<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 June 30, 2000
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 AVENUE, 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 July 31, 2000, there were 11,720,470 shares of the Issuer's Common Stock,
no par value, outstanding.
<PAGE>
INDEX
PHOTON DYNAMICS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2000 and September 30, 1999..... 3
Condensed Consolidated Statements of Operations for the Three and Nine Month
Periods Ended June 30, 2000 and 1999.............................................. 4
Condensed Consolidated Statements of Cash Flows for the Three and Nine Month
Periods Ended June 30, 2000 and 1999.............................................. 5
Notes to Condensed Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 15
Item 2. Changes in Securities............................................................. 15
Item 3. Defaults Upon Senior Securities................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............................... 15
Item 5. Other Information................................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................................. 15
SIGNATURES 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Photon Dynamics, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------------------ ------------------
(UNAUDITED) (NOTE)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,811 $ 6,421
Short-term investments 42,028 1,605
Accounts receivable, net of allowance of $1,469 and $1,301 at
June 30, 2000 and September 30, 1999, respectively 19,878 13,630
Inventories 11,006 7,112
Prepaid expenses and other current assets 397 714
------------------- -------------------
Total current assets 129,120 29,482
Property, equipment and leasehold improvements, net 2,189 1,817
Other assets 998 768
------------------- -------------------
Total assets $ 132,307 $ 32,067
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,224 $ 2,831
Accrued expenses and other current liabilities 10,079 5,535
Deferred revenue and customer deposits 215 655
------------------- -------------------
Total current liabilities 14,518 9,021
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value -- --
Common stock, no par value 131,317 45,972
Accumulated deficit (13,508) (22,929)
Accumulated other comprehensive income (loss) (20) 3
------------------- -------------------
Total shareholders' equity 117,789 23,046
------------------- -------------------
Total liabilities and shareholders' equity $ 132,307 $ 32,067
=================== ===================
</TABLE>
Note: The balance sheet at September 30, 1999 has been derived from the audited
supplemental 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.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Photon Dynamics, Inc.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue $ 22,086 $ 13,700 $ 58,129 $ 30,530
Cost of revenue 11,570 7,499 30,965 17,605
------------ ------------ ------------ ------------
Gross margin 10,516 6,201 27,164 12,925
------------ ------------ ------------ ------------
Operating expenses:
Research and development 3,181 1,641 8,018 4,303
Selling, general and administrative 3,391 2,823 9,272 8,074
Non-recurring acquisition charges -- -- 860 --
------------ ------------ ------------ ------------
Total operating expenses 6,572 4,464 18,150 12,377
------------ ------------ ------------ ------------
Operating income 3,944 1,737 9,014 548
Interest income 1,600 51 2,634 198
Interest expense and other (21) 9 (107) (94)
------------ ------------ ------------ ------------
Income before income taxes 5,523 1,797 11,541 652
Provision for income taxes 1,000 319 2,120 383
------------ ------------ ------------ ------------
Net income $ 4,523 $ 1,478 $ 9,421 $ 269
============ ============ ============ ============
Earnings per share:
Basic $ 0.39 $ 0.16 $ 0.88 $ 0.03
============ ============ ============ ============
Diluted $ 0.36 $ 0.15 $ 0.80 $ 0.03
============ ============ ============ ============
Weighted average number of shares:
Basic 11,613 9,340 10,664 9,200
============ ============ ============ ============
Diluted 12,630 10,150 11,741 9,781
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
Photon Dynamics, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
----------------------------------------
2000 1999
------------------- ------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income $ 9,421 $ 269
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 732 898
Unrealized gain on investments (48) --
Stock compensation expense 481 --
Changes in assets and liabilities:
Accounts receivable, net (6,248) (6,108)
Inventories (3,894) 1,681
Deferred income taxes -- (130)
Prepaid expenses and other current assets 317 22
Other assets (230) (21)
Accounts payable 1,393 1,593
Accrued expenses and other current liabilities 4,544 1,493
