<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
Prospectus (not complete)
Issued January 3, 2000
2,000,000 SHARES
[PHOTON DYNAMICS LOGO]
COMMON STOCK
----------------
Photon Dynamics, Inc. is offering 1,320,000 shares of our common stock, and
the selling shareholder is offering 680,000 shares of our common stock in a
firmly underwritten offering. We will not receive any of the proceeds from the
sale of shares by the selling shareholder.
------------------------
Our common stock is traded on the Nasdaq National Market under the symbol
"PHTN." The last reported sale price of our common stock on the Nasdaq National
Market on December 28, 1999 was $35.125 per share.
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Offering Price $ $
Discounts and Commissions to Underwriters $ $
Offering Proceeds to Photon Dynamics, Inc. $ $
Offering Proceeds to the Selling Shareholder $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters the right to purchase up to an additional
300,000 shares from Photon Dynamics, Inc. to cover over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering. The underwriters expect to deliver the shares of common stock to
investors on , 2000.
JOINT LEAD AND BOOK-RUNNING MANAGERS
BANC OF AMERICA SECURITIES LLC NEEDHAM & COMPANY, INC.
----------------
SOUNDVIEW TECHNOLOGY GROUP
----------------
, 2000
<PAGE>
[Inside Front Cover Graphic:
Located in the center of the page is the Photon Dynamics logo and name and a
caption which reads "Photon Dynamics, Inc. provides yield management solutions
to the flat panel display, printed circuit board assembly and advanced
semiconductor packaging industries."
Surrounding caption on the top half of the page, photographs of the following
consumer products incorporating active matrix flat panel displays from left to
right: DVD player, flat panel display monitor and computer keyboard, flat panel
television and laptop computer.
Surrounding caption on the bottom half of the page are photographs of the
following mobile consumer products which incorporate small, dense printed
circuit boards and advanced semiconductor packages from left to right: global
positioning system, personal digital assistant, cellular phone and handheld
video game.
In the background of the bottom half of the page is a photograph of a ball grid
array and a printed circuit board.]
<PAGE>
[Gatefold Graphic:
Left center of page is the following caption: "Photon Dynamics--Our test, repair
and inspection systems provide integrated yield management solutions for
ActiveMatrix Liquid Crystal Display (AMLCD) manufacturing. AMLCDs are currently
the predominant source of revenue in the flat panel display industry."
To the right of the above-described caption and along the top of the page are
photographs of the following products of Photon Dynamics:
- ArrayChecker FPD test system, with two close-up photographs coming out
of the machine. One photograph is a voltage-image map, which displays a
detected defect in a flat panel display, coming from the test system
monitor with the caption "Voltage Imaging Map". The second photograph
depicts a voltage sensor coming out from the test equipment with the
caption "Voltage Sensor";
- ArraySaver FPD repair system, with a photograph of the graphical user
interface coming out of the monitor with the caption "Intuitive Graphical
User Interface"; and
- PanelMaster 300 FPD inspection system, with photograph of Mura defect
coming from the test system monitor with the caption of "Enhanced Mura
Image".
Below the respective product photos are the following bulleted points:
- ArrayChecker Test System
- Proprietary non-contact Voltage Imaging technology
- Creates high-resolution voltage image map of the entire display
- Provides complete pixel defect data
- ArraySaver Repair System
- Proprietary PixeLaser and BeamBlender technology
- Automated high-speed, precision stage
- Semi-automatic repair
- Panel Master 300 Inspection System
- Proprietary MuraLook and N-Aliasing technology
- Advanced image analysis algorithms
- Enables quantitative quality standards
Underneath the above product pictures is a two-way horizontal arrow running the
length of the product photos with the following caption immediately underneath
the line: "Pixel defect data files pass information between test, repair and
inspection equipment to provide for an integrated yield management solution."
Underneath the product photos and related descriptions and arrow is a graphic
depicting the AMLCD manufacturing process with the caption "AMLCD manufacturing
process". The graphics depicts a series of boxes connected by arrows
representing the following key steps of the AMLCD manufacturing process: array
fabrication; array pattern inspection; array repair; array test; array repair;
cell assembly; cell inspection; cell repair; module assembly; module inspection;
and module repair. The array fabrication, array pattern inspection, array
repair, and array test boxes are grouped by a dotted line with the caption
"Array Fabrication Phase". The cell assembly, cell inspection and cell repair
boxes are grouped by a dotted line with the caption "Cell Assembly Phase". The
module assembly, module inspection, and module repair boxes are grouped by a
dotted line with the caption "Module Assembly Phase".
The steps in the manufacturing process in which FPD manufacturers use PDI's
systems are indicated in bold. Text beneath the diagram is a box followed by the
text: "Indicates steps that use our systems."]
<PAGE>
[Inside Back Cover Graphic:
Right center of page--caption: "We provide inspection systems to the printed
circuit board assembly and advanced semiconductor packaging industries. Our
systems use proprietary image processing technology and intuitive graphical user
interfaces for flexibility in manufacturing requirements."
Left side of page from top to bottom--Three photographs of the following X-ray
and optical inspection products of Photon Dynamics:
- X-ray Inspection Equipment, with one close-up photograph coming from the
monitor of an X-ray image with the caption "X-ray Image".
- Optical Inspection Equipment; and
- Combined X-ray and Automated Optical Inspection Equipment.
To the right of the respective product photos is the description of the
equipment and the following bulleted points:
- X-ray Inspection Equipment
- Inspects hidden solder connections under ball grid array devices
- Inspects features inside semiconductor packaging
- Allows non-destructive defect detection
- Optical Inspection Equipment
- Inspects for component presence, correct component, orientation,
polarity, skew, solder integrity and other defects on printed circuit
board assemblies
- Offers various automation options
- Accommodates a wide range of printed circuit board sizes
- Combined X-ray and Automated Optical Inspection Equipment
- Inspects visible and hidden feature simultaneously on a printed
circuit board
- Reduces handling
- Increases throughput
- Saves floor space]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 13
Use of Proceeds............................................. 14
Price Range of Our Common Stock............................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Selected Supplemental Consolidated Financial Data........... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 24
Management.................................................. 39
Principal and Selling Shareholders.......................... 41
Underwriting................................................ 43
Legal Matters............................................... 45
Experts..................................................... 45
Where You Can Find More Information......................... 45
Incorporation of Certain Documents by Reference............. 46
Index to Supplemental Consolidated Financial Statements..... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with information that is
different. We are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. This
prospectus may only be used where it is legal to sell these securities. The
information in this document may only be accurate on the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our equity shares.
Information contained in our web site does not constitute part of this
document.
Flying P Design-Registered Trademark-, MuraLook-Registered Trademark-,
Photon Dynamics-Registered Trademark-, Voltage Imaging-Registered Trademark- and
the PDI logo are our registered trademarks in the U.S. and other jurisdictions.
BeamBlender-TM-, N-Aliasing-TM- and PixeLaser-TM- are also our trademarks. This
prospectus also contains registered trademarks or servicemarks of other
entities.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE MAKING AN INVESTMENT DECISION. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH IN "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. REFERENCES TO "WE," "US," "OUR" AND "PDI" MEAN PHOTON
DYNAMICS, INC. AND ALL ENTITIES OWNED OR CONTROLLED BY PHOTON DYNAMICS, INC.
PHOTON DYNAMICS, INC.
We believe we are the leading provider of yield management solutions to the
flat panel display, or FPD, industry. We also offer yield management solutions
to the printed circuit board, or PCB, assembly and advanced semiconductor
packaging industries. Our test, repair and inspection systems are used by
manufacturers to collect data, analyze product quality and identify and repair
product defects at critical steps in the manufacturing process.
The end markets served by our customers include a number of large markets
that have experienced rapid growth. These markets include mobile devices such as
notebook computers and cellular phones, and stationary devices such as flat
panel desktop monitors and digital televisions. Manufacturers of mobile
electronic devices are continually seeking ways to increase the performance and
quality, as well as reduce the size, weight and power requirements of the
components incorporated into these devices, such as displays, electronic
assemblies and semiconductors. The market for mobile computers, including
notebook computers and handheld devices, is expected to grow at a rate of 25%
from 18.8 million units in 1998 to 45.2 million units in 2002, according to
Dataquest. Similarly, the cellular phone market is expected to grow at a rate of
27% from 175.4 million units in 1998 to 461.1 million units in 2002, according
to Dataquest. In addition, for stationary applications such as desktop computer
monitors and televisions, consumers have increasingly demanded FPDs due to their
higher resolution and performance and their smaller footprint, lower power
consumption and reduced heat emission. The market for liquid crystal displays,
the principal type of FPD, is expected to grow at a rate of 86% from
approximately 1.3 million units, or 1.5% of the desktop monitor market in 1998,
to 15.5 million units, or 11% of the desktop market by 2002, according to
International Data Corporation.
FPD manufacturers use our test, repair and inspection equipment to increase
yields and quality and to reduce costs. By identifying defects and gathering
data during the manufacturing process, our equipment assists manufacturers in
controlling and refining their manufacturing processes to achieve the production
of zero defect displays at high yields. Our proprietary technologies include:
- Voltage Imaging technology to detect, locate, quantify and characterize
electrical, contamination and other defects in FPDs after array
fabrication;
- PixeLaser and BeamBlender laser technologies for the repair of FPD panels;
and
- N-Aliasing and MuraLook technologies to inspect FPD panels for pixel, line
and blemish defects after cell and module assembly.
We also offer a broad line of X-ray and optical systems for non-destructive
inspection of PCB assemblies and advanced semiconductor packaging. Our X-ray
systems inspect for hidden features inside semiconductor packaging and on PCB
assemblies that have ball grid array, or BGA, solder connections. Our optical
inspection systems inspect PCB assemblies for component presence, correct
component, orientation, polarity, skew, solder integrity and other defects. Our
combined X-ray and optical in-line inspection products enable simultaneous
inspection of both visible and hidden features on PCB assemblies.
1
<PAGE>
Our objective is to enhance our position as a leading supplier of yield
management solutions to the FPD industry and to become a leading supplier of
yield management solutions to advanced segments of the electronics assembly and
semiconductor packaging industries. We plan to achieve these goals by:
- further penetrating existing markets;
- expanding our yield management product offerings;
- extending our technology leadership;
- maintaining and enhancing existing customer relationships; and
- fostering industry standards for yield management and quality.
We maintain our principal offices at 6325 San Ignacio Avenue, San Jose,
California 95119-1202, and our telephone number is (408) 226-9900. Our web site
is located at www.photondynamics.com. Information contained on our web site does
not constitute part of this prospectus.
RECENT DEVELOPMENTS
In November 1999, we acquired all of the outstanding capital stock of CR
Technology, Inc. in exchange for 1,834,251 shares of our common stock. This
transaction was accounted for as a pooling of interests. This strategic
acquisition complements our core capabilities of data acquisition, image
analysis and systems engineering and broadens our product lines to include yield
management solutions to the PCB assembly and advanced semiconductor packaging
markets.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by PDI........................ 1,320,000 shares
Common stock offered by the selling shareholder.... 680,000 shares
Common stock to be outstanding after this
offering......................................... 10,977,481 shares
Use of proceeds.................................... For working capital, capital expenditures,
general corporate purposes and potential
acquisitions. See "Use of Proceeds." We will not
receive any proceeds from the sale of common
stock by the selling shareholder.
