Well here is a beginning the last 10qsb filed with the SEC
COMPANY DATA:
COMPANY CONFORMED NAME: PHOTONICS CORP
CENTRAL INDEX KEY: 0000912844
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 770102343
STATE OF INCORPORATION: CA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10QSB
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-22514
FILM NUMBER: 96664345
BUSINESS ADDRESS:
STREET 1: 1515 CENTRE POINTE DR
CITY: MILPITAS
STATE: CA
ZIP: 95035
BUSINESS PHONE: 4089557930
MAIL ADDRESS:
STREET 1: 1515 CENTRE POINTE DRIVE
CITY: MILPITAS
STATE: CA
ZIP: 95035
</SEC-HEADER>
<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<TEXT>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-22514
PHOTONICS CORPORATION
(Name of Small Business Issuer as specified in its charter)
CALIFORNIA
(State of other jurisdiction of incorporation or organization)
77-0102343
(I.R.S. Employer Identification Number)
1515 CENTRE POINTE DRIVE
MILPITAS, CA 95035
(Address of principal executive offices)
Issuer's telephone number: (408) 942-4000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ].
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
COMMON STOCK, $0.001 PAR VALUE
(Class)
4,329,144
(Outstanding at November 8, 1996)
1
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(THIS PAGE INTENTIONALLY LEFT BLANK)111PHOTONICS CORPORATION
1
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FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE NUMBER
INTRODUCTION PHOTONICS CORPORATION
Summary 2
The Market 2
The Competition 3
The Strategy 3
Products 4
Intellectual Property 4
Talent 5
Sales, Distribution and Customer Service 5
Research & Development 5
Manufacturing 6
Current Developments 6
Private Financing 6
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Interim Financial Statements . 8
Consolidated Balance Sheet as of September 30,
1996 and December 31 1995 . . . . . . . . . 9
Consolidated Statements of Operations for the Three
and Six Months Ended September 30, 1996 and 1995 10
Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 1996 and 1995. 11
Notes to Consolidated Financial Statements . 12
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . 14
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings. . . . . . . . . . . . . . 16
ITEM 2 Changes in Securities . . . . . . . . . . . . 16
ITEM 3 Defaults Upon Senior Securities . . . . . . 16
ITEM 4 Submission of Matters of a Vote of Security
Holders . . . . . . . . . . . . . . . . . . 16
ITEM 5 Other Information . . . . . . . . . . . . . . 16
ITEM 6 Exhibits and Reports on Form 8-K . . . . . . 16
1
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PHOTONICS CORPORATION
FORM 10-QSB
INTRODUCTION
This report contains forward-looking statements and the Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of numerous factors, including those set forth
below and elsewhere in this report. The industry in which the Company competes
is characterized by extreme rapid changes in technology and frequent new
product introductions. The Company believes that its long-term growth will
depend largely on its ability to continue to enhance existing products and to
introduce new products and features that meet the continually changing
requirements of customers. While the Company has invested in new products and
processes, 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.
SUMMARY
Photonics Corporation, doing business as DTC Data Technology ("DTC" or
"Company"), designs, develops and markets Integrated Device Electronics ("IDE")
and Small Computer Systems Interface ("SCSI") disk controllers and Input /
Output ("I/O") products for personal computers. Disk controllers provide the
interface between the computer and hard drive(s) while I/O products provide the
interface between the computer and peripheral devices such as a mouse, modem or
printer. In late 1994 and early 1995, DTC Data Technology Corporation became
the leading supplier of after market IDE controller cards, shipping as many as
120,000 cards per month (shipments have shrunk, in the current quarter, to
30,000 cards per month, see discussion below). During this time DTC Data
Technology Corporation established low cost contract manufacturing capability,
developed comprehensive distribution channels and established strong name and
trademark recognition. Photonics having acquired DTC Data Technology
Corporation in March 1996, intends to use DTC's established name recognition
and eventually rename the company DTC Data Technology Corporation.