Deferred revenue and customer deposits (440) (76)
------------------- ------------------
Net cash provided by (used in) operating activities 6,028 (379)
Investing activities:
Disposals of property and equipment -- 45
Purchases of property and equipment (1,104) (239)
Sales of short-term investments -- 282
Purchases of short-term investments (40,423) --
------------------- ------------------
Net cash provided by (used in) investing activities (41,527) 88
Financing activities:
Principle payments on capital lease obligations -- (3)
Proceeds from borrowings under line of credit -- 1,000
Proceeds from issuance of common stock 84,864 590
Proceeds from notes receivable to shareholders -- 12
------------------- ------------------
Net cash provided by financing activities 84,864 1,599
Adjustment to conform to fiscal year of CR Technology, Inc. -- (116)
Effect of exchange rate changes on cash and cash equivalents 25 131
------------------- ------------------
25 15
Net increase in cash and cash equivalents 49,390 1,323
Cash and cash equivalents at beginning of period 6,421 6,117
------------------- ------------------
Cash and cash equivalents at end of period $ 55,811 $ 7,440
=================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-B. 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 nine-month period
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2000. For further information, refer
to the supplemental consolidated financial statements and footnotes thereto for
the year ended September 30, 1999 included in the Company's Registration
Statement on Form S-3 (No. 333-92937), declared effective on January 31, 2000.
On November 30, 1999, the Company acquired CR Technology, Inc. ("CR
Technology") in a transaction that was accounted for as a pooling of interests.
The consolidated financial statements at September 30, 1999 and for the three
and nine month periods ended June 30, 2000 and 1999 have been restated to
include the financial position, results of operations and cash flows of CR
Technology. Financial information for Photon Dynamics, Inc.'s fiscal years ended
September 30, 1999 and 1998 have been combined with CR Technology's financial
information for the twelve months ended September 30, 1999 and the fiscal year
ended December 31, 1998, respectively. Therefore, CR Technology's results of
operations for the three months ended December 31, 1998 have been included in
both years. The unaudited results of operations of CR Technology are summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1998
------------------------
(IN THOUSANDS)
<S> <C>
Revenue $2,423
Operating income $ 9
Net income $ 67
</TABLE>
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB
101"). SAB 101 summarizes certain views of the SEC in applying generally
accepted accounting principles to revenue recognition in financial statements.
Changes in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting principle
no later than the quarter ending September 30, 2001. The change in the revenue
recognition policy would result in a cumulative adjustment to reflect the
deferral of revenue for shipments previously reported as revenue that do not
meet SAB 101 revenue recognition guidance. Although the Company believes its
revenue recognition policy is in accordance with generally accepted accounting
principles, the Company is currently studying SAB 101 and has not determined its
impact on the Company's financial statements.
6
<PAGE>
NOTE 3 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------------------- -------------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 4,731 $ 3,769
Work in process 5,626 2,686
Finished products 649 657
------------------- -------------------
$ 11,006 $ 7,112
=================== ===================
</TABLE>
NOTE 4 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------------------- -------------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
<S> <C> <C>
Accrued warranty $ 2,953 $ 1,640
Accrued compensation 2,280 1,518
Accrued commission 1,606 968
Accrued income taxes 1,917 305
Other accrued expenses 1,323 1,104
------------------- -------------------
$ 10,079 $ 5,535
=================== ===================
</TABLE>
NOTE 5 - PUBLIC OFFERING OF COMMON STOCK
On February 4, 2000, the Company completed an underwritten public offering
of shares of common stock. The offering related to 2,000,000 shares of common
stock at a price of $55.00 per share of which approximately 1,321,000 shares
were sold by the Company and approximately 679,000 shares were sold by a
stockholder of the Company. The net proceeds to the Company were approximately
$68.6 million. On March 4, 2000, the Company received additional proceeds of
approximately $15.6 million from the sale of an additional 300,000 shares of
common stock as a result of the underwriters exercising their over-allotment
option in the public offering.