Nasdaq National Market symbol...................... PHTN
</TABLE>
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of November 30, 1999
and does not include the following:
- 1,294,587 shares of common stock issuable upon exercise of outstanding
stock options with a weighted average exercise price of approximately
$6.38 per share;
- 636,720 shares of common stock reserved for future issuance under our
stock option plans;
- 312,172 shares of common stock reserved for sale under our employee stock
purchase plan; and
- warrants to purchase 12,067 shares of common stock, exercisable at $5.40
per share.
2
<PAGE>
SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following tables present our summary supplemental consolidated statement
of operations data for fiscal 1995 through 1999 and our summary supplemental
consolidated balance sheet data as of September 30, 1999. Supplemental
consolidated balance sheet data is presented on an actual basis and as adjusted
to reflect the sale of 1,320,000 shares of common stock offered by us in this
offering at an assumed public offering price of $35.125 per share and after
deducting the estimated underwriting discounts and offering expenses and giving
effect to the application of the net proceeds.
Prior to the acquisition, CR Technology prepared its financial statements
based on a fiscal year ended December 31. For fiscal 1999, the selected
supplemental consolidated statements of operations data combine the PDI and CR
Technology results for the twelve months ended September 30, 1999. However, for
fiscal 1995 through 1998, the summary supplemental consolidated statements of
operations data combine the PDI fiscal year ended September 30 with the CR
Technology fiscal year ended December 31. Therefore, the supplemental
consolidated statement of operations data for the fiscal years ended
September 30, 1998 and 1999 both include the CR Technology results of operations
for the three months ended December 31, 1998. The summary supplemental
consolidated balance sheet data as of September 30, 1999 combines the PDI and CR
Technology consolidated balance sheet data as of that date.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL STATEMENT OF OPERATIONS DATA:
Revenue........................................ $21,617 $28,388 $30,215 $30,970 $45,431
Gross margin................................... 8,320 13,355 13,248 13,091 19,858
Operating income (loss)........................ 1,173 904 (2,264) (1,403) 2,775
Net income (loss).............................. 644 1,245 (1,882) (1,207) 2,273
Basic net income (loss) per share.............. $ 0.12 $ 0.15 $ (0.22) $ (0.14) $ 0.24
Diluted net income (loss) per share............ $ 0.10 $ 0.14 $ (0.22) $ (0.14) $ 0.23
Shares used in computing:
Basic net income (loss) per share.............. 5,335 8,095 8,702 8,930 9,282
Diluted net income (loss) per share............ 6,160 9,099 8,702 8,930 9,935
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 8,026 $51,296
Working capital............................................. 20,461 63,731
Total assets................................................ 32,067 75,337
Total shareholders' equity.................................. 23,046 66,316
</TABLE>
3
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE INVESTING IN
OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS
COULD BE HARMED. THIS COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE, AND YOU MAY
LOSE PART OR ALL OF YOUR INVESTMENT. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING STATEMENTS ABOUT OUR
FUTURE PLANS, OBJECTIVES, INTENTIONS AND EXPECTATIONS. MANY FACTORS, INCLUDING
THOSE DESCRIBED BELOW, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE DISCUSSED IN ANY FORWARD-LOOKING STATEMENTS.
OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT.
Our quarterly results of operations fluctuate significantly. Many factors
influence our results of operations in a particular quarter. These include:
- volume, mix and timing of orders from our customers;
- scheduling, rescheduling or cancellation of shipments;
- pricing pressures;
- our ability to design, manufacture and commercialize new products on a
cost-effective and timely basis;
- the delay between the time we incur expenses in developing our marketing
and service capabilities and the time we receive benefits from our
improved capabilities;
- costs of components and subsystems incorporated into our products;
- the announcement and introduction of new products by our competitors; and
- changing conditions in the FPD industry.
We currently derive a majority of our revenues 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 our quarterly results of operations.
WE DEPEND 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 our
top four customers, each of which is a FPD manufacturer, accounted for 55% of
our total revenue in fiscal 1999 and 67% in fiscal 1998. In fiscal 1999, sales
to Ishikawajima-Harima Heavy Industries Co., Ltd., or IHI, Samsung, LG
Electronics and Unipac accounted for 18%, 16%, 11% and 10% of our revenues,
respectively. We currently have no long-term purchase commitments from our
customers, and our sales are generally made through purchase orders. Orders for
our products may be delayed or cancelled with limited or no penalty to our
customers. If one or more of our customers cancel or delay their orders, or if
we lose one or more of our customers, our business could be harmed.
CAPITAL INVESTMENT BY THE FPD INDUSTRY CAN BE HIGHLY CYCLICAL AND MAY DECLINE IN
THE FUTURE.
Our 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 our products. In addition, we must continually invest in engineering,
research and development and marketing to penetrate our target markets and to
maintain extensive worldwide customer service and support
4
<PAGE>
capabilities. Our ability to quickly reduce these expenses is limited, and,
therefore, any downturns or slowdowns in capital investment by the FPD industry
would harm our business.
WE FACE RISKS ASSOCIATED WITH SELLING SUBSTANTIALLY ALL OF OUR FPD YIELD
MANAGEMENT PRODUCTS TO COMPANIES LOCATED OUTSIDE THE U.S.
Sales to customers outside the U.S. are subject to a number of specialized
risks. Over three-quarters of our total revenue for fiscal 1999 came from
international sales, particularly sales in Japan, Korea and Taiwan. We expect
that most of our 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;
- we may have more difficulty in servicing our international customers and
otherwise administering our business internationally;
- we have limited protection for our intellectual property;
- we may have difficulty in accessing local legal protections if we have 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;
- we must comply with a wide variety of foreign and U.S. export laws and
restrictions; and
- we must comply with technical standards established by foreign regulatory
bodies.
Our 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 our customers failing to place new orders for
our products. Also, if the Japanese, Taiwanese and Korean FPD markets do not
grow as we have anticipated, our business would be harmed.
Because our sales and sales through our value-added reseller, IHI, are
denominated in U.S. dollars, fluctuations in currency exchange rates may impact
the price of our products in foreign countries. As a result, both direct sales
by us 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
our sales and costs are denominated in foreign currency, our revenue and results
of operations may be directly affected by fluctuations in foreign currency
exchange rates.
WE MAY HAVE DIFFICULTY IN INTEGRATING THE BUSINESSES OF PDI AND CR TECHNOLOGY.
Integrating PDI and CR Technology may be a complex, time-consuming and
expensive process. Before the merger, PDI and CR Technology operated
independently. Each company had its own business culture, customers, employees
and systems. Following the merger, PDI and CR Technology have commenced
operations as a combined organization, using common information and
communications systems, operating procedures, financial controls and human
resource practices. We may experience difficulties in integrating PDI and CR
Technology. These difficulties may include:
- diversion of management resources from the business of the combined
company;
- incompatibility of business cultures;
- perceived adverse changes in customer service standards, business focus,
billing practices or service offerings available to customers;
5
<PAGE>
- perceived uncertainty in career opportunities, benefits and the long-term
value of stock options available to employees;
- costs and delays in implementing common systems and procedures; and
- potential inefficiencies in delivering services to the customers of the
combined company.
Any of these difficulties could increase our operating costs, harm our
financial performance or cause the loss of customers or employees. Many of these
factors are outside of our control.
WE MAY NOT BE ABLE TO OBTAIN CRITICAL COMPONENTS FROM OUR SINGLE OR LIMITED
SOURCE SUPPLIERS.
We obtain some of the components included in our FPD, PCB assembly and
advanced semiconductor packaging yield management products from a single or a
limited group of suppliers. For example, we currently obtain materials handling
platforms, ultra high-resolution cameras and high-speed image processing systems
for our FPD products from single source suppliers. We also currently obtain
X-ray sources for our PCB assembly and advanced semiconductor packaging products
from limited source suppliers. We have 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 our manufacturing costs or delay product shipments while we
qualify a new supplier;
- require redesigning our products; and
- harm our customer relationships.
WE DEPEND ON OUR RELATIONSHIP WITH IHI TO MARKET OUR FPD PRODUCTS IN JAPAN.
Since June 1997, we have depended on IHI as our exclusive value-added
reseller to sell our array test, repair and inspection systems in Japan, and we
anticipate that this relationship will continue in the future. In fiscal 1999
and fiscal 1998, 18% and 33% of our revenues came from sales to IHI.
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 our array test, repair
and inspection systems in Japan, our business would be harmed.
In addition, IHI's rights to continue as our exclusive value-added reseller
in Japan are currently unresolved. IHI may have the right to market some or all
of our products in Japan on an exclusive basis, even as to us. If so, we may not
be able to compete effectively in Japan. Although IHI must purchase certain
critical components from us, IHI may manufacture competing array test systems
based on our technology. If this occurs, our business could be harmed.
We have granted IHI the non-exclusive right to manufacture and sell array
test systems based on our technology (excluding technology incorporated into
some critical components) in Korea, Taiwan and several other countries. Although
IHI has never manufactured these products, nor sold these products in countries
other than Japan, our business could be harmed if IHI manufactures and sells
array test systems in competition with our own in these countries.
6
<PAGE>
OUR BACKLOG MAY NOT RESULT IN FUTURE SALES.
We schedule the production of our systems based in part upon order backlog.
Due to possible customer changes in delivery schedules and cancellations of
orders, our 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 our backlog to result in future revenue,
could harm our business.
WE MUST COMPETE EFFECTIVELY IN OUR TARGET MARKETS OR WE WILL LOSE MARKET SHARE.
The FPD, PCB assembly and advanced semiconductor packaging industries are
highly competitive. We face competition from established companies, some of
which are larger, have greater financial, engineering and manufacturing
resources and have larger service organizations. Some of these companies also
have long-standing customer relationships with major manufacturers. In the FPD
industry, our competitors include Micronics Japan Corporation in array test,
NTN Corporation and Hoya Corporation in array repair for the Japanese market,
and several competitors in the cell and module inspection market. In the X-ray
inspection market, our competitors include Nicolet Imaging, Agilent Technologies
and FeinFocus. In the optical inspection market, our competitors include GSI
Lumonics, Hewlett-Packard Company and Omron.
In particular, our success will depend upon our ability to compete
successfully in Japan, Taiwan and Korea. Most of the world's FPD manufacturing
occurs in these countries. Our ability to compete in these countries depends on
the following factors:
- our ability to maintain and establish satisfactory relationships with
leading companies in Japan, Taiwan and Korea;
- our ability to maintain our relationship in Japan with IHI;
- our ability to develop products that meet the technical requirements of
our customers; and
- continued free trade among Japan, Korea and Taiwan and the U.S.
We believe that our Japanese competitors have an advantage in that country
because of the preference of some customers for local equipment suppliers. Also,
local FPD equipment suppliers may have longer standing or closer business
relationships with their customers.
We expect that we will face competition from new entrants in the FPD, PCB
assembly and advanced semiconductor packaging industries and from competitors
using new technologies. We expect that our competitors will continue to improve
the design and performance of their products and will introduce new products
with competitive price/performance characteristics. Our customers may also
develop technology and equipment which may reduce or eliminate their need to
purchase our products.
WE RELY UPON SALES OF A LIMITED RANGE OF PRODUCTS.
A substantial percentage of our revenues have come from a limited range of
products for the FPD, PCB assembly and advanced semiconductor packaging
industries. We expect that these products will continue to account for a
substantial percentage of our revenues. We currently market two primary products
for the FPD industry, our array test and array repair equipment. For the PCB
assembly and advanced semiconductor packaging industries, our primary products
include our X-ray and optical inspection systems. Revenues from these four
products represented 89% of our total revenues in fiscal 1999. The remaining 11%
is based on sales of spare and replacement parts and services. Continued market
acceptance of these primary products is critical to our success. Any decline in
demand for, or failure to achieve continued market acceptance of, our primary
products or any new version of these products, could harm our business.