During the third quarter of 1996, the Company's shipments of IDE controller
cards were reduced to approximately 30,000 units per month due in part to the
shrinking market (see discussion below) and due in part to product
availability. Lacking adequate working capital, the Company was unable to
obtain enough products to meet customer demands. These potential sales were
lost forever as customers turned to other suppliers to meet their needs. At the
current shipping rate, the Company is not meeting its operating expenses. With
the shrinking of IDE market, the Company has developed a new product strategy,
as described below, and needs to raise capital to finance its plans.
THE MARKET
Today, the market for IDE controller cards is in decline because Intel, which
dominates the personal computer ("PC") motherboard market, has incorporated the
IDE controller function onto its motherboards. While the Company intends to
continue to sell IDE controller cards as long as there exists a market for
these products, it is the Company's intention to base its future on a new line
of SCSI controller cards.
According to InfoCorp of Santa Clara, CA, sales of SCSI disk controllers were
$994 million in 1995. This represents a compound annual rate of growth of 49%
from $202 million in 1991. The continued increase in THE number of
workstations, network and Internet web site file servers, using SCSI
controllers, has fueled this growth. Alternatives to SCSI controllers, such as
SSA (Serial SCSI Architecture) and Fibre Channel are newer technologies which
may still be years away from general acceptance due to their lack of product
standards and the continuous improvements of SCSI controllers. While the SCSI
market is forecast to grow at least 25% per year for the next 5 years, there
PHOTONICS CORPORATION
FORM 10-QSB
can be no assurances that the SCSI market won't be replaced by an alternative
technology.
The SCSI market today has one dominate supplier, Adaptec Inc. With calendar
year 1995 revenues of $593 million, Adaptec controls nearly 60% of the SCSI
market and has posted growth greater than 39% in each of the last two years.
Consistent with prior periods, the year to year growth in Adaptec's third
quarter 1996 revenues of $215 million was 44% with gross margins of 56%. Both
Adaptec's growth and gross margins are higher than the industry average. In
addition to Adaptec, there are about a dozen other SCSI suppliers, each with
revenues less than $50 million.
The SCSI protocol is not precise which causes each company's SCSI offering to
be vendor unique and incompatible with the products of the other vendors.
Adaptec was the first company to focus on the SCSI market and, because of its
domination in the SCSI market from the beginning, its products have become the
de facto industry standard. The continued incompatibility among the competing
products of all other vendors has allowed Adaptec to remain the dominant SCSI
supplier in the market even with its premium pricing strategy. Customers who
are unwilling to deal with current or future compatibility issues have had no
alternative but to purchase the Adaptec solution at a significant premium.
Without an Adaptec compatible solution, neither DTC nor any other SCSI supplier
can provide Adaptec customers an acceptable alternative.
THE COMPETITION
Besides DTC, which currently markets non-Adaptec compatible SCSI products, and
Adaptec, the other current suppliers of SCSI products are: Acculogic, Always,
DPT, Advanced System Products, CMD, Forex, LDP, Mylex, Promise, Q Logic, SIIG
and Symbios ("Other Competitors"). Trantor, Future Domain and Buslogic, each of
which was a recent independent supplier in the SCSI market, have been acquired
in the last two years. Currently, none of the Other Competitors offers an
Adaptec compatible solution and each tries to differentiate its products with
higher performance at prices lower than that of Adaptec. None of these Other
Competitors has been able to achieve a significant lasting success with their
SCSI products either in terms of market share or profitability.
THE STRATEGY
THE COMPANY'S STRATEGY IS TO DEVELOP A FAMILY OF ADAPTEC COMPATIBLE SCSI
CONTROLLER CARDS WITH A SUPERIOR VALUE TO THE MARKET'S CURRENT OFFERINGS.
DTC has been in the SCSI market since 1990 and has, in the past, developed
several high performance (non-Adaptec-compatible) SCSI products. These
products, as with the products of the Other Competitors, have not gained
general market acceptance and there can be no assurances that general market
acceptance can be attained with DTC's proposed Adaptec compatible products.