NOTE 6 - BUSINESS COMBINATION
On November 30, 1999, the Company acquired CR Technology in exchange for
approximately 1,835,000 shares of the Company's common stock. The acquisition
was accounted for as a pooling of interests. The Company incurred a one-time
charge of $860,000. The charge consisted of costs associated with the
acquisition primarily related to legal, investment banking and accounting fees.
7
<PAGE>
NOTE 7 - CREDIT ARRANGEMENTS
The Company renegotiated the terms of its $3.5 million bank line of credit
that expired in March 2000. The Company has entered into a new bank line of
credit of $4.0 million which expires March 25, 2001. This line of credit is
secured by substantially all of the Company's assets and contains certain
financial and other covenants. The Company is eligible to borrow against a
portion of accounts receivable. Borrowings under this line of credit bear
interest at prime rate (9.50% at June 30, 2000). At June 30, 2000, no amounts
were outstanding under this bank line of credit, and the Company was in
compliance with all bank covenants.
NOTE 8 - COMPREHENSIVE INCOME
Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2000 1999 2000 1999
-------------- ------------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 4,523 $ 1,478 $ 9,421 $ 269
Net foreign currency translation adjustments (31) (27) 25 131
Net unrealized losses on investments (21) -- (48) --
-------------- ------------- ------------- ---------------
Total comprehensive income $ 4,471 $ 1,451 $ 9,398 $ 400
============== ============= ============= ===============
</TABLE>
NOTE 9 - OPERATIONS BY INDUSTRY SEGMENT
The Company conducts business in two operating segments: flat panel display
("FPD") products and printed circuit board ("PCB") assembly and advanced
semiconductor packaging inspection products (collectively, "semiconductor
inspection products"). The Company's FPD products include test, repair and
inspection equipment. The Company's FPD test and inspection equipment identifies
and characterizes defects at early stages of the manufacturing process so that
the panels may be repaired before the next stage, or, if necessary, discarded,
minimizing the loss of time and materials. The Company's FPD products gather
comprehensive data that enable FPD manufacturers to control and refine their
manufacturing processes. The Company's semiconductor inspection products enable
PCB assembly and advanced semiconductor packaging manufacturers to detect and
identify defects thereby increasing yields and quality and reducing costs.
Prior to the acquisition of CR Technology on November 30, 1999, the Company
only operated in the FPD products segment. The Company's management has
determined the operating segments based upon the manner in which the business is
managed and operated. There are no significant intersegment sales or transfers,
and substantially all of the Company's long-lived assets are located in the U.S.
The Company's principal customers are primarily Asian-based FPD manufacturers
and North American-based PCB assembly and advanced semiconductor packaging
manufacturers.
