 1998,
respectively) 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
1999 and 1998. However in October 1999, the line of credit was revoked and
repaid from the bank's direct collections of Company accounts receivable.
Notes payable
The Company's long-term debt consists of various notes payable financing
transportation and other equipment. These notes are generally payable
monthly over terms of two to six years with interest rates ranging from 8.0%
F-12
<PAGE>
to 15.0%, are secured by the items of equipment being financed and contain no
significant restrictions or debt covenants. During the year ended December
31, 1998, all of these notes were repaid.
6. COMMITMENTS AND CONTINGENCIES
Leases
Through July 1999, the Company conducted its operations from facilities
leased under non-cancelable operating lease agreements expiring through 2003.
The leases required the Company to pay certain maintenance and operating
expenses such as taxes, insurance and utilities. In August 1999, the Company
moved to a smaller facility in Sunnyvale, California and negotiated with the
landlord a total rent obligation of $82,715 for the entire lease term. For
the years ended December 31, 1999 and 1998, rent expense approximated
$119,000 and $189,000, respectively.
At December 31, 1999, the Company has no future minimum rental payments
obligations under capital or operating lease agreements.
Legal matters
The Company is subject to legal proceedings that arise in the ordinary course
of business. Management does not believe that the outcome of any of these
matters will have a material adverse effect on the Company's consolidated
financial position, operating results or cash flows.
7. EMPLOYEE BENEFIT PLANS
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. During the years ended December 31, 1999 and 1998, the
Company made no contributions of common stock to the SSP.
8. STOCK OPTION PLAN
The Company's stock option plan (the 1997 Stock Option 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 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
F-14
<PAGE>
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 stock options is as follows:
Weighted-Average
Share Exercise Exercise Fair Remaining
Options Price Price Value at Life
Grant
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
Granted -
Canceled -
Expired ( 359,277) 0.06-1.69 0.47
Balance,
December 31, 1999 -
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 method prescribed in FASB
Statement 123. The Company estimates the fair value of the stock options at
the grant date by using the Black-Scholles option pricing-model with the
following weighted-average assumptions used for grants in 1998: dividend
yield of 0; expected volatility of 167 percent; risk-free interest rates of
4.7; 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.
1999 1998
Net loss attributed to
common shareholders:
As reported $( 836,514) $(
2,917,000)
Pro forma ( 836,514) ( 2,970,000)
Basic and diluted loss per share:
As reported $( .23) $( .67)
Pro forma ( .23) ( 0.68)
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During 1999, no additional options were granted and all outstanding options
expired with employee termination.
9. RELATED PARTY TRANSACTIONS
Actionwell, Development, Ltd. (ADL)
A former member of the Board is President of the Company's prime
subcontractor for the production of the Company's storage controllers, which
met approximately 90% of the Company's requirements (Note 16). For the years
ended December 31, 1999 and 1998, the Company purchased approximately
$2,481,000 and $1,025,000 from this prime subcontractor, respectively. As of
December 31, 1999 and 1998, amounts due to this subcontractor were
approximately $497,070 and $1,115,000, respectively. During the year ended
December 31, 1999, ADL filed for bankruptcy protection.
Note receivable, stockholder
In March 1997, the Company received a non interest bearing unsecured note
totaling $300,000 from a shareholder in exchange for preferred stock. As of
December 31, 1999 and 998, the Company, at the direction of the shareholder,
had offset $300,000 and $248,000, respectively of the note against $819,000
accounts payable due to the shareholder.
Notes payable, stockholders
During 1999 and 1998, the Company entered into debt agreements with
shareholders for approximately $79,000 and $934,000, respectively. A summary
of these debt agreements follows:
Years ended December 31, 1999 1998
Bridge loan to shareholder at the rate of 15%;
due on demand; convertible to preferred stock
at $1.00 per share $
529,000 $ 450,000
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
255,000 255,000
Total $
1,013,000 $ 934,000
10. SEGMENT INFORMATION
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
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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 46% of
net revenues. At December 31, 1998, these three customers accounted for 66%
of accounts receivable.