Although the engineering resources of the Company have been reduced due to the
decline of the IDE market, both of the key hardware and software managers who
engineered the Company's previous SCSI products are still with the Company. As
a result of the Company's prior success in the highly competitive IDE market,
the Company has developed access to low cost contract manufacturing, learned to
operate on low overheads, developed strong name recognition, and established
broad sales channels. With the stated strategy and the above mentioned
strengths, the Company believes it will be in the unique position to be able to
offer SCSI users a cost effective Adaptec compatible product.
The Company's strategy is similar to that used by the PC clone manufacturers to
establish themselves in the PC market. IBM was one of the first to enter the
personal computer market and established itself as the de facto standard.
Initially, clone manufactures offered their alternatives at a price lower than
IBM's, however these offerings were not totally IBM compatible. IBM was able to
remain dominate until the clone manufactures, led by Compaq, began producing an
IBM compatible PC. Today, IBM is no longer the dominant supplier
PHOTONICS CORPORATION
FORM 10-QSB
and shares the market with Compaq, Dell, Gateway, Packard Bell and others.
The Company believes that, if it can become entrenched in the market and
satisfy the customers' needs for an alternative SCSI solution, any potential
new competitors may be left with few opportunities for market expansion. There
are, however, no assurances that the Company can design, develop, or market
such an Adaptec compatible product or that the Company can effectively use its
earlier established sales channels. Furthermore, Adaptec has significant
financial, legal, and marketing resources. A focused response by Adaptec,
against DTC, might have severe impact on the Company's ability to succeed with
this strategy.
PRODUCTS
The Company will, for a time, continue to market its IDE and I/O product cards,
although they no longer generate sufficient operating income to meet the
Company's operating costs.
In October 1996, the Company started marketing a low end Adaptec compatible
ISA-SCSI product based on its proprietary DTC50C18 chip. This low-end product
is intended to be marketed to Original Equipment Manufacturers ("OEM") and
Value Added Retailers ("VAR") who could "bundle" such a controller card with
their SCSI peripherals such as scanners or CD-ROMs. This low end market, which
represents 10% to 20% of the overall SCSI market, commands low prices and is
much more cost competitive than the high end market. Although the Company
believes it can be cost competitive and generate a profit with these low end
products, there can be no assurances that it can either book sufficient sales
or maintain adequate margins to justify its entry into this market. As of
November 1, 1996, the Company had yet to receive any large orders for this
product and there can be no assurances that the Company can, even with a lower
unit sales price, convince the OEMs and VARs to switch to DTC.
The Company is in the process of developing a family of high end Adaptec
compatible PCI-SCSI products which would include high performance features that
are not currently found on Adaptec products. While the Company believes that
the new SCSI products, selling at a lower unit price and having certain high
performance features will represent an attractive alternative to the Other
Competitors' and Adaptec's offerings, there can be no assurances that the users
of these SCSI products will embrace the new DTC offerings.
The Company is committed to continuous product improvement which the Company
believes is necessary for greater market penetration of its Adaptec compatible
SCSI products.
INTELLECTUAL PROPERTY
The Company has studied the intellectual property issues (and performed patent
searches) related to the SCSI products which it intends to market and is
unaware of any patents or intellectual property owned by any other party which
would impede the development or sale of its proposed line of Adaptec compatible
SCSI products. However, there can be no assurances that such legal challenges
will not come and will not adversely affect the design, development or
marketing of the Adaptec compatible SCSI product.
Software is an important ingredient for success in the controller market. DTC
has a large library of copyrighted IDE and SCSI software drivers and utilities
for various operating systems including DOS, OS/2, UNIX, Novell,
Windows 3.1, and Windows 95. DTC, having designed several SCSI and IDE ASICs,
recently acquired the design rights to the ASIC used in its low end DTC50C18
ISA-SCSI product. However, there are no assurances that any SCSI competitor
might not file and / or be awarded a patent or copyright that might prevent
the Company from pursuing its SCSI strategy.