8
<PAGE>
The Company's operating segments consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- -------------------------------
2000 1999 2000 1999
-------------- --------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales to external customers:
FPD products $ 17,533 $ 9,391 $ 45,409 $ 20,699
Semiconductor inspection products 4,553 4,309 12,720 9,831
-------------- --------------- ------------- --------------
Consolidated net sales to external customers $ 22,086 $ 13,700 $ 58,129 $ 30,530
============== =============== ============= ==============
Operating income (loss):
FPD products $ 3,390 $ 1,002 $ 7,842 $ (488)
Semiconductor inspection products 554 735 1,172 1,036
-------------- --------------- ------------- --------------
Consolidated operating income $ 3,944 $ 1,737 $ 9,014 $ 548
============== =============== ============= ==============
</TABLE>
NOTE 10 - EARNINGS PER SHARE
For the three and nine month periods ended June 30, 2000 and 1999, basic
earnings per share is calculated using the weighted average number of shares of
common stock outstanding. Diluted earnings per share is computed in the same
manner and also gives effect to all dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
employee stock options and warrants. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share - net
income $ 4,523 $ 1,478 $ 9,421 $ 269
============ ============= ============= =============
Denominator for basic earnings per share - weighted
average shares 11,613 9,340 10,664 9,200
Effect of dilutive securities:
Employee stock options 1,010 763 1,067 499
Warrants 7 47 10 82
------------ ------------- ------------- -------------
Denominator for diluted earnings per share - adjusted for
weighted average shares from options and warrants 12,630 10,150 11,741 9,781
============ ============= ============= =============
Basic earnings per share $ 0.39 $ 0.16 $ 0.88 $ 0.03
Diluted earnings per share $ 0.36 $ 0.15 $ 0.80 $ 0.03
</TABLE>
NOTE 11 - INCOME TAXES
The provision for income taxes was $1.0 million and $2.1 million for the
three and nine month periods ended June 30, 2000. The effective tax rate was 18%
and 17% on income before non-recurring acquisition expenses for the three and
nine month periods and is lower than the statutory U.S. tax rate of 35% for
fiscal 2000 due to the realization of net operating loss carryforwards. The
effective tax rate for the three and nine month periods ended June 30, 1999 was
18% and 59% due to a different relative benefit of net operating loss
carryforward realization and the inability to file consolidated tax returns
prior to completing the acquisition of CR Technology in November 1999.
9
<PAGE>
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 AND OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. 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 supplemental consolidated audited financial statements and notes
thereto for the year ended September 30, 1999.
OVERVIEW
The Company is a leading provider of yield management solutions to the flat
panel display ("FPD") industry. The Company also offers yield management
solutions for the printed circuit board ("PCB") assembly and advanced
semiconductor packaging industries. In fiscal 1999, the Company's products for
the FPD industry accounted for 69% of revenue.
Revenue is derived primarily from sales in Japan, Korea and Taiwan, where
FPD production is concentrated. However, with the acquisition of CR Technology,
which derives the majority of its revenue from sales in North America, the
Company has diversified its geographic mix of product sales. In fiscal 1999, the
Company derived 76% of its revenue from customers outside North America.
Substantially all of the Company's sales are made in U.S. dollars.
RESULTS OF OPERATIONS
Revenue was $22.1 million and $58.1 million for the three and nine month
periods ended June 30, 2000 compared to $13.7 million and $30.5 million for the
same periods of the prior fiscal year, representing an increase of 61% and 90%
for the respective periods. The Company has experienced increased revenue in
both of its operating segments. The increase in revenue was primarily
attributable to a significant increase in customer orders, particularly from
Korea, due to increased capital spending by FPD manufacturers.
Gross margins were 48% and 47% of revenue for the three and nine month
periods ended June 30, 2000 compared to 45% and 42% of revenue for the same
periods in the prior fiscal year. The increase in gross margins was primarily
attributable to increased capacity utilization resulting from higher production
volume. Overall gross margins will fluctuate on a quarterly basis due to
production volume, product mix and other factors.
Research and development expenses were $3.2 million and $8.0 million for
the three and nine month periods ended June 30, 2000 compared to $1.6 million
and $4.3 million for the same periods in the prior fiscal year. As a percentage
of revenue, research and development expenses were 14% for the three and nine
month periods ended June 30, 2000 compared to 12% and 14% for the same periods
in the prior fiscal year. The increase in research and development expenses was
attributable to the Company's investment in personnel, consultants and prototype
materials associated with the development of the Company's ArrayChecker-2000
Array Test and XRV Combo Inspection Systems that were introduced to the market
during the third quarter of fiscal 2000. The Company believes it must
continually invest in research and development to remain competitive and expects
research and development expenses to continue to increase in absolute dollars
during the remainder of fiscal 2000.