7
<PAGE>
WE MAY NOT BE ABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS THAT RESPOND TO
EVOLVING INDUSTRY REQUIREMENTS IN A TIMELY MANNER.
The markets for our products are characterized by rapidly changing
technologies and frequent new product introductions. For example, the size of
FPD substrates and resolution of FPDs have changed frequently and may continue
to change, requiring us to redesign or reconfigure our FPD products. Similarly,
as semiconductors, PCBs and semiconductor packaging technologies have become
more complex, CR Technology has been forced to continually redefine its product
offerings. Our success will depend in part upon our ability to continue to
enhance our existing products and to develop or acquire new products in response
to evolving industry requirements. If we are not able to do this, our business
may be harmed. We have experienced delays in the development of new products and
product enhancements in the past and could experience delays in the future.
WE MUST ATTRACT AND RETAIN KEY EMPLOYEES TO MAINTAIN AND GROW OUR BUSINESS.
Our success will depend, in part, on our ability to retain certain key
employees, particularly our senior members of management and engineers. In order
to grow, we must also attract skilled employees in all areas of our business. We
may not be able to retain our existing employees or attract additional skilled
employees in the future. Our failure to do so could harm our business. We have
not entered into employment contracts with any of our employees, other than
Richard Amtower, Vice President of PDI and President of CR Technology, and do
not maintain key employee life insurance for our key employees other than
Richard Amtower.
WE RELY ON OUR SALES REPRESENTATIVES.
We sell our FPD products in Taiwan through a sales representative. We also
market and sell our PCB assembly and advanced semiconductor packaging inspection
products domestically and internationally primarily through sales
representatives. These sales representatives could reduce or discontinue sales
of our products. They may not devote the resources necessary to provide
effective sales and marketing support to us. In addition, we depend upon the
continued viability and financial resources of these representatives, many of
which are small organizations with limited working capital. These
representatives, in turn, depend substantially on general economic conditions
and other factors affecting the markets for the products they sell. We believe
that our success will continue to depend upon these sales representatives. If
some or all of our sales representatives experience financial difficulties, or
otherwise become unable or unwilling to promote and sell our products, our
business could be harmed.
PERFORMANCE, RELIABILITY OR QUALITY PROBLEMS WITH OUR PRODUCTS MAY CAUSE OUR
CUSTOMERS TO REDUCE THEIR ORDERS.
We believe that future orders of our products will depend in part on our
ability to maintain the performance, reliability and quality standards required
by our customers. If our products have performance, reliability or quality
problems, then we may experience:
- delays in collecting accounts receivable;
- reduced orders;
- additional warranty and service expenses; and
- higher manufacturing costs.
8
<PAGE>
WE DEPEND ON THE STRENGTH OF THE AMLCD FPD INDUSTRY.
While our technology is applicable to other FPD technologies, our experience
has been limited to active matrix liquid crystal display, or AMLCD,
applications. Currently, we derived our revenue primarily from sales of products
based upon AMLCD technology. An industry shift away from AMLCD technology to
existing or new competing technologies could reduce the demand for our products
and harm our business.
WE MAY NOT EFFECTIVELY MANAGE POSSIBLE FUTURE GROWTH OR SUCCESSFULLY INTEGRATE
ACQUIRED BUSINESSES.
To manage possible future growth, our management must improve financial and
management controls, management processes, business and management information
systems and expand, train and manage our work force. We may not be successful in
performing these actions. In addition, we may acquire complementary companies,
products or technologies in the future. Managing an acquired business, product
or technology may entail numerous operational and financial risks, including
difficulties in assimilating acquired operations, diversion of management's
attention to other business concerns, amortization of acquired intangible assets
and potential losses of key employees or customers of acquired operations. To be
successful, our management must respond to these challenges effectively. At
present, we do not know if we will be able to effectively achieve and manage
growth, or that our management, personnel or systems will be adequate to support
our operations.
OUR BUSINESS COULD BE HARMED IF WE FAIL TO PROPERLY PROTECT OUR INTELLECTUAL
PROPERTY.
Our success depends in part on our ability to protect our intellectual
property. We rely on patent, trademark and copyright laws and trade secrets to
protect our intellectual property. Any patent owned or licensed by us could be
invalidated, circumvented, or challenged by others. Also, our pending or future
patent applications may not be issued as broadly as we wish, or at all. Even if
issued, rights granted under these patents may not provide significant
competitive advantages to us. Our competitors may develop technologies that are
similar or superior to our technology, duplicate our technology or design around
the patents owned by us. The steps we have taken to protect our intellectual
property may not prevent misappropriation of our technology. Litigation may be
necessary in the future to enforce our patents and other intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Even if successful, litigation could be
expensive and divert important management resources. If our intellectual
property is not properly protected, our business would be harmed.
LITIGATION MAY BE NECESSARY TO DEFEND US AGAINST CLAIMS OF INTELLECTUAL PROPERTY
INFRINGEMENT.
Our domestic and international competitors, many of which have substantially
greater resources and have made substantial investments in competing
technologies, may have patents that will prevent, limit or interfere with our
ability to manufacture and sell our products. We have not conducted an
independent review of patents issued to third parties. Third parties may assert
infringement claims, successful or otherwise, against us, and litigation may be
necessary to defend against claims of infringement or invalidity. An adverse
outcome in the defense of a patent suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require us to cease selling our products. Even successful defenses of
patent suits can be costly and time-consuming.
OUR BUSINESS MAY BE HARMED IF WE FAIL TO COMPLY WITH GOVERNMENTAL REGULATIONS.
Some of our PCB assembly and advanced semiconductor packaging products are
subject to regulation by the U.S. Food and Drug Administration, the California
Department of Public Health and other agencies in each jurisdiction where these
products are sold or used. Compliance with these
9
<PAGE>
regulations is time-consuming and expensive and may delay or even prevent sales
in the U.S. or other jurisdictions. If we fail to comply with these regulations,
we could face fines or penalties, and sales of our products could be prohibited.
These fines, penalties, and prohibitions could harm our business.
Our business is also subject to a variety of governmental regulations
related to the discharge or disposal of toxic, volatile, or otherwise hazardous
chemicals used in our manufacturing process. If we fail to comply with these
regulations, fines could be imposed on us, or we could be ordered to suspend our
production or cease our operations altogether. New environmental regulations
could also require us to purchase expensive equipment or incur other significant
expenses to ensure compliance. Unanticipated environmental compliance costs
could harm our business.
WE MAY EXPERIENCE UNANTICIPATED WARRANTY CLAIMS.
We typically provide a limited warranty on our products for a period of one
year from final acceptance by customers. In addition, for some custom-designed
systems, we may need to comply with certain performance specifications for a
specific application. We may incur substantial warranty claim expenses on our
products or with respect to our obligations to meet custom performance
specifications. Actual warranty claims may exceed recorded allowances, resulting
in harm to our business.
YEAR 2000 ISSUES MAY DISRUPT OUR BUSINESS.
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 our 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. Specific problems could
include our temporary inability to process transactions, send invoices or engage
in normal business activities. We may not have foreseen and corrected all Year
2000 problems which may result in harm to our business. We do not have a
contingency plan for addressing Year 2000 issues and do not intend to establish
one.
WE FACE RISKS DUE TO OUR RELIANCE ON THE YEAR 2000 COMPLIANCE OF THIRD PARTIES.
We use software developed by third parties in our products and to operate
our business. Our third party software may be affected by Year 2000 issues. We
also rely on third parties to supply some components incorporated into our
products. Our third party suppliers may also be affected by Year 2000 issues.
The failure of third party software or components used by us or by our third
party suppliers to properly process dates for the year 2000 and thereafter could
require us to incur unanticipated expenses to remedy any problems. It could also
disrupt the supply of components necessary for our products.
EARTHQUAKES MAY DAMAGE OUR FACILITIES.
Our corporate and manufacturing facilities in California are located near
major earthquake faults which have experienced earthquakes in the past. In
addition, some of our Asian customers are located near fault lines. In the event
of a major earthquake or other disaster in or near the San Francisco Bay Area or
Southern California, our facilities may sustain significant damage and our
operations could be harmed. Similarly, a major earthquake in Asia, like the one
that occurred in Taiwan in September 1999, could disrupt our operations or the
operations of our Asian customers, which could reduce demand for our products.
10
<PAGE>
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY.
Our stock price will fluctuate in the future. Price fluctuations may occur
in response to a variety of factors, including the following:
- our quarterly results of operations;
- announcements of new products by us or our competitors;
- changes in either our earnings estimates or investment recommendations by
stock market analysts;
- announcements of technological innovations;
- conditions or trends in the FPD, PCB assembly and advanced semiconductor
packaging industries;
- announcements by us or our competitors of acquisitions, strategic
partnerships or joint ventures; and
- additions or departures of our senior management and other events or
factors many of which are beyond our control.
In addition, in recent years, the stock market in general, and shares of
technology companies in particular, have experienced extreme price fluctuations.
These extreme price fluctuations may continue. These broad market and industry
fluctuations may harm the market price of our common stock.
YOU WILL BE RELYING ON THE JUDGMENT OF OUR MANAGEMENT REGARDING OUR USE OF
PROCEEDS.
We have not designated any specific use for the net proceeds from our sale
of common stock described in this prospectus. Rather, we expect to use the net
proceeds for working capital, capital expenditures, general corporate purposes
and potential acquisitions. Consequently, our management will have significant
flexibility in applying the net proceeds of this offering. You will be relying
on the judgment of our management regarding the application of the proceeds. Our
management will have the ability to change the application of the proceeds of
this offering without shareholder approval.
SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK.
Our Articles of Incorporation authorize the board of directors to issue up
to 5,000,000 shares of preferred stock. The board also has the authority to
determine the price, rights, preferences and privileges, including voting
rights, of those shares without any further vote or action by the shareholders.
The rights of our shareholders will be subject to, and may be impaired by, the
rights of the holders of any preferred stock that may be issued in the future.
The Articles of Incorporation require advance notice of shareholder proposals
and director nominations. These and other provisions contained in our charter
documents and applicable provisions of California law could serve to depress our
stock price or discourage a hostile bid in which shareholders could receive a
premium for their shares. In addition, these provisions could make it more
difficult for a third party to acquire a majority of our outstanding voting
stock or otherwise effect a change of control of the Company.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
All of our outstanding shares are freely tradeable without restriction or
further registration. Affiliates must sell all shares they own in compliance
with the volume and other requirements of Rule 144, except for the holding
period requirements. Our directors and executive officers and the selling
shareholder have agreed that for a period of 90 days after the date of this
prospectus, they will not directly or indirectly sell any shares of common stock
without the consent of Banc of America Securities LLC and Needham & Company,
Inc. Sales of substantial amounts of common stock by our
11
<PAGE>
shareholders, or even the potential for such sales, may have a depressive effect
on the market price of our common stock and could impair our ability to raise
capital through the sale of our equity securities.
INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION FROM THIS OFFERING.
The public offering price per share in this offering will significantly
exceed our net tangible book value per share. Accordingly, investors purchasing
shares in this offering at an assumed public offering price of $35.125 per share
will suffer immediate and substantial dilution to their investment of $32.74 per
share.