PHOTONICS CORPORATION
FORM 10-QSB
EMPLOYEES
The Company has worked on the development of SCSI based devices since 1990 and
believes that it has the technical resources needed to design and develop the
proposed Adaptec compatible SCSI products. The Company intends to further
augment its technical staff in order to accelerate the SCSI developments. In
addition, the Company believes that its general management is both adequate for
the current position of the Company and capable of executing its plans
regarding the Adaptec compatible market. The Company plans to hire additional
employees as needed to deliver and gain market acceptance for the new Adaptec
compatible products.
SALES, DISTRIBUTION AND CUSTOMER SERVICE
The Company currently sells its products through domestic and international
independent distributors, computer retailers and OEMs. In the United States and
Canada, the Company sells to 15 of the top 20 national distributors to the
computer industry including Ingram Micro, Merisel, Tech Data, Ameriquest and
Globelle (the top five distributors) who in turn distribute the Company's
products to smaller retailers, OEMs and VARs. The Company also sells its
products in the United States and Canada to large national computer retailers
such as CompUSA, Computer City, Best Buy and Micro-Center. These distributors
and national computer retailers are substantially identical to those used by
Adaptec and there can be no assurances that Adaptec will not use its influence,
as the market leader, to minimize DTC's marketing and sales effort in these
distribution channels. In addition, the Company also sells and has sold its
products on an OEM basis to PC System and subsystem manufacturers such as Acer,
Creative Labs, Diamond Computer, Gateway, Goldstar, Mitsumi, and Turtle Beach.
These OEMs also use products supplied by Adaptec and there can be no assurances
that Adaptec will not use its influence, as the market leader, to minimize
DTC's marketing and sales effort with this distribution channel. With the
current decline in sales and the limitations on product availability, the
Company's access to these channels of distribution has diminished and there can
be no assurances that these distributors, national computer retailers, or OEMs
will continue to purchase the Company's products.
The Company's customer service and technical support organization is located in
Milpitas, California and provides customers with software driver updates,
upgrade programs and warranty service. The technical support personnel assist
end users and distributors via telephone, fax-back facsimile services, a 24
hour bulletin board service and an Internet Web site (WWW.datatechnology.com).
As is common practice in the personal computer industry, the Company frequently
grants distributors limited rights to return unsold inventories of the
Company's products in exchange for new purchases, as well as price protection.
There can be no assurances that the Company's current allowances
will be sufficient or that any future returns or price changes will not have a
material adverse effect on operating results.
RESEARCH & DEVELOPMENT
The Company believes that continued investment in research and development is
critical to successful new product introductions, which address market needs,
on a timely and cost effective basis. DTC's knowledge and expertise in SCSI
predates the founding of Adaptec and the Company has completed similar SCSI
projects in the past. There can be no assurances, however, that the Company can
design and develop this new line of SCSI products.
The Company has just completed the development of its low end Adaptec
compatible ISA-SCSI line of products. For the high end PCI-SCSI product family,
the Company has completed the architectural and product specifications for the
Application Specific Integrated Circuit ("ASIC") and plans to
outsource the design phase of the ASIC to another firm. This practice is
intended to allow the Company to focus on its own SCSI expertise and leverage
the ASIC knowledge of the outside design firm thereby reducing the cost and
PHOTONICS CORPORATION
FORM 10-QSB
time to market. Development of the Adaptec compatible high end PCI-SCSI
products as well as a number of enhancements to the IDE and I/O products, the
Company currently markets, are in process. There can be no assurances, however,
that the efforts of the outside design firm will yield a viable ASIC that will
have the desired functionality or compatibility.
MANUFACTURING
Over the years the Company has developed business relationships with various
contract board manufacturers in the Far East which currently supply DTC with
highly cost competitive finished product. It is the Company's intention to
continue utilizing these sources of production. Not having to invest in capital
equipment and/or purchase raw material inventories and being able to take
advantage of the lower cost of labor and overhead utilized by such contract
manufacturers, the Company believes that it will be able to conserve its cash
position, allow the Company greater operational flexibility and keep the
Company focused on its areas of expertise. There can, however, be no assurances
that these manufacturing sources will remain available to DTC and that they can
produce the quality of product the Company will need in the future.