10
<PAGE>
Selling, general and administrative expenses were $3.4 million and $9.3
million for the three and nine month periods ended June 30, 2000 compared to
$2.8 million and $8.1 million for the same periods in the prior fiscal year. As
a percentage of revenue, selling, general and administrative expenses were 15%
and 16% for the three and nine month periods ended June 30, 2000 compared to 21%
and 26% for the same periods in the prior fiscal year. The increase in selling,
general and administrative expenses was attributable to the establishment of a
Taiwan sales and customer support office during the third quarter of fiscal
2000, higher selling related expenses associated with increases in orders and
revenue and the Company's investment in additional personnel to support the
Company's expansion.
On November 30, 1999, the Company acquired CR Technology which resulted in
a one-time charge of $860,000. The charge consisted of costs associated with the
acquisition primarily related to legal, investment banking and accounting fees.
The net of interest income and expense and other increased $1.5 million and
$2.4 for the three and nine month periods ended June 30, 2000. The increases
were primarily due to interest income on higher average cash and investment
balances as a result of the net proceeds from an underwritten public offering
during the second quarter of fiscal 2000.
The provision for income taxes was $1.0 million and $2.1 million for the
three and nine month periods ended June 30, 2000. The effective tax rate was 18%
and 17% on income before non-recurring acquisition expenses for the three and
nine month periods and is lower than the statutory U.S. tax rate of 35% for
fiscal 2000 due to the realization of net operating loss carryforwards. The
effective tax rate for the three and nine month periods ended June 30, 1999 was
18% and 59% due to a different relative benefit of net operating loss
carryforward realization and the inability to file consolidated tax returns
prior to completing the acquisition of CR Technology in November 1999.
LIQUIDITY AND SOURCES OF CAPITAL
During the nine month period ended June 30, 2000, cash, cash equivalents
and short-term investments balances increased to $97.8 million from $8.0 million
at September 30, 1999. Working capital increased to $114.6 million at June 30,
2000 compared to $20.5 million at September 30, 1999 primarily from the proceeds
of an underwritten public offering during the second quarter of fiscal 2000.
Net cash provided by operations for the nine month period ended June 30,
2000 was $6.1 million compared to $379,000 net cash used in operations for the
same period of the prior fiscal year. Net cash provided by operations for the
nine month period ended June 30, 2000 was primarily attributable to increased
net income before adjustments and increases in accrued expenses and other
current liabilities offset by increases in accounts receivable and inventories.
Net cash used in investing activities for the nine month period ended June
30, 2000 was $41.6 million compared to $88,000 net cash provided by investing
activities for the same period of the prior fiscal year. Capital expenditures of
$1.1 million were primarily for equipment and leasehold improvements to support
the Company's expansion. The Company purchased $40.4 million of short-term
investments from the proceeds of the underwritten public offering.
Net cash provided by financing activities for the nine month period ended
June 30, 2000 was $84.9 million compared to $1.6 million for the same period of
the prior fiscal year. The Company received $83.6 million net of issuance costs
for shares of common stock issued in an underwritten public offering during the
second quarter of fiscal 2000.
The Company has a $4.0 million revolving line of credit with a bank which
expires in March 2001. This line of credit is secured by substantially all of
the Company's assets and contains certain financial and other covenants. The
Company is eligible to borrow against a portion of accounts receivable.
Borrowings under this line of credit
11
<PAGE>
bear interest at prime rate (9.50% at June 30, 2000). At June 30, 2000, no
amounts were outstanding under this bank line of credit, and the Company was in
compliance with all bank covenants.
The Company also has a $1.5 million revolving bank line of credit that was
acquired as part of the CR Technology acquisition. This line of credit expires
in February 2001 and is secured by substantially all of CR Technology's assets
and contains certain financial and other covenants. The Company is eligible to
borrow on an unsecured basis. Borrowings under this line of credit bear interest
at prime rate (9.50% at June 30, 2000). At June 30, 2000, no amounts were
outstanding under this revolving line of credit, and the Company was in
compliance with all bank covenants.
