<PAGE>
UNITED STATES 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 December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27234
PHOTON DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
California 94-3007502
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6325 San Ignacio, San Jose, CA 95119
(Address of principal executive offices) (Zip Code)
(408) 226-9900
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
--- ---
As of February 10, 1999, 7,512,281 shares of the Issuer's Common Stock, no par
value, were outstanding.
1
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TABLE OF CONTENTS
Part I: Financial Information Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - December 31, 1998 and
September 30, 1998........................................... 3
Condensed Consolidated Statements of Operations - three months
ended December 31, 1998 and 1997............................. 4
Condensed Consolidated Statements of Cash Flows - three months
ended December 31, 1998 and 1997............................. 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 8
Part II: Other Information
Item 1. Legal Proceedings................................................11
Item 2. Changes in Securities............................................11
Item 3. Defaults Upon Senior Securities..................................11
Item 4. Submission of Matters to a Vote of Security Holders..............11
Item 5. Other Information................................................11
Item 6. Exhibits and Reports on Form 8-K.................................11
Signatures.......................................................12
2
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Photon Dynamics, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
------------------- --------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,862 $ 5,562
Accounts receivable, net 4,994 6,027
Inventories 5,739 6,767
Prepaid expenses and other current assets 192 276
------------------- --------------------
Total current assets 16,787 18,632
Property, equipment, and leasehold improvements, net 1,638 1,798
Other assets 747 603
------------------- --------------------
Total assets $ 19,172 $ 21,033
================== ===================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 754 $ 1,486
Accrued expenses and other liabilities 2,836 2,936
Customer deposits and deferred revenue 395 116
Current portion of long-term debt 4 4
------------------- --------------------
Total current liabilities 3,989 4,542
Noncurrent portion of long-term debt 1 2
Shareholders' equity:
Common stock 38,977 38,918
Accumulated deficit (23,702) (22,147)
Foreign currency translation adjustment and other (21) (197)
Notes receivable from shareholders (72) (85)
------------------- --------------------
Total shareholders' equity 15,182 16,489
------------------- --------------------
Total liabilities and shareholders' equity $ 19,172 $ 21,033
================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Note: The balance sheet at September 30, 1998, has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
3
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Photon Dynamics, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
---------------------- ----------------------
<S> <C> <C>
Revenue $ 4,081 $ 5,374
Cost of revenue 2,820 2,729
---------------------- ----------------------
Gross margin 1,261 2,645
Operating expenses:
Research and development 1,125 1,873
Selling, general and administrative 1,670 1,121
Asset recovery related to product line disposal - (350)
---------------------- ----------------------
Total operating expenses 2,795 2,644
---------------------- ----------------------
Operating income (loss) (1,534) 1
Interest income 72 69
Interest expense and other (91) (24)
---------------------- ----------------------
Income (loss) before provision for income taxes (1,553) 46
Provision for income taxes 2 -
---------------------- ----------------------
Net income (loss) $ (1,555) $ 46
====================== ======================
Basic and diluted net income (loss) per share $ (0.21) $ 0.01
====================== ======================
Shares used in computing basic net income (loss) per share 7,362 7,152
====================== ======================
Shares used in computing diluted net income (loss) per share 7,362 7,492
====================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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Photon Dynamics, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
---------------------- ----------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (1,555) $ 46
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 265 271
Changes in operating assets and liabilities:
Accounts receivable 1,033 3,031
Inventories 1,028 (1,050)
Prepaid expenses and other current assets 84 (94)
Other assets (144) 15
Accounts payable (732) (256)
Accrued expenses and other liabilities (100) (58)
Customer deposits and deferred revenue 279 (90)
---------------------- ----------------------
Net cash provided by operating activities 158 1,815
Investing activities:
Acquisition of property and equipment (105) (101)
---------------------- ----------------------
Net cash used in investing activities (105) (101)
Financing activities:
Principal payments under capital leases (1) (2)
Proceeds from issuance of common stock 59 5
Repayment of notes receivable from shareholders 13 5
---------------------- ----------------------
Net cash provided by financing activities 71 8
---------------------- ----------------------
Effect of exchange rate changes 176 (226)
---------------------- ----------------------
Net increase in cash and cash equivalents 300 1,496
Cash and cash equivalents at beginning of period 5,562 4,831
---------------------- ----------------------
Cash and cash equivalents at end of period $ 5,862 $ 6,327
====================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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PHOTON DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended December 31, 1998, are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 1999. For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1998.