WE DO NOT PAY CASH DIVIDENDS.
We have never paid any cash dividends on our common stock and do not
anticipate that we will pay cash dividends in the future. Instead, we intend to
apply any earnings to the expansion and development of our business.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes 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. We intend such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and we are including this
statement for purposes of complying with these safe harbor provisions. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions, including those set forth under "Risk Factors."
Words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate" and variations of such words and similar expressions are intended to
identify such forward-looking statements. We undertake no obligations to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
13
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 1,320,000 shares of
common stock that we are offering at an assumed public offering price of $35.125
per share will be approximately $43.3 million after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we estimate the net
proceeds from this offering will be approximately $53.2 million.
We expect to use the net proceeds from this offering for working capital,
capital expenditures and general corporate purposes. We may also use a portion
of the net proceeds to acquire other complementary products, technologies or
businesses when the opportunity arises; however, we currently have no
commitments or agreements and are not involved in any other negotiations with
respect to any such transactions. As of the date of this prospectus, we cannot
specify with certainty the particular uses for the net proceeds we will receive
in this offering. Accordingly, our management will have broad discretion in
applying our net proceeds of this offering. Pending such uses, the net proceeds
of this offering will be invested in investment grade, interest-bearing
instruments.
14
<PAGE>
PRICE RANGE OF OUR COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "PHTN" since November 15, 1995. The following table sets forth for the
period indicated the high and low sale prices for our common stock, as reported
by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal year ended September 30, 1998
First Quarter............................................. $7.38 $2.50
Second Quarter............................................ 3.75 2.38
Third Quarter............................................. 5.56 3.19
Fourth Quarter............................................ 3.63 2.00
Fiscal year ended September 30, 1999
First Quarter............................................. $5.63 $2.25
Second Quarter............................................ 8.25 3.94
Third Quarter............................................. 12.38 7.00
Fourth Quarter............................................ 25.75 10.63
</TABLE>
On December 28, 1999 the last reported sale price of our common stock on the
Nasdaq National Market was $35.125. As of November 30, 1999 there were 9,657,481
shares of our common stock outstanding held by approximately 120 holders of
record.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable future.
Payment of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results and current and anticipated cash needs.
15
<PAGE>
CAPITALIZATION
The following table sets forth on an unaudited basis our capitalization as
of September 30, 1999 and as adjusted to reflect the sale of the 1,320,000
shares of common stock we are offering at an assumed public offering price of
$35.125 per share and the receipt of the estimated net proceeds, after deducting
the underwriting discounts and our estimated offering expenses.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $ 8,026 $51,296
======= =======
Shareholders' equity:
Preferred stock; no par value; 5,000,000 shares
authorized; none issued and outstanding, actual and as
adjusted................................................ -- --
Common stock; no par value; 20,000,000 shares authorized;
9,648,571 shares issued and outstanding, actual and as
adjusted................................................ 45,972 89,242
Accumulated deficit......................................... (22,929) (22,929)
Accumulated other comprehensive income...................... 3 3
------- -------
Total shareholders' equity.............................. 23,046 66,316
------- -------
Total capitalization.................................... $23,046 $66,316
======= =======
</TABLE>
The number of outstanding shares as of September 30, 1999 excludes:
- 1,197,752 shares of common stock issuable upon exercise of outstanding
stock options with a weighted average exercise price of approximately
$4.62 per share;
- 392,664 shares of common stock reserved for future issuance under our
stock option plans;
- 62,172 shares of common stock reserved for sale under our employee stock
purchase plan; and
- warrants to purchase 12,067 shares of common stock, exercisable at $5.40
per share.
16
<PAGE>
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial information of
PDI as of September 30, 1998 and 1999 and for the fiscal years ended
September 30, 1998 and 1999, has been derived from and should be read in
conjunction with the audited supplemental consolidated financial statements of
PDI included elsewhere in this prospectus. The selected historical consolidated
financial information of PDI as of September 30, 1995, 1996 and 1997 and for the
fiscal years ended September 30, 1995, 1996 and 1997 has been combined from the
separate audited consolidated financial statements of PDI and CR Technology
which are not included in this prospectus.
Prior to the acquisition, CR Technology prepared its financial statements
based on a fiscal year ended December 31. For fiscal 1999, the selected
supplemental consolidated statements of operations data combine the PDI and CR
Technology results for the twelve months ended September 30, 1999. However, for
fiscal 1995 through 1998, the selected supplemental consolidated statements of
operations data combine the PDI fiscal year ended September 30 with the CR
Technology fiscal year ended December 31. Therefore, the consolidated
supplemental statement of operations data for the fiscal years ended
September 30, 1998 and 1999 both include the CR Technology results of operations
for the three months ended December 31, 1998.
The selected supplemental consolidated balance sheet data as of
September 30, 1999 combines the PDI and CR Technology consolidated balance sheet
data as of that date. However, for fiscal 1995 through 1998, the September 30
selected supplemental consolidated balance sheet data combines the PDI balance
sheet data as of September 30 with the CR Technology balance sheet data as of
December 31.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $21,617 $28,388 $30,215 $30,970 $45,431
Cost of revenue............................................. 13,297 15,033 16,967 17,879 25,573
------- ------- ------- ------- -------
Gross margin................................................ 8,320 13,355 13,248 13,091 19,858
Operating expenses:
Research and development.................................. 1,881 4,303 8,067 6,523 5,943
Selling, general and administrative....................... 5,266 7,304 7,445 8,321 11,140
Asset write-off (recovery) related to product line
disposal................................................ -- 844 -- (350) --
------- ------- ------- ------- -------
Total operating expenses.................................... 7,147 12,451 15,512 14,494 17,083
------- ------- ------- ------- -------
Operating income (loss)..................................... 1,173 904 (2,264) (1,403) 2,775
Interest income (expense) and other......................... (515) 393 268 269 171
------- ------- ------- ------- -------
Income (loss) before income taxes........................... 658 1,297 (1,996) (1,134) 2,946
Provision (benefit) for income taxes........................ 14 52 (114) 73 673
------- ------- ------- ------- -------
Net income (loss)........................................... $ 644 $ 1,245 $(1,882) $(1,207) $ 2,273
======= ======= ======= ======= =======
Basic net income (loss) per share........................... $ 0.12 $ 0.15 $ (0.22) $ (0.14) $ 0.24
======= ======= ======= ======= =======
Diluted net income (loss) per share......................... $ 0.10 $ 0.14 $ (0.22) $ (0.14) $ 0.23
======= ======= ======= ======= =======
Shares used in computing:
Basic net income (loss) per share......................... 5,335 8,095 8,702 8,930 9,282
Diluted net income (loss) per share....................... 6,160 9,099 8,702 8,930 9,935
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 596 $10,118 $ 5,401 $ 6,295 $ 8,026
Working capital............................................. 1,461 19,219 17,243 16,993 20,461
Total assets................................................ 12,311 27,730 27,325 25,191 32,067
Total shareholders' equity.................................. 2,375 21,982 20,568 19,568 23,046
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING BUT NOT
LIMITED TO THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We believe we are the leading provider of yield management solutions to the
FPD industry. We also offer yield management solutions for the PCB assembly and
advanced semiconductor packaging industries. Our test, repair and inspection
systems are used by manufacturers to collect data, analyze product quality and
identify and repair product defects at critical steps in the manufacturing
process.
We derive our revenue primarily from sales in Japan, Korea and Taiwan, where
FPD production is concentrated. However, with our recent acquisition of CR
Technology, which derives the majority of its revenues in North America, we have
diversified our geographic revenue mix. We derived approximately 76% of our
revenue in fiscal 1999 and 72% in fiscal 1998 from customers outside North
America. Substantially all of our sales are made in U.S. dollars.
Sales outside North America accounted for $34.3 million of our revenue in
fiscal 1999 and $22.1 million in fiscal 1998. Sales in Japan decreased to
$8.3 million, or 18% of revenue, in fiscal 1999 from $10.2 million, or 33% of
revenue, in fiscal 1998. Sales in Taiwan increased to $11.3 million, or 25% of
revenue, in fiscal 1999 from $927,000, or 3% of revenue, in fiscal 1998. Sales
in Korea increased to $12.2 million, or 27% of revenue, in fiscal 1999 from
$10.4 million, or 34% of revenue, in fiscal 1998.
In 1998, financial difficulties in Japan and Korea, combined with a decline
in FPD prices, caused our FPD customers to reduce their capital equipment
purchases. We incurred losses in 1998, not only because of this downturn, but
also because we continued to invest in research and development and in building
our infrastructure. In 1999, our revenues increased and we returned to
profitability in large part because the financial environment improved in Japan
and Korea, FPD industry conditions recovered and we captured a larger share of
the FPD market.
We derive most of our revenues from a small number of customers, and we
expect this to continue. Our top four customers, each of which is an FPD
manufacturer, contributed 55% of revenue in fiscal 1999, compared to 67% in
fiscal 1998. Our products for the FPD industry accounted for 69% of revenue in
fiscal 1999, compared to 72% in fiscal 1998.
We generally recognize revenues from product sales upon shipment, which
usually precedes final acceptance, and record a provision for estimated warranty
costs at that time. We typically provide a limited warranty on our products for
a period of one year from final acceptance by customers. We recognize revenues
from service contracts ratably over the contract period. We sell our products on
net-30 day terms with a small portion held back until final acceptance; however,
a substantial portion of our customers, primarily foreign, remit payments on
significantly longer terms.
We obtain revenues from the FPD industry through direct sales in Korea, our
sales representative in Taiwan and our value-added reseller, IHI, in Japan.
Sales to IHI were $8.3 million in fiscal 1999 as compared to $10.2 million in
fiscal 1998. IHI purchases our equipment for resale in Japan and we recognize
revenues from IHI upon shipment. IHI provides installation, certain custom
modifications and field service support to their customers. Our personnel at our
wholly-owned Japanese subsidiary engage in joint sales and service activities in
conjunction with IHI. In fiscal 1999 and fiscal 1998, 18% and 33%, of our
revenues came from sales to IHI.
18
<PAGE>
In November 1999, we acquired all of the outstanding capital stock of CR
Technology, Inc. in exchange for 1,834,251 shares of our common stock. This
strategic acquisition complements our core capabilities of data acquisition,
image analysis and systems engineering and enables us to broaden our product
lines to offer yield management solutions to the PCB assembly and advanced
semiconductor packaging markets.
COMPARISON OF THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1999
In connection with the acquisition of CR Technology in November 1999,
accounted for as a pooling of interests, all financial data for the prior
periods have been restated to include CR Technology.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth operating data as a percentage of revenue.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue..................................................... 100.0% 100.0%
Cost of revenue............................................. 57.7 56.3
----- -----
Gross margin................................................ 42.3 43.7
----- -----
Operating expenses:
Research and development.................................. 21.1 13.1
Selling, general and administrative....................... 26.8 24.5
Asset recovery related to product line disposal........... (1.1) 0.0
----- -----
Total operating expenses................................ 46.8 37.6
----- -----
Operating income (loss)..................................... (4.5) 6.1
Interest income (expense) and other......................... 0.8 0.4
----- -----
Income (loss) before income taxes........................... (3.7) 6.5
Provision for income taxes.................................. 0.2 1.5
----- -----
Net income (loss)........................................... (3.9)% 5.0%
===== =====
</TABLE>
REVENUE. Revenue increased 46% to $45.4 million in fiscal 1999 from
$31.0 million in fiscal 1998. The increase in revenue for fiscal 1999 was due to
increased shipments of FPD yield management equipment, particularly in Taiwan,
and increased sales of our X-ray and optical inspection system products. Our
backlog was approximately $21.4 million at September 30, 1999 as compared to
approximately $10.4 million as of September 30, 1998. Our backlog may not result
in future revenues.