The Company believes that existing liquid capital resources and funds
generated from operations combined with the ability, if necessary, to borrow
funds will be sufficient to meet its operating and capital requirements and
obligations for at least the next twelve months. 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 and may seek 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 dilution to the Company's shareholders.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. The Company is currently studying SAB 101
and has not determined its impact on the Company's financial position or results
of operations. In the event that the implementation of SAB 101 requires the
Company to report a change in accounting principles related to its revenue
recognition policy, the Company would be required to report such change no later
than the quarter ending September 30, 2001. In addition to other risks related
to SAB 101, it is possible that SAB 101 will result in increased fluctuations in
the Company's quarterly operating results and increase the likelihood that the
Company may fail to meet the expectations of securities analysts for any period.
OTHER FACTORS AFFECTING COMPANY RESULTS
The Company's quarterly results of operations fluctuate significantly. Many
factors influence the Company's results of operations in a particular quarter.
These include:
- volume, mix and timing of orders from the Company's customers;
- scheduling, rescheduling or cancellation of shipments;
- pricing pressures;
- the Company's ability to design, manufacture and commercialize
new products on a cost-effective and timely basis;
- delay between the time the Company incurs expenses in developing
its marketing and service capabilities and the time it receives
benefits from its improved capabilities;
- costs of components and subsystems incorporated into the Company's
products;
- announcement and introduction of new products by the Company's
competitors; and
- changing conditions in the FPD and PCB assembly and advanced
semiconductor packaging industries.
12
<PAGE>
The Company currently derives a majority of its revenue from the sale of a
small number of FPD yield management systems ranging 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 Company schedules the production of its systems based in part upon
order backlog. Due to possible customer changes in delivery schedules and
cancellations of orders, the Company's backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period. A reduction of
backlog during any particular period, or the failure of the Company's backlog to
result in future revenue, could have a material impact on the Company's results
of operations.
THE COMPANY DEPENDS ON SALES TO A FEW LARGE CUSTOMERS
The FPD industry is extremely concentrated, with a small number of
manufacturers producing the majority of the world's FPDs. Direct sales to the
Company's top four customers, each of which is an FPD manufacturer, accounted
for 60% of the Company's total revenue for the first nine months of fiscal 2000
compared to 55% and 67% in fiscal 1999 and fiscal 1998. The Company currently
has no long-term purchase commitments from its customers, and sales are
generally made through purchase orders. Orders for the Company's products may be
delayed or cancelled with limited or no penalty to customers. If one or more of
the Company's customers cancel or delay their orders, or if one or more
customers are lost, the Company's business could be harmed.
CAPITAL INVESTMENT BY THE FPD INDUSTRY CAN BE HIGHLY CYCLICAL AND MAY DECLINE IN
THE FUTURE
The Company's business depends, in large part, upon the amount of money
spent by FPD manufacturers on capital equipment. This, in turn, depends on the
current and anticipated market demand for FPDs and products incorporating FPDs.
Capital investment by the FPD industry has been highly cyclical as the industry
has reacted to capacity shortages and surpluses. Future industry overcapacity
would likely reduce capital equipment expenditures by FPD manufacturers and
reduce the demand for the Company's products. In addition, the Company must
continually invest in engineering, research and development and marketing to
penetrate target markets and to maintain extensive worldwide customer service
and support capabilities. The Company's ability to quickly reduce these expenses
is limited, and, therefore, any downturns or slowdowns in capital investment by
the FPD industry would harm the Company's business.
THE COMPANY FACES RISKS ASSOCIATED WITH SELLING SUBSTANTIALLY ALL OF THE
COMPANY'S FPD YIELD MANAGEMENT PRODUCTS TO COMPANIES LOCATED OUTSIDE THE U.S.