CURRENT DEVELOPMENTS
The Company has recently developed a family of low end compatible Adaptec
ISA-SCSI controller cards based on its proprietary DTC50C18 chip. Management
believes that the introduction of this Adaptec compatible product line paves
the way for the future introduction of the high end line of PCI-SCSI products
as discussed above. Shipment of samples of the low end Adaptec compatible
products began in October 1996 and shipment in quantities are anticipated in
the fourth quarter of 1996. The Company has yet to receive any large orders for
this product and there can be no assurances that the Company can, even with a
lower unit sales price, convince the OEMs and VARs to switch from their
existing suppliers to DTC.
The architectural design and product specifications for the high end PCI-SCSI
Adaptec compatible ASIC chip that would yield the PCI-SCSI products mentioned
above have been completed and the Company has received preliminary bids from
various firms for the ASIC chip design. Additionally, the tools have already
been created which would allow the Company to debug and verify the operation of
its design. The Company believes that, given the progress to date, the first
high end Adaptec compatible SCSI disk controllers can be commercially available
within eight months after the successful completion of the Private Financing
discussed below. Even if the Company succeeds in raising the sought after
funds, there can be no assurances that the development of the ASIC would not be
beyond the financial capabilities of the Company. Should the Company be
unable to complete the proposed financing, there can be no assurances that the
proposed SCSI plan can be executed or that the Company can continue to be
viable.
PRIVATE FINANCING
The Company and an investment banker are in the process of finalizing a private
placement memorandum in which the Company proposes to raise a minimum of $3.48
million to a maximum of $5.5 million to fund the development of the high end
Adaptec compatible SCSI family of products as well as for general business and
working capital purposes. The offering will be made on a "best efforts, all or
none" basis with respect to the minimum and on a "best efforts" basis with
respect to the additional investment sought up to the maximum. The offering
will consist of the Company's Series A Convertible Preferred Stock ("Preferred
Stock") that, when designated, will carry a 10% cumulative dividend, payable
twelve months in arrears in the form of Common Stock. The Preferred Stock will
be convertible at any time at the option of the holder into an equal number of
shares of the Company's Common Stock and will also have standard anti dilution
protection, a liquidation preference and voting rights. At the option of the
Company, the Preferred Stock will be
PHOTONICS CORPORATION
FORM 10-QSB
subject to mandatory conversion into an equal number of shares of the Company's
Common Stock provided that the closing bid price for the Company's Common Stock
equals or exceeds $2.50 per share (as adjusted for any subsequent stock
dividends, splits, combinations or the like) for twenty consecutive trading
days and the Company has a currently effective registration statement on file
with the Securities and Exchange Commission covering the underlying Common
Stock to be issued upon conversion. At the time of its sale, the Preferred
Stock, and Common Stock issuable upon conversion thereof, 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 will target only
sophisticated investors who meet the definition of accredited investor as set
forth in Rule 501 of Regulation D under the Act. While the Company intends to
move forward with the Private Financing, there can be no assurances that the
minimum amount sought can be raised or that the Company will be able to
successfully implement its strategy with the net proceeds.
1
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PHOTONICS CORPORATION
FORM 10-QSB
PART I FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The condensed consolidated interim financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated interim financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's Annual Report on Form 10-KSB/A
for the year ended December 31, 1995.
The accompanying consolidated interim financial statements have been prepared,
in all material respects, in conformity with the standards of accounting
measurements set forth in Accounting Principles Board Opinion No. 28 and
reflect, in the opinion of management, all adjustments, which are of a normal
recurring nature, necessary to summarize fairly the financial position and
results of operations for such periods. The results of operations for such
interim periods are not necessarily indicat |