GROSS MARGIN. Our gross margin increased to 44% in fiscal 1999 from 42% in
fiscal 1998 largely due to manufacturing efficiencies resulting from higher
production volumes. These margin improvements were partially offset by lower
than typical gross margins from shipments to Taiwan. Overall gross margins will
fluctuate on a quarterly basis due to our production volume and product mix,
among other factors.
19
<PAGE>
RESEARCH AND DEVELOPMENT. We reduced our research and development expenses
to $5.9 million, or 13% of revenue, in fiscal 1999 from $6.5 million, or 21% of
revenue, in fiscal 1998, primarily due to reduced spending for consultants and
materials for development activities. In fiscal 1998, we were developing major
enhancements to our ArrayChecker test system which were largely complete by
fiscal 1999. We expect that our investment in research and development will
increase in fiscal 2000 as we begin new development projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $11.1 million, or 25% of revenue, in fiscal 1999 from
$8.3 million, or 27% of revenue, in fiscal 1998, largely due to higher
commissions and other selling expenses related to increases in orders and
revenue. Business development expenses also increased in fiscal 1999. Selling
expenses fluctuate based on our product and geographic sales mix, which have
different sales channels and associated cost structures. We expect selling,
general and administrative expenses to increase in fiscal 2000 and in future
periods.
ASSET RECOVERY RELATED TO PRODUCT LINE DISPOSAL. During the quarter ended
December 31, 1997, we received $350,000 related to discontinuing our defect
monitoring tool product in September 1996. We expensed the inventory and assets
associated with this product in fiscal 1996.
INTEREST INCOME (EXPENSE) AND OTHER. Interest income (expense) and other
decreased to $171,000 in fiscal 1999 from $269,000 in fiscal 1998. Interest
income (expense) and other consists of interest income, interest expense,
foreign exchange gains and losses, and other miscellaneous income and expenses.
PROVISION FOR INCOME TAXES. The fiscal 1999 tax provision of $673,000 is
lower than the expected tax at statutory rates due to the utilization of net
operating losses. As of September 30, 1999, we had federal and state net
operating loss carryforwards of approximately $12.1 million and $320,000,
respectively. We also had federal and state research and development tax credit
carryforwards of approximately $1.3 million and $750,000, respectively. The net
operating loss and credit carryforwards will expire at various times beginning
in 2000 through 2018, if not utilized. As of September 30, 1999, we had deferred
tax assets of approximately $9.7 million, which has been fully reserved by
valuation allowance and which consist primarily of net operating loss, research
and development tax credit carryforwards, and reserves and other accrued
expenses not yet deductible for income tax purposes. These deferred tax assets
will be recognized in future periods as taxable income is realized and
consistent profits are reported.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statement of operations
data for each of the eight quarters ended September 30, 1999, as well as such
data expressed as a percentage of net sales. The consolidated quarterly
statement of operations below combines the PDI and CR Technology results of
operations in the same manner as the annual statements such that the operating
results of CR Technology for the three months ended December 31, 1998 are
included in the results for both the quarters ended September 30, 1998 and
December 31, 1998. We believe that all necessary adjustments have been included
to fairly present the quarterly information when read in conjunction with the
consolidated financial statements. The operating results for any quarter are not
necessarily indicative of the results for any subsequent quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................... $7,379 $9,472 $7,637 $ 6,482 $ 6,504 $10,326 $13,700 $14,901
Cost of revenue........................... 3,804 5,435 4,255 4,385 4,249 5,857 7,499 7,968
------ ------ ------ ------- ------- ------- ------- -------
Gross margin.............................. 3,575 4,037 3,382 2,097 2,255 4,469 6,201 6,933
Operating expenses:
Research and development................ 1,989 1,599 1,578 1,357 1,309 1,353 1,641 1,640
Selling, general and administrative..... 1,903 2,065 1,891 2,462 2,471 2,780 2,823 3,066
Asset recovery related to product line
disposal.............................. (350) -- -- -- -- -- -- --
------ ------ ------ ------- ------- ------- ------- -------
Total operating expenses.................. 3,542 3,664 3,469 3,819 3,780 4,133 4,464 4,706
------ ------ ------ ------- ------- ------- ------- -------
Operating income (loss)................... 33 373 (87) (1,722) (1,525) 336 1,737 2,227
Interest income (expense) and other....... 56 50 116 47 (9) 53 60 67
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) before income taxes......... 89 423 29 (1,675) (1,534) 389 1,797 2,294
Provision (benefit) for income taxes...... -- 64 (30) 39 (46) 110 319 290
------ ------ ------ ------- ------- ------- ------- -------
Net income (loss)......................... $ 89 $ 359 $ 59 $(1,714) $(1,488) $ 279 $ 1,478 $ 2,004
====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue........................... 51.6 57.4 55.7 67.6 65.3 56.7 54.7 53.5
----- ----- ----- ----- ----- ----- ----- -----
Gross margin.............................. 48.4 42.6 44.3 32.4 34.7 43.3 45.3 46.5
Operating expenses:
Research and development................ 26.9 16.9 20.6 20.9 20.1 13.1 12.0 11.0
Selling, general and administrative..... 25.8 21.8 24.8 38.0 38.0 26.9 20.6 20.6
Asset recovery related to product line
disposal.............................. (4.7) -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses.................. 48.0 38.7 45.4 58.9 58.1 40.0 32.6 31.6
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)................... 0.4 3.9 (1.1) (26.5) (23.4) 3.3 12.7 14.9
Interest income (expense) and other....... 0.8 0.6 1.5 0.7 (0.2) 0.5 0.4 0.4
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes......... 1.2 4.5 0.4 (25.8) (23.6) 3.8 13.1 15.3
Provision (benefit) for income taxes...... 0.0 0.7 (0.4) 0.6 (0.7) 1.1 2.3 1.9
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)......................... 1.2% 3.8% 0.8% (26.4)% (22.9)% 2.7% 10.8% 13.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
In 1998, financial difficulties in Japan and Korea combined with a decline
in FPD prices caused our FPD customers to reduce their capital equipment
purchases. Despite incurring net losses in the third and fourth calendar
quarters of 1998, we continued to invest in research and development and build
our infrastructure. Beginning in the first calendar quarter of 1999, our
revenues increased and we returned to profitability in large part because the
financial environment improved in Japan and Korea, FPD industry conditions
recovered and we captured a larger share of the FPD market.
21
<PAGE>
Research and development expenses decreased in the third calendar quarter of
1998, primarily due to reduced spending for consultants and materials for
development activities. We were developing major enhancements to our
ArrayChecker test system which were largely complete by the second calendar
quarter of 1998. Our investment in research and development increased in the
first calendar quarter of 1999 as we began new development projects.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our growth primarily by a combination of equity financing,
loans, lines of credit, and cash flows from operations. As of September 30,
1999, we had working capital of $20.5 million of which $8.0 million was cash,
cash equivalents and short-term investments.
Cash provided by operating activities was $1.4 million for fiscal 1999.
Working capital items that significantly impacted cash balances were accounts
receivable, inventories, accounts payable, and accrued expenses and other
liabilities. Our accounts receivable balance increased $6.2 million to
$13.6 million in fiscal 1999 from $7.4 million in fiscal 1998 due to higher
shipments. We reduced inventories $1.1 million to $7.1 million in fiscal 1999
from $8.2 million in fiscal 1998. Accounts payable increased $973,000 to
$2.8 million in fiscal 1999 from $1.9 million in fiscal 1998 due to the purchase
of additional materials required to meet increased production requirements. The
increase of $1.9 million in accrued expenses and other liabilities to
$5.5 million in fiscal 1999 from $3.6 million in fiscal 1998 is attributable to
the higher number of systems under warranty in addition to higher commission and
incentive expenses associated with increases in orders and revenue.
Capital expenditures were $908,000 in fiscal 1999 and were $790,000 in
fiscal 1998.
We have entered into a $3.5 million bank line of credit which expires in
March 2000. This line of credit is secured by substantially all of the Company's
assets and contains certain financial and other covenants. We are eligible to
borrow against accounts receivable and a portion of inventories. Borrowings
under this line of credit bear interest at prime rate plus 1.00% to 1.25% (9.25%
to 9.50% as of September 30, 1999). As of September 30, 1999, no amounts were
outstanding under this bank line of credit, and we were in compliance with all
bank covenants.
We also have a $1.5 million revolving bank line of credit which we 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. We are eligible to borrow on an
unsecured basis. Borrowings under this line of credit bear interest at prime
rate (8.25% as of September 30, 1999). As of September 30, 1999, no amounts were
outstanding under this revolving line of credit, and we were in compliance with
all bank covenants.
We believe that cash, cash equivalents, short-term investments, borrowings
from the line of credit and cash flows from operations will be sufficient to
satisfy working capital requirements and capital equipment needs for at least
the next twelve months. As of September 30, 1999, we had no material outstanding
commitments to purchase or lease capital equipment.
We believe that success in our industry requires substantial capital in
order to maintain flexibility to take advantage of opportunities as they may
arise. We 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 us on commercially reasonable terms. The sale of additional equity
or convertible debt could result in dilution to our shareholders.
22
<PAGE>
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 our 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 disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. In addition to our own systems, we rely,
directly and indirectly, on external systems of our customers, creditors,
financial organizations, utility providers, and government entities, both
domestic and international. Consequently, we could be affected by disruptions in
the operations of these third parties with which we interact.
We have established a task force to address internal and external Year 2000
issues. To date, we have made several modifications to our product software,
enterprise software and network software to help ensure Year 2000 compliance.
Although we believe that our products and internal systems are currently Year
2000 compliant, third parties with which we interact may not be Year 2000
compliant. Failure of third party enterprises to achieve Year 2000 compliance
could harm our business.
We continue to evaluate the estimated costs associated with the efforts to
prepare for Year 2000 based on actual experience. While the efforts will involve
additional costs, we believe that we will be able to manage our total Year 2000
transition without harm to our business. As of September 30, 1999, we had
incurred approximately $36,000 in costs to achieve Year 2000 compliance. The
actual outcomes and results could be affected by many factors. These factors
include:
- continued availability of skilled personnel;
- cost control;
- 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.
We anticipate that we will remediate all Year 2000 risks and be able to
conduct normal operations without having to establish a Year 2000 contingency
plan. Accordingly, we do not have a contingency plan and do not intend to
establish one. Furthermore, we may not have foreseen and corrected all Year 2000
problems which may disrupt our business.
23
<PAGE>
BUSINESS
INTRODUCTION
We believe we are the leading provider of yield management solutions to the
flat panel display, or FPD, industry. We also offer yield management solutions
for the printed circuit board, or PCB, assembly and advanced semiconductor
packaging industries. Our test, repair and inspection systems are used by
manufacturers to collect data, analyze product quality and identify and repair
product defects at critical steps in the manufacturing process.