2. Inventories
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis.
<TABLE>
<CAPTION>
Inventories comprise (in thousands): December 31, September 30,
1998 1998
---------------------- ---------------------
<S> <C> <C>
Raw materials $ 1,532 $ 1,888
Work-in-process 4,040 2,144
Finished goods 167 2,735
---------------------- ---------------------
$ 5,739 $ 6,767
====================== =====================
</TABLE>
3. Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, Earnings per Share ("SFAS 128"). SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented and where appropriate restated to
conform to the SFAS 128 requirements.
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For the three months ended December 31, 1998, basic and diluted net loss
per share is computed using the weighted average number of shares of common
stock outstanding. Shares issuable from stock options, warrants and convertible
debt outstanding are excluded from the diluted earnings per share computation as
their effect is antidilutive. As the Company incurred a loss in the three
month period ended December 31, 1998, the effect of dilutive securities totaling
approximately 224,240 have been excluded from the computation as they are
antidilutive. The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------------------------
(In thousands, except per share amounts) 1998 1997
---------------------- ----------------------
<S> <C> <C>
Numerator for basic and diluted net income (loss) per share $ (1,555) $ 46
Denominator for basic net income per share 7,362 7,152
Effect of dilutive securities:
Employee stock options - 227
Warrants - 113
---------------------- ----------------------
Denominator for diluted net income per share 7,362 7,492
Basic and diluted net income (loss) per share $ (0.21) $0.01
</TABLE>
4. Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS 130") .
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components. Comprehensive income generally represents all
changes in shareholders' equity except those resulting from investments or
contributions by shareholders. The Company has reclassified earlier financial
statements for comparative purposes. The Company's total comprehensive income
was as follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------------------------
(In thousands) 1998 1997
---------------------- ---------------------
<S> <C> <C>
Net income (loss) $ (1,555) $ 46
Foreign currency translation income (loss) 176 (226)
---------------------- ---------------------
Total comprehensive loss $ (1,379) $ (180)
====================== =====================
</TABLE>
5. Stock Options
On November 27, 1998, the Company presented its employees with the
opportunity to exchange stock option grants with an exercise price in excess of
$5.00 per share for prorated stock option grants with an exercise price of $4.50
per share. Under this program, employees exchanged 431,833 old option grants
for 353,464 new option grants.
7
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PHOTON DYNAMICS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The statements contained in this report on Form 10-QSB that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward looking statements.
You should consult the risk factors listed from time to time in the Company's
reports on Form 10-KSB and annual reports to shareholders. Among the factors
that could cause actual results to differ materially are those discussed under
"Other Factors Affecting Company Results" and elsewhere in this Form 10-QSB.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto and with the
Company's audited financial statements and notes thereto for the year ended
September 30, 1998.
Results of Operations
Revenue. Revenue decreased to $4.1 million in the first quarter of fiscal
1999 from $5.4 million in the first quarter of fiscal 1998. Revenue continued
to be below the Company's expectations due to the general economic conditions in
Korea and Japan. As of December 31, 1998, backlog was $13.5 million.
Gross Margin. Gross margin as a percent of revenue decreased to 31% in the
first quarter of fiscal 1999 from 49% in the first quarter of fiscal 1998. This
decrease in gross margin was due to a less favorable product mix and
manufacturing inefficiencies resulting from lower production volumes. Overall
gross margins will fluctuate on a quarterly basis due to the Company's
production volume and product mix among other factors.