For the year ended December 31, 1999, five customers accounted for 46% of net
revenues. At December 31, 1999, these five customers accounted for 100% of
accounts receivable (prior to the DTC sale (Note 14)).
11. 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 assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. In addition, future tax benefits, such as those from net operating
loss carry forwards, are recognized to the extent that realization of such
benefits is more likely than not. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
A reconciliation of income tax expense at the statutory federal rate of 34%
to income tax expense at the Company's effective tax rate for the years ended
December 31, 1999 and 1998 is as follows.
1999 1998
Tax benefits computed at statutory rate $( 205,257) $(
920,040)
Increase in valuation allowance 205,257
920,040
Permanent and other differences -
-
State income taxes 1,000
1,000
$ 1,000
$ 1,000
Significant components of the Company's deferred tax assets (benefits) and
liabilities are summarized below.
1999 1998
Depreciation $ 32,000 $
32,000
Reserves not currently deductible -
318,000
Accrued liabilities -
77,000
Net operating losses 35,562,000
35,357,000
Tax credit carryovers 2,075,000
2,075,000
Valuation allowance (
37,669,000)(37,859,000)
$ -
$ -
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<PAGE>
For the years ended December 31, 1999 and 1998 income tax expense is comprised
of the following components.
Current tax expense $ 1,000 $ 1,000
Deferred tax expense - -
$ 1,000 $
1,000
As of December 31, 1999, the Company has approximately $102 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 2000
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
(Note 14), 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, 1999.
12. OTHER STATEMENT OF CASH FLOWS DISCLOSURES
For the years ended December 31, 1999 and 1998, supplemental disclosures of
cash flow information is as follows:
1999 1998
Cash paid for interest $ 156,935 $ 156,000
Cash paid for income taxes 1,000
1,000
Non cash investing and financing activities:
Issuance of preferred stock in payment of
accounts payable -
122,000
Decrease note receivable, stockholder in payment
of accounts payable -
107,000
Sale of assets in exchange for contract
receivable 75,000 -
13. FINANCIAL INSTRUMENTS
The Company's financial instruments, which potentially subject it to credit
and other risks, consists of its cash, accounts receivable, short-term debt
and notes payable, stockholders.
Cash
The Company maintains its cash in bank deposit and other accounts, which, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts and does not believe it is exposed to any
significant credit risks involving its cash.
Accounts receivable, trade
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<PAGE>
The Company accounts receivable result from granting credit to its customers
without collateral on a net thirty day basis to its customers located
primarily in the United States and Taiwan (through early 1999). The Company
believes its customer acceptance, billings and collections procedures are
adequate to protect the Company against any significant credit risks
involving its accounts receivable. At December 31, 1999 and 1998, 100% and
66%, respectively, of the Company's accounts receivable were represented by
five and three customers, respectively (Note 10). Management believes their
accounts receivable are fairly stated at estimated net realizable amounts.
Short-term debt
Management believes the carrying value of the Company's short-term debt,
primarily accounts payable and the line of credit arrangement, represent the
fair value of these financial instruments because their terms are similar to
those in the lending market for comparable debt with comparable risks.
Notes payable, stockholders
Management believes the carrying value of these notes represent the fair
value of these financial instruments because their terms are similar to those
in the lending market for comparable loans with comparable risks.
14. SUBSEQUENT EVENT
In March 2000, the Company entered into a purchase and sales agreement with a
corporation owned by a stockholder and former officer of the Company. The
agreement was effective December 31, 1999. Pursuant to the agreement, the
acquiring corporation purchased the remaining assets of the Company by
assuming $60,500 of liabilities and for $ 75,000 cash, which
was paid to the Company in April 2000. This transaction has been reflected
in the accompanying consolidated financial statements as occurring on the
December 31, 1999 effective date. Below is a schedule of the assets sold
In the transaction for the above consideration totaling $135,000.
Cash $ 10,393
Accounts receivable 102,796
Inventories 18,326
Other assets 3,985
135,000
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