INDUSTRY BACKGROUND
Advancing technology and increasing demand for connectivity among electronic
devices have promoted the development and growing use of increasingly
sophisticated mobile electronic devices, such as notebook computers, cellular
phones, personal digital assistants and portable video games. Consequently,
manufacturers of mobile electronic devices are continually seeking ways to
increase the performance and quality, as well as reduce the size, weight and
power requirements of the components incorporated into these devices, such as
displays, electronic assemblies and semiconductors. The market for mobile
computers, including notebook computers and handheld devices, is expected to
grow at a rate of 25% from 18.8 million units in 1998 to 45.2 million units in
2002, according to Dataquest. Similarly, the cellular phone market is expected
to grow at a rate of 27% from 175.4 million units in 1998 to 461.1 million units
in 2002, according to Dataquest.
For stationary devices, including desktop computer monitors and televisions,
consumers have increasingly demanded higher resolution and performance, as well
as reduced footprint, power consumption and heat emission. In response to these
market demands, the desktop monitor and television industries have increasingly
adopted FPDs, as an alternative to traditional cathode ray tube, or CRT,
technology. The market for liquid crystal displays, or LCDs, the principal type
of FPD, is expected to grow at a rate of 86% from approximately 1.3 million
units, or 1.5% of the desktop monitor market in 1998, to 15.5 million units, or
11% of the desktop market by 2002, according to International Data Corporation.
As advanced electronics manufacturers ramp up production to meet increased
market demands, they are also seeking to improve the quality and reduce the cost
of their products by improving manufacturing yields and throughput. To do so,
they are increasing the use of more advanced test, repair and inspection
equipment and other yield management technologies.
THE FLAT PANEL DISPLAY INDUSTRY
Growth in the mobile electronic devices market has driven the demand for
FPDs, which offer many advantages over CRTs for mobile applications. FPDs offer
reduced size, weight, power consumption and heat emission and better picture
quality. As a result, FPDs have emerged as the dominant display technology for
mobile electronic devices and have also made inroads into stationary display
markets, such as the desktop monitor and television markets.
In recent years, the FPD manufacturing industry has matured significantly.
Korea and Taiwan have emerged as major centers of FPD manufacturing, whereas
previously the industry had been concentrated in Japan. The emergence of new
competition in the FPD industry has accelerated advances in the FPD
manufacturing process, including a move towards adoption of a standard, larger
plate size. By moving to a standard plate size, FPD manufacturers may prolong
the useful life of their equipment, thereby reducing costs. This larger plate
size also increases flexibility to manufacture different and larger display
sizes. In addition, the competition has resulted in a move to a zero defect
quality standard. Furthermore, as the supply of displays and their importance to
computer systems have become more critical, computer OEMs, such as Dell Computer
Corporation and Apple Computer, Inc.,
24
<PAGE>
have invested in or entered into long-term supply agreements with FPD
manufacturers. As the industry has matured, better manufacturing processes have
been developed, leading to lower cost, higher quality and higher resolution
displays.
In addition to their dominance of high performance portable display
applications, FPDs offer key advantages for stationary display applications,
even though they are currently more expensive than CRTs with comparable viewing
areas. Key advantages of FPDs over CRTs include:
- reduced size;
- less weight;
- less power consumption;
- reduced heat emission; and
- sharper, higher resolution images.
Improvements in FPD technology together with the following market trends
have contributed to the growth in demand for FPDs in stationary display markets,
such as desktop monitors and televisions.
- The growth of the world wide web has resulted in a dramatic increase in
the use of mobile and stationary devices for entertainment and information
gathering purposes. As a result, consumers spend more time viewing their
monitors, which has spurred the demand for both mobile and stationary
display technologies with sharper, higher resolution images.
- Emerging technologies, such as high-definition television and very
high-resolution desktop applications, are better viewed on FPDs that
provide for higher resolution pictures than CRTs.
- Consumers today have more disposable income, which may be allocated to
purchases of more sophisticated electronic products.
- Computers and other electronic devices are becoming less expensive,
allowing consumers to allocate a greater portion of the overall system
cost to the display.
- OEMs are promoting sales of FPDs by bundling computers with FPDs.
The highest performance FPD available today is the active matrix liquid
crystal display, or AMLCD, which produces full color images and operates at much
faster refresh rates than earlier passive monochrome LCDs. The color capability,
resolution, speed and picture quality of AMLCDs currently make these displays a
preferred choice for high performance portable computer, multimedia and other
applications requiring the display of video and graphics. DisplaySearch
estimates that AMLCDs will represent approximately 78% of the overall dollar
volume of the FPD market in 1999.
THE AMLCD MANUFACTURING PROCESS
The manufacture of AMLCDs is an extremely complex process, which is
developed and refined for different panel sizes and resolutions through research
and development, pre-production prototyping and commercial production.
Manufacturing an AMLCD involves a series of three principal phases. The first
phase is to fabricate an array of thin-film transistors on a glass substrate
through a process which is essentially the same as that used to create
electronic circuitry on a semiconductor device. In a high-quality color AMLCD,
each pixel, the smallest addressable dot on the display, is represented by three
transistors, one for each of the display's primary colors, red, green and blue.
The second phase, cell assembly, involves attaching a color filter to the
transistor-embedded substrate and injecting liquid crystal material between the
color filter and the transistor array. The color filter enables the display to
attain color capability by selectively filtering out the light emissions from
each multi-color pixel array to produce the desired color mix in the displayed
image. At the cell assembly phase, each individual pixel is created through the
combination of transistors and the color filter. The third phase in the process,
25
<PAGE>
module assembly, involves packaging the display and attaching the electronics
that will allow the device to display the text, graphics and video images
directed by the computer or other electronic systems to the AMLCD. This step
also involves sealing the FPD and installing the electronics that connect the
FPD to other electronic devices like a computer. The following diagram
illustrates these three principal phases in the manufacture of an AMLCD:
[Graphic depicting the AMLCD manufacturing process with the caption "AMLCD
manufacturing process". The graphics depicts a series of boxes connected by
arrows representing the following key steps of the AMLCD manufacturing process:
array fabrication; array pattern inspection; array repair; array test; array
repair; cell assembly; cell inspection; cell repair; module assembly; module
inspection; and module repair. The array fabrication, array pattern inspection,
array repair, and array test boxes are grouped by a dotted line with the caption
"Array Fabrication Phase". The cell assembly, cell inspection and cell repair
boxes are grouped by a dotted line with the caption "Cell Assembly Phase". The
module assembly, module inspection, and module repair boxes are grouped by a
dotted line with the caption "Module Assembly Phases". The steps in the
manufacturing process in which FPD manufacturers use PDI's systems are indicated
in bold. Text beneath the diagram is a box followed by the text: "Indicates
steps that use our systems."]
The ability of FPD manufacturers to improve yields of AMLCDs and other FPDs
depends in large part on their ability to test and inspect displays both during
and upon completion of the manufacturing process and to use test and inspection
data to refine the manufacturing process. Through test and inspection, the FPD
manufacturer seeks to identify defects at an early stage in the process to
permit repair or to avoid wasting costly materials on continued manufacturing of
a defective product. We estimate that approximately two-thirds of the overall
cost of manufacturing a typical full color AMLCD is incurred in later stage
manufacturing steps after the array fabrication phase. Many of these material
costs can be avoided through in-process testing for defects at earlier stages in
the manufacturing process. In addition, systematized test and inspection
provides qualitative feedback to the FPD manufacturer and enables it to address
yield problems and to optimize the manufacturing process. At present, FPD
manufacturers are utilizing a number of different approaches to test, repair and
inspect at the array and cell phases of the FPD manufacturing process.
ARRAY TEST. After the array fabrication and prior to attaching the color
filter plate and injecting the liquid crystal material, functional electrical
tests are performed. Comprehensive testing at the array fabrication phase is
critical to yield management and cost reduction.
Traditional methods for testing array fabrications have increasing
limitations as resolutions and quality standards increase and as manufacturing
flexibility becomes more important. Traditional array testing methods
sequentially exercise each individual pixel from the edge of the display panel
through each row and column, while simultaneously measuring the electrical
characteristics of the pixel. The sequential measurement of the very large
number of pixels on each panel imposes throughput limitations. In order to
contact each row and column, traditional methods require the use of probe cards
to make thousands of physical contacts around the edge of the display panel.
These high precision probe cards are expensive and can only be used for one
display resolution and size. The sheer number of lines to be probed generally
results in several missed contacts during each test. As resolutions increase,
more probes are necessary, with tighter spacing between each probe making it
prohibitively difficult to use probe cards for array testing. Furthermore, by
measuring each pixel indirectly from the end of its respective row and column,
traditional array testing methods have certain other inaccuracies and
measurement limitations.
26
<PAGE>
REPAIR. Laser-based repair systems enable FPD manufacturers to improve
yields by repairing panels at several steps in the manufacturing process. Repair
systems can download defect data from test and inspection systems to aid
operators in locating defects. Repairs can be made during the array fabrication
process, after functional electrical test of the completed array plate and after
cell inspection. The probability of successful defect repair is highest during
the early phases of the manufacturing process. Once a defect is located,
operators repair the defect using a laser to either remove or weld material.
In order to repair defects with high throughput, the large plate substrate
must be moved rapidly with micron-level accuracy to successive repair sites.
There are many different types of defects that FPD manufacturers seek to repair
and each type of defect requires different repair processing. Traditional repair
equipment requires significant and repeated operator intervention not only to
position the repair site accurately, but also to select the required repair
process parameters such as the type of cut, cut points, the power and wavelength
of the laser, and the number of repetitions. Traditional repair systems have
used equipment stages with limited speed, accuracy and repeatability. These
systems have also been characterized by labor intensive user interfaces and
limited position automation. These factors have constrained throughput and
limited the success rate of repairs. Thus, there is a need for automated
equipment that more precisely and rapidly positions large FPD plates and
determines and executes the correct repair with minimal human intervention.
CELL AND MODULE INSPECTION. Human visual inspection has traditionally been
the main method of inspection after cell assembly and at various stages of
module assembly. To facilitate human inspection at the cell assembly phase, a
probing system is used to electronically exercise each pixel. The probing system
employs a probe card that contains thousands of probe pins to physically contact
every gate and data line. At the module phase, after attachment of the driver
electronics, humans inspect the display as the driver electronics exercise each
pixel. Inspections at both the cell assembly phase and the module phase include
pixel, line and blemish (also known as Mura) defects. Additional inspections at
the module stage include: polarizer defects, such as bubbles, particles and
scratches; driver integrated circuit defects, such as poor bond joints and
circuit defects; and backlighting defects, such as non-uniform brightness and
particles. For each of these inspections, the operator manually logs the results
for use in repair and statistical process control.
Human visual inspection suffers from high labor costs, high labor turnover,
inconsistency and inefficiency. Human inspection is generally subjective, lacks
quantitative standards and does not facilitate the analysis of test and
inspection data to isolate and eliminate yield reduction factors. Moreover, as
the resolution of displays increases, it becomes more difficult for operators to
find single pixel defects and more costly to manufacture and maintain the probe
cards. Additionally, OEMs desire specific panel and lot quality control data for
FPDs purchased from manufacturers. Providing this information to OEMs is
difficult or impossible without automated inspection, data acquisition and
quality grading systems. Some of these requirements may be beyond the
capabilities of human inspectors. Consequently, as the industry seeks to adopt
tighter quality standards, there is a need for automated, high throughput,
standard inspection procedures.
Historically, automated inspections systems have employed a variety of image
acquisition and processing techniques, including a variety of CCD sensor
configurations. These techniques provide high-resolution images that allow
excellent pixel and line defect detection. However, these techniques generally
are complex and expensive, have difficulty identifying low contrast Mura defects
and have slow image acquisition times. Thus, neither human inspection nor
current automated equipment meets the complete inspection needs of FPD
manufacturers as the industry moves towards larger, higher resolution panels
with zero defects.