Research and Development. Research and development spending decreased to
$1.1 million in the first quarter of fiscal 1999, or 28% of revenue, from $1.9
million in the first quarter of fiscal 1998, or 35% of revenue. The decrease in
research and development spending was primarily in the areas of outside
consultants and prototype materials. In the prior period, the Company was
working on a number of product enhancements that it believed would improve its
ability to sell to volume production environments. Because this work is
complete, the Company has now reduced its spending on outside consultants and
prototype materials. The Company does not expect to materially increase the
level of research and development spending from its current level through the
remainder of fiscal 1999.
Selling, General and Administrative. The Company increased its selling,
general and administrative expenses in the first quarter of fiscal 1999 to $1.7
million, or 41% of revenue, from $1.1 million in the first quarter of fiscal
1998, or 21% of revenue. The increase is due largely to higher commission
expense related to large order volume in the current period. In the prior
period, the Company collected some older extended receivables that had
previously been reserved. Without this cash collection, total selling, general
and administrative costs for the first quarter of fiscal 1998 would have been
$1.4 million. Selling, general and administrative expenses may increase in
absolute dollar amounts in fiscal 1999 and in future periods depending on
factors such as the level of the Company's revenue and other operations.
Selling expenses may also fluctuate based on the Company's product and territory
sales mix, which have different sales channels and associated cost structures.
Asset Recovery Related to Product Line Disposal. During the quarter ended
December 31, 1997, the Company received a payment of $350,000 in settlement of
a dispute related to the cancellation of its Defect Monitoring Tool (DMT)
8
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product line. In September 1996, the Company ceased operations of its DMT
product line. The DMT product group worked exclusively on a single customer
project not in the FPD market. As a result of the cancellation of this project,
the Company disposed of the associated inventory and assets of this product
line which were not transferred to other products.
Interest Income. Interest income in the first quarter of fiscal 1999
increased to $72,000 from $69,000 in the first quarter of fiscal 1998. Interest
income varies slightly as a result of changes in the average cash and investment
balances.
Interest Expense and Other. Interest expense and other consists of
interest expense and foreign exchange gains and losses.
Provision for Income Taxes. The provision for income taxes for the three
months ended December 31, 1998, was related to taxes by the Company's foreign
subsidiary in Korea. There were no U.S. taxes as a result of the Company's net
operating loss.
Liquidity and Capital Resources
As of December 31, 1998, the Company had working capital of $12.8 million
of which $5.9 million was cash or cash equivalents.
Cash provided by operating activities was $158,000 for the three months
ended December 31, 1998. Working capital items that significantly impacted cash
balances in the quarter were accounts receivable, inventories and accounts
payable. The Company's accounts receivable balance decreased $1.0 million to
$5.0 million. During the quarter ended December 31, 1998, the Company collected
a large amount of receivables resulting in a lower account receivable balance.
The Company's credit terms to customers typically extend a small portion of the
payment for a period of months after shipment. Inventory balances decreased as a
result of lower levels of incoming material and the significant reduction of
finished goods related to products that shipped in the early part of the first
quarter of fiscal 1999. Accounts payable decreased dramatically due mainly to
the previously mentioned lower level of incoming material.
The Company believes that cash and cash equivalents and cash flow from
operations will be sufficient to satisfy working capital requirements and
capital equipment needs for the next twelve months. As of December 31, 1998, the
Company had no material outstanding commitments to purchase or lease capital
equipment.
The Company believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of opportunities
as they may arise. The Company may, from time to time, invest in or acquire
complementary businesses, products or technologies. The Company may seek to
affect additional equity or debt financing to fund such activities. There can be
no assurance that such funding will be available to the Company on commercially
reasonable terms. The sale of additional equity or convertible debt could result
in additional dilution to the Company's shareholders.
Year 2000 Computer System Compliance
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing the disruption of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. In addition to the Company's own
systems, the Company relies, directly and indirectly, on external systems of its
customers, creditors, financial organizations, utility providers, and government
entities, both domestic and international (collectively, "Third Parties").
Consequently, the Company could be affected by disruptions in the operations of
Third Parties with which the Company interacts.