Sales to customers outside the U.S. are subject to a number of risks. Over
75% of the Company's total revenue for fiscal 1999 came from international
sales, particularly in Japan, Korea and Taiwan. The Company expects that most of
its sales will continue to come from these countries, where most of the world's
FPD manufacturing occurs. Risks related to international sales include:
- foreign countries may experience political and economic
instability;
- the Company may have more difficulty in servicing international
customers and otherwise administering its business
internationally;
- the Company has limited protection for its intellectual property;
- the Company may have difficulty in accessing local legal
protections if the Company has a dispute with a local business;
- there may be changes in tariffs and taxes in foreign countries;
- trade restrictions exist between the U.S. and other countries, and
additional restrictions may be adopted;
13
<PAGE>
- the Company must comply with a wide variety of foreign and U.S.
export laws and restrictions; and
- the Company must comply with technical standards established by
foreign regulatory bodies.
The Company's sales to Japan, Taiwan and Korea have been hurt by downturns
in these economies, most recently in 1998. A future downturn in economic
conditions in these countries could result in customers failing to place new
orders for the Company's products. Also, if the Japanese, Taiwanese and Korean
FPD markets do not grow as the Company has anticipated, the Company's business
would be harmed.
Because international sales and sales through IHI, a value-added reseller,
are denominated in U.S. dollars, fluctuations in currency exchange rates may
impact the price of the Company's products in foreign countries. As a result,
both direct sales and sales through IHI may be affected by changes in demand
resulting from fluctuations in interest and currency exchange rates. In
addition, to the extent the Company's sales and costs are denominated in foreign
currency, the Company's revenue and results of operations may be directly
affected by fluctuations in foreign currency exchange rates.
THE COMPANY MAY NOT BE ABLE TO OBTAIN CRITICAL COMPONENTS FROM ITS SINGLE OR
LIMITED SOURCE SUPPLIERS
The Company obtains some of the components included in its FPD, PCB
assembly and advanced semiconductor packaging yield management products from a
single or a limited group of suppliers. For example, the Company currently
obtains materials handling platforms, ultra high-resolution cameras and
high-speed image processing systems for its FPD products from single source
suppliers. The Company also currently obtains X-ray components for its PCB
assembly and advanced semiconductor packaging products from limited source
suppliers. The Company has not entered into formal agreements with any of these
suppliers, other than long-term purchase orders and, in some cases, volume
pricing agreements. In addition, alternative sources of supply for these
components may not be available or may be available on unfavorable terms.
Disruptions in supply, price increases for these components, or other changes in
material terms could:
- increase the Company's manufacturing costs or delay product
shipments while the Company qualifies a new supplier;
- require redesigning the Company's products; and
- harm customer relationships.
THE COMPANY DEPENDS ON IHI TO MARKET ITS FPD PRODUCTS IN JAPAN
Since June 1997, the Company has depended on IHI as the exclusive
value-added reseller to sell the Company's array test, repair and inspection
systems in Japan, and the Company anticipates that this relationship will
continue in the future. For the first nine months of fiscal 2000, 4% of the
Company's revenues came from sales to IHI compared to 18% and 33% in fiscal 1999
and fiscal 1998. Historically, foreign companies have experienced difficulty
penetrating the Japanese market and often depend upon local sales channels to
sell their products in Japan. If IHI reduced the resources allocated to the
development, systems construction, customization, sale and support of the
Company's array test, repair and inspection systems in Japan, the Company's
business would be harmed.
In addition, IHI's rights to continue as the exclusive value-added reseller
in Japan are currently unresolved. IHI may have the right to market some or all
of the Company's products in Japan on an exclusive basis, even as to the
Company. If so, the Company may not be able to compete effectively in Japan.
Although IHI must purchase certain critical components from the Company, IHI may
manufacture competing array test systems based on the Company's technology. If
this occurs, the Company's business could be harmed.
14
<PAGE>
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 FORM 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOTON DYNAMICS, INC.
(Registrant)
Date: August 10, 2000 /s/ VINCENT F. SOLLITTO, JR.
----------------------------
Vincent F. Sollitto, Jr.
Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 10, 2000 /s/ RICHARD L. DISSLY
----------------------------
Richard L. Dissly
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16