27
<PAGE>
NEED FOR ADVANCED TEST, REPAIR AND INSPECTION EQUIPMENT AND OTHER YIELD
MANAGEMENT TECHNOLOGIES IN THE FPD MANUFACTURING PROCESS
A number of trends in the FPD industry are driving the need for more
sophisticated yield management solutions and highlighting the deficiencies of
existing test, repair and inspection systems.
DEMAND FOR HIGHER QUALITY. Increased competition among FPD manufacturers,
improvements in the manufacturing process and higher consumer expectations are
moving the FPD industry towards a zero defect standard. The manufacturing
challenges presented by the requirement for zero defect products have been
compounded by the increasing demand for higher resolution and larger displays,
which are more difficult to manufacture.
INCREASING DISPLAY RESOLUTIONS. Resolutions of advanced FPDs now involve
more than a million pixels, presenting a challenge when test and inspection
equipment must exercise each pixel. Traditional methods of physically contacting
each row and column of pixels with probe cards have difficulty handling current
advanced displays. New techniques, such as non-contact pixel-addressing
mechanisms, are required to more effectively handle these displays.
HIGH COST OF MATERIALS. Materials costs comprise approximately 57% of FPDs
in contrast to only approximately 11% for semiconductors. High materials costs
expose the FPD manufacturer to high costs from yield loss throughout the
manufacturing process. Therefore, it is important to test and repair early in
the manufacturing process before expensive materials are added to the display in
the assembly phases.
NEED FOR INCREASED YIELD AND GREATER THROUGHPUT. Optimizing yield and
throughput is critical to cost reduction because of the high cost of
constructing, operating and maintaining an FPD manufacturing facility. Test,
inspection and repair tools are essential to increase manufacturing yields.
These tools must function rapidly and accurately in production to provide for
greater throughput.
NEED FOR FLEXIBILITY. The FPD industry is producing a larger number of
different panel sizes as the variety of applications incorporating FPDs has
increased. Therefore, manufacturers are seeking test, repair and inspection
equipment that can be reconfigured quickly and accurately for different panel
sizes with minimal production downtime.
The FPD manufacturer's need for a yield management solution that reduces
costs, increases throughput and improves product quality has driven the demand
for new FPD test, repair and inspection technologies while underscoring the
shortcomings of traditional technologies. Because of the critical role of yield
to FPD manufacturers in reducing their costs, the FPD industry is now generally
recognizing the need for automated FPD test, repair and inspection equipment and
is looking for yield enhancing solutions at all stages of the FPD manufacturing
process. This need has become more acute as FPDs have become increasingly
complex and the market has moved to higher resolution displays.
PCB ASSEMBLY AND ADVANCED SEMICONDUCTOR PACKAGING MARKETS
Just as the growing demand for increasingly sophisticated mobile and
interconnected electronic devices is driving the market for new display
technologies, this demand has caused electronics manufacturers to seek to reduce
the size, power consumption and cost of the other components contained in these
devices. Additionally, as the functionality and sophistication of mobile
electronic devices have increased, so has the complexity of their electronic
components. These factors are driving the development of smaller, denser and
more complex PCBs, the backplanes upon which semiconductors and other electronic
components are attached and interconnected. These factors are also contributing
to the development of advanced semiconductor packaging technologies.
As semiconductors continue to shrink and become more complex, an increasing
number of wire connectors, or leads, must be attached to the semiconductor
package. Ball grid array, or BGA,
28
<PAGE>
semiconductor packaging technology was developed to address the problems
associated with greater lead counts required for advanced semiconductors. A BGA
package has leads on the bottom of the package in the form of small bumps or
balls. These balls can be distributed over the entire bottom surface of the
semiconductor package, rather than just its perimeter, allowing greater distance
between the individual leads. A number of other high-lead count interconnect
solutions with hidden solder joints have been developed, including flip chip and
chip scale packaging. The BGA market is estimated to grow at a rate of 46% from
1.8 billion units in 1998 to 12.3 billion units in 2003, according to Electronic
Trend Publications.
Because the leads in BGA semiconductor packages are located under the
package and, therefore, are not visible after the package has been affixed to a
PCB, the inspection of these solder joints requires the use of alternatives to
visual inspection technologies, such as X-ray inspection or ultrasound
technologies. Furthermore, as the number of leads on semiconductor packages
continues to increase, inspection technology must become more sophisticated and
precise.
At the same time, electronic device OEMs are increasingly focusing on their
core competencies and outsourcing the manufacture of many components
incorporated into their products. This trend has resulted in the rapid expansion
of the contract manufacturing industry. The contract manufacturing industry
represented 16% of the $554 billion electronics manufacturing market in 1998 and
is projected to increase to 26% of the $682 billion market in 2001, according to
Technology Forecasters. The contract manufacturing industry has consolidated in
recent years and is currently dominated by a few large companies, including SCI
Systems Inc., Solectron Corporation, Celestica Inc. and Jabil Circuit Inc.
Increased competition is causing contract manufacturers to focus on reducing
costs while differentiating themselves through improved quality. One way in
which contract manufacturers may reduce manufacturing costs is through yield
improvements and increased throughput, which may be achieved through increased
and more sophisticated inspection. Contract manufacturers are moving towards
100% inspection standards and adopting new inspection technologies as they seek
to provide high quality products while reducing costs. Also, the contract
manufacturing industry is characterized by shorter product life cycles, a
greater variety of products manufactured in smaller lot sizes and a high
employee turnover rate. These factors require contract manufacturers to adopt a
flexible approach to manufacturing with inspection equipment that is intuitive,
easy to use and easily configured.
THE PHOTON DYNAMICS SOLUTION
We believe we are the leading provider of yield management solutions for the
FPD industry. We also offer yield management solutions to the PCB assembly and
advanced semiconductor packaging industries. Our extensive test, repair and
inspection systems are used to collect data, analyze product quality and repair
product defects at critical steps in the manufacturing process.
Through our years of experience, we have developed extensive application
knowledge and skills in data acquisition, image analysis, high precision
electromechanical and electro-optical engineering and systems engineering. In
the U.S., we have 35 patents issued and active and 7 additional patents pending.
FPD SOLUTION
Our FPD yield management products include test, repair and inspection
equipment. Our 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. Our products gather comprehensive data which enable FPD
manufacturers to control and tune their processes to produce zero defect
displays at high yields.
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<PAGE>
FPD ARRAY TEST EQUIPMENT. Our test tools utilize our proprietary Voltage
Imaging technology, which provides a high-resolution voltage map of the entire
display without contacting the panel. Our proprietary software algorithms
convert this voltage map into comprehensive defect and performance data for each
pixel. Our technology can pinpoint subtle differences in signal strength such as
interlayer shorts, line opens, deposition faults and leaky transistors. PDI's
Voltage Imaging technology more completely and accurately identifies and
characterizes defective pixels than traditional probe technology, which measures
pixel performance indirectly from the edge of the display. Our test tools also
record information regarding defective pixels to a data file for use by the FPD
repair or inspection systems or by manufacturing engineers for process design
and yield improvement analysis.
FPD REPAIR EQUIPMENT. Our repair equipment analyzes data files from array
test and inspection systems to locate defects and automatically position the
panel for repair. Our repair equipment generates laser energy in multiple
wavelengths to repair most types of defects. The automation and versatility of
our repair equipment allows manufacturers to produce zero defect plates
efficiently with high yields. Also, the ability to repair FPDs lowers material
costs as the number of discarded panels is reduced.
FPD INSPECTION EQUIPMENT. Our MuraLook technology uses our proprietary
software algorithms to identify and characterize blemishes and other defects on
panels. Our MuraLook technology automates the inspection process thereby
eliminating human errors and implementing consistent objective measurement
standards. Our team of leading experts on image analysis has re-engineered our
MuraLook software based on a rigorous image analysis theory to provide a
comprehensive, automated solution. We believe our next-generation MuraLook
technology will reinforce our position as the leader in providing yield
management solutions for the FPD industry.
PCB ASSEMBLY AND ADVANCED SEMICONDUCTOR PACKAGING SOLUTIONS
Our recent acquisition of CR Technology complements our core capabilities of
data acquisition, image analysis and systems engineering, and provides yield
management solutions to the PCB assembly and advanced semiconductor packaging
industries.
Our X-ray and optical inspection systems enable PCB assembly and advanced
semiconductor packaging manufacturers to meet the challenges of shorter product
life cycles, higher standards for quality and increased need for manufacturing
flexibility. PDI's intuitive graphical user interface and configuration software
speeds operator training and the setup of inspection for new circuit boards
which are important in this fast-turnaround manufacturing environment that
suffers from high employee turnover.
X-RAY INSPECTION EQUIPMENT. Our X-ray inspection systems provide an
effective, non-destructive means of verifying hidden solder connections such as
under BGA packages. These systems also verify connections such as die
attachments and wire bonds inside semiconductor packaging.
OPTICAL INSPECTION EQUIPMENT. Our optical inspection systems inspect PCB
assemblies for component presence, correct component, orientation, polarity,
skew, solder integrity and other defects.
COMBINED X-RAY AND AUTOMATED OPTICAL INSPECTION EQUIPMENT. Our combination
X-ray and automated optical inspection equipment reduces handling, speeds
throughput and saves floor space by simultaneously inspecting both visible and
hidden features of PCB assemblies.
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PDI'S STRATEGY
Our objective is to enhance our position as a leading supplier of yield
management solutions to the FPD industry and to become a leading supplier of
yield management solutions to advanced segments of the electronics assembly and
semiconductor packaging industries. Essential elements of our strategy are as
follows:
FURTHER PENETRATE EXISTING MARKETS
We plan to leverage our global presence, technology leadership and extensive
customer relationships to further penetrate the market for yield management
solutions. For example, in Japan, although we have a strong customer base and
major market share for FPD test and inspection equipment, we are just beginning
to penetrate the market for repair equipment. We also intend to leverage our
position as a technology leader in the FPD industry to offer our next-generation
products and further penetrate our existing customer base.
In addition, through the acquisition of CR Technology, we have gained access
to the PCB assembly and advanced semiconductor packaging markets. CR Technology
has been focused on sales to U.S. entities in part due to its limited
international infrastructure. As a result, approximately 14% of CR Technology's
current revenues come from Asia, a region that represents approximately 40% of
the PCB assembly and advanced semiconductor packaging markets. We plan to
leverage our global infrastructure in Asia to grow our position in these
markets.
EXPAND YIELD MANAGEMENT PRODUCT OFFERINGS
Through internal development and acquisitions, we intend to broaden our
product offerings for the FPD industry and to expand into new markets within the
electronics industry where we can leverage our core competencies. For example,
in November 1999 we completed the acquisition of CR Technology, a supplier of
advanced X-ray and optical inspection systems to the PCB assembly and advanced
semiconductor packaging markets. We will continue to seek new acquisitions or
develop strategic partnerships to enhance our technological expertise and yield
management product line.
EXTEND TECHNOLOGY LEADERSHIP
We believe that our proprietary technology provides us with competitive
advantages. We intend to continue to invest in research and development to
extend our technology leadership position. We recently formed a technical
advisory panel of academic and industry experts to assist us in assessing future
developments in our core competencies and in our served markets. In addition, we
will continue to build our patent portfolio to bolster our technological
competitive advantage.