The Company is in the process of addressing internal and external Year 2000
issues and has established a task force with this responsibility. To date, the
Company has made several modifications to its product software, its enterprise
software and its network software to ensure Year 2000 compliance. Although the
Company believes that its products and internal systems are currently Year 2000
compliant, there can be no assurance that the Third Parties with which the
Company interacts are or will be Year 2000 compliant. Failure of Third Party
enterprises to achieve Year 2000 compliance could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company
9
<PAGE>
continues to evaluate the estimated costs associated with the efforts to prepare
for the year 2000 based on actual experience. While the efforts will involve
additional costs, the Company believes, based on available information, that it
will be able to manage its total Year 2000 transition without any material
adverse effect on its business operations, products or financial prospects. The
actual outcome and result could be affected by future factors including, but not
limited to, the continued availability of skilled personnel, cost control, the
ability to locate and correct software code problems, critical suppliers and
subcontractors meeting their commitments to be Year 2000 compliant, and timely
actions by customers. The Company anticipates that it will remediate all Year
2000 risks and be able to conduct normal operations without having to establish
a Year 2000 contingency plan; accordingly, the Company does not have a
contingency plan and does not intend to establish one. There is no guarantee,
however, that all problems will be foreseen and corrected or that no material
disruption of business will occur.
Other Factors Affecting Company Results
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results of operations. The Company
derives substantially all of its revenue from the sale of a relatively small
number of systems, which typically range in price from $400,000 to $1.5 million.
As a result, the timing of the sale of a single system could have a significant
impact on the Company's quarterly revenue and results of operations. The failure
to receive anticipated orders or delays in shipments in a particular quarter
due, for example, to unanticipated shipment reschedulings, cancellations by
customers or unexpected manufacturing difficulties may cause revenue for that
quarter to fall significantly below the Company's expectations. This would have
a material adverse effect on the Company's results of operations for such a
quarter. The Company's backlog at the beginning of each quarter is not
necessarily indicative of actual sales for any succeeding period. All orders are
subject to delay or cancellation with limited or no penalty. The Company's sales
will often reflect orders shipped in the same quarter that they are received.
Other factors which may have an influence on the Company's results of operations
in a particular quarter include the volume, mix and timing of the receipt of
orders from major customers; competitive pricing pressures; costs of components
and subsystems; the Company's ability to design, manufacture and introduce new
products on a cost effective and timely basis; the delay between incurrence of
expenses to further develop marketing and service capabilities and realization
of benefits from such improved capabilities; fluctuations in foreign exchange
rates; the timing of recognition of revenue under development contracts; the
introduction and announcement of new products by the Company's competitors; and
changing conditions in the FPD market worldwide. In particular, due to
substantial differences in gross margin for the Company's products, changes in
the mix of products sold could result in substantial fluctuations in the
Company's gross margin. Accordingly, the Company's results of operations are
subject to significant variability from quarter to quarter. The Company believes
that the current economic conditions in East Asia will continue to have a
negative impact on the Company's results of operations. For a further discussion
of the Company's business and certain risk factors pertaining to its business,
please refer to the Company's 1998 Annual Report on Form 10-KSB.
10
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
None.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Forms 8-K
None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHOTON DYNAMICS, INC.
(Registrant)
Date: February 12, 1999 /s/ Vincent Sollitto
--------------------------------
Vincent Sollitto
Chief Executive Officer and
Director
(Principal Executive Officer)
Date: February 12, 1999 /s/ Richard Dissly
--------------------------------
Richard Dissly
Chief Financial Officer and
Secretary
(Principal Financial and Accounting
Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,862
<SECURITIES> 0
<RECEIVABLES> 4,994
<ALLOWANCES> 0
<INVENTORY> 5,739
<CURRENT-ASSETS> 16,787
<PP&E> 1,638
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,172
<CURRENT-LIABILITIES> 3,989
<BONDS> 0
0
0
<COMMON> 38,977
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,172
<SALES> 4,081
<TOTAL-REVENUES> 4,081
<CGS> 2,820
<TOTAL-COSTS> 2,820
<OTHER-EXPENSES> 2,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (1,553)
<INCOME-TAX> 2
<INCOME-CONTINUING> (1,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,555)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