MAINTAIN AND ENHANCE EXISTING CUSTOMER RELATIONSHIPS
We have established close working relationships with the leaders in the FPD
industry, which is concentrated among a small number of major manufacturers. We
will continue to work with our key customers to develop next generation products
to solve their yield management problems. As we extend our product line, we will
provide more comprehensive yield management solutions to our customers. We also
intend to add focus on certain strategic customers within the PCB assembly and
advanced semiconductor packaging industries. Furthermore, we plan to expand and
strengthen our service offerings to our customers as well as grow the number of
our sales and field applications personnel.
FOSTER INDUSTRY STANDARDS FOR YIELD MANAGEMENT AND QUALITY
Our yield management solutions have been instrumental in the development of
more rigorous quality standards for the FPD industry. Our recently introduced
second generation of test and repair
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equipment has allowed the industry to cost-effectively produce panels with no
defects. As a result, a new zero defect quality standard is emerging in the FPD
industry. In addition, we are working to establish quality standards for
blemishes and other defects. We have been asked by the Video Electronics
Standards Association to assist in the establishment of standards for blemish
characterization. We plan to continue to drive quality standards in the FPD
industry as well as the PCB assembly and the advanced semiconductor packaging
industries.
PRODUCTS AND TECHNOLOGIES
FPD PRODUCTS
We offer products that test, repair and inspect AMLCDs, which are estimated
to represent 78% of the FPD market in 1999, according to DisplaySearch. Our
test, repair and inspection systems use similar software-based controls,
processing and graphical user interfaces. Products can be networked together so
that defect data can be stored, analyzed and used throughout the manufacturing
process. Our highly reliable systems are also compatible with a variety of
material handling automation systems.
The following tables summarizes our products for the FPD manufacturing
industry.
<TABLE>
TYPE OF
PRODUCT PRODUCT STAGE OF PROCESS FUNCTION TECHNOLOGY
<S> <C> <C> <C> <C>
ArrayChecker Test After array Analysis of the Voltage Imaging
fabrication and performance of each
before color filter pixel
is attached
ArrayChecker 2000 Test After array Analysis of the Voltage Imaging;
(Introduction planned fabrication and performance of each higher resolution
for mid-2000) before color filter pixel and throughput;
is attached larger plate size
ArraySaver Repair During and after Repairs line and PixeLaser;
array fabrication pixel defects BeamBlender
multiple wavelength
laser; fast high-
precision stage
PanelMaster Inspection After cell assembly Locates and Optical N-Aliasing
and module assembly characterizes line, imaging; MuraLook
cluster, pixel and image analysis
blemish (Mura) algorithms
defects
</TABLE>
ARRAYCHECKER TEST SYSTEMS. Our ArrayChecker test system detects, locates,
quantifies and characterizes electrical, contamination and other defects in
AMLCDs after array fabrication. The system uses our proprietary non-contact
Voltage Imaging technology to provide a high-resolution voltage map of the
entire display and our proprietary image analysis software converts this voltage
map into complete pixel defect data. The ArrayChecker determines whether
individual pixels or lines of pixels are functional, and also finds more subtle
defects such as variations in individual pixel voltage. These defect data files
are then used for repair and statistical process control. Our software driven
ArrayChecker test system can be configured rapidly for testing different panel
sizes relative to traditional systems that require a different probe card for
each panel size.
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Our Voltage Imaging technology does not require each pixel to be
individually driven. Thus, the probe frames necessary to drive the pixels have
significantly reduced complexity through the use of shorting bars which are
already incorporated on the array plate for electrostatic discharge protection.
These much lower cost, less complex probe frames facilitate easy changeover in
panel designs and sizes and increase the reliability of the testing process. We
have patented the method of testing and inspecting FPDs through shorting bars
rather than through individual contact points.
Our current ArrayChecker system is an enhanced version of our earlier array
test products with improved Voltage Imaging sensors, image processing software,
graphical user interface and materials transport features. These enhancements
substantially increased the throughput and reliability of our array test systems
to provide throughput rates that are similar to or higher than traditional probe
card based systems. At the same time, our current ArrayChecker system provides
substantially improved defect detection, while continuing to provide the
superior functionality, flexibility and cost-efficient features of our earlier
array test systems.
We are now developing our next-generation ArrayChecker 2000 which we believe
will deliver further significant improvements in throughput and reliability
while accommodating the largest glass plate sizes currently anticipated in the
industry. This generation of ArrayChecker is intended to incorporate features
which provide for longer life Voltage Imaging sensors, thereby further reducing
overall cost of ownership.
ARRAYSAVER REPAIR SYSTEMS. Our array repair system utilizes our proprietary
PixeLaser technology and BeamBlender multiple wavelength laser technology to
repair defects in FPDs during and after array fabrication. Our system can use
defect data files downloaded from our array test systems, or other test and
inspection systems, to automatically position the panel for repair, thereby
eliminating the time spent by operators locating defects.
The ArraySaver system includes a high-precision stage and a user-friendly
graphical user interface allowing for high throughput and the capability to
repair all current panel sizes. Our fast high-precision stage fully automates
the precise positioning of the plate for each successive repair, thereby
substantially increasing throughput. Our graphical user interface and software
supports semi-automated setup of repair programs for common types of defects so
that repairs can be executed rapidly and accurately. These programs provide a
series of actions that the system automatically executes to repair the
particular defect type.
PANELMASTER INSPECTION SYSTEMS. Our PanelMaster inspection systems use our
proprietary MuraLook image analysis algorithms and N-Aliasing technology to
inspect FPD panels for visual defects after cell assembly, and also during and
after module assembly. The systems use a high-resolution camera and a computer
workstation to quantitatively measure visual characteristics such as contrast,
luminance and color balance, and to precisely locate and characterize line,
cluster, pixel and blemish defects. Inspection data generated by the systems is
displayed on a video monitor for immediate interpretation and can be stored or
sent to a repair system to effect repairs. Our inspection systems offer
different levels of resolution, functionality and flexibility to suit customers'
needs. The systems are available either as stand-alone units or as modular units
that can be integrated with manufacturers' material handling equipment.
We believe our next-generation PanelMaster inspection systems will enable
new objective quality standards to be adopted by the FPD industry. We expect our
systems to provide quantitative data providing end users with individual display
and lot quality data. The need for quality standards in FPDs will require
significantly increased statistical process control and lot quality data similar
to those that exist in most other segments of the electronics industry.
Providing this information to OEMs is not feasible without automated inspection,
data acquisition and quality grading systems. These requirements are beyond the
capabilities of human inspectors.
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PCB ASSEMBLY AND ADVANCED SEMICONDUCTOR PACKAGING PRODUCTS
We also offer a broad line of X-ray and optical systems for non-destructive
inspection of PCB assemblies and advanced semiconductor packaging. Customers use
these systems to detect and identify defects on PCB assemblies and within
advanced semiconductor packaging. Both our X-ray and optical inspection product
lines are based on our proprietary image processing technology and are
integrated with a graphical user interface designed for ease of use on the
production line. Our user-friendly, flexible configuration interface is a
critical feature for many of our customers whose manufacturing operations must
cope with fast turnaround, short production runs and workforces with limited
skills and high turnover rates. These products use a common Windows-based
computing platform and can be networked together to provide factory and
enterprise wide access to product defect data. We offer fully automated systems
for use in high volume production lines and also offer lower cost systems for
use off the production line.
The following table summarizes our products for the PCB assembly and
advanced semiconductor packaging industries.
<TABLE>
HANDLER SIZE
PRODUCT FUNCTION (INCHES) SPECIAL FEATURES
<S> <C> <C> <C>
X-RAY INSPECTION
CRX-80 Die attach, wire bond, BGA, chip scale 18 X 24 Up to 80 kev; up to 50x
package, flip chip and QFP solder magnification
integrity
CRX-1000 Die attach, wire bond, BGA, chip scale 12 X 12 Rotation and tilt
package, flip chip and QFP solder capabilities; up to 160
integrity kev; up to 1000x
magnification
CRX-2000 Die attach, wire bond, BGA, chip scale 18 X 24 Rotation and tilt
package, flip chip and QFP solder capabilities; up to 160
integrity kev; up to 1000x
magnification
OPTICAL INSPECTION
RTI-6500 Component presence, correct component, 24 X 24 Illumination options
orientation, polarity, skew, solder for full inspection
integrity and other defects capability; for large
complex PCB assemblies
RTI-6520 Component presence, correct component, 18 X 20 Illumination options
orientation, polarity, skew, solder for full inspection
integrity and other defects capability; production
line automation
AOI-2020 Component presence, correct component, 9 X 12 Compact table-top
orientation, polarity, skew, and other system; advanced
defects scanner technology
COMBINATION X-RAY AND AUTOMATED OPTICAL INSPECTION
XRV-Combination BGA, chip scale package and flip chip 18 X 20 Production line
solder verification; component presence, automation; optimized
correct component, orientation, polarity, for PCB assemblies
skew, solder integrity and other defects using advanced
semiconductor packaging
</TABLE>
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<PAGE>
CRX X-RAY INSPECTION SYSTEMS. Our CRX systems utilize X-ray images to
inspect for hidden features in both PCB assemblies and advanced semiconductor
packaging. Customers use the sharp, high magnification images provided by these
CRX systems to analyze failures which cannot be detected by optical means. PCB
assembly manufacturers use our systems to inspect the hidden solder connections
between PCBs and BGA devices. Semiconductor manufacturers use our systems to
inspect for features within advanced semiconductor packaging including die
attach, wire bond and flip chip solder bump connections.
We offer a variety of CRX systems to meet customer requirements for handler
size, resolution, magnification, power, pricing and other factors. Magnification
ranges from 50 times to 1000 times, power from 80 kev to 160 kev and handler
size from 12 inches to 24 inches on a side.
OPTICAL INSPECTION SYSTEMS. Our optical inspection systems inspect PCB
assemblies for defects either before or after the soldering step in the
manufacturing process. Many of the defects detected by our systems cannot be
detected electrically. Our systems inspect for component presence, correct
component, orientation, polarity, skew, solder integrity and other defects. We
offer a variety of optical inspection products from a low-cost table-top PCB
inspection system targeted to small, cost-sensitive contract manufacturers, to
an integrated multi-camera system focused on high-volume production of large
complex PCB assemblies.
Our RTI-6500 and RTI-6520 products feature integrated cameras and lighting
heads which pass over the surface of the PCB, selecting different magnifications
depending on the size of the components. The RTI-6500 is an off-line system
which inspects PCB sizes up to 24 by 24 inches. The RTI-6520 is an in-line
system with a built-in conveyor to inspect PCB sizes up to 18 by 20 inches on
the production conveyor line.
Our AOI-2020 system is a low-cost, table-top PCB inspection system for
customers who regard price as the most important criteria influencing their
purchasing decision. With a maximum PCB size of 9 by 12 inches, the AOI-2020
system is well suited for inspection of notebook computer motherboards and
similar compact, complex assemblies.
COMBINED X-RAY AND AUTOMATED OPTICAL INSPECTION SYSTEMS. Our XRV combined
X-ray and automated optical inspection systems enable the simultaneous
inspection of both visible and hidden features on a PCB. This reduces handling,
increases throughput and saves floor space.
CUSTOMERS
We sell our products to FPD manufacturers, semiconductor manufacturers, PCB
manufacturers and assemblers, and other electronic product manufacturers. Most
of our FPD customers are located in Japan, Taiwan and Korea, where FPD
production is concentrated. Our installed customer base for our FPD products
includes eight out of the ten leading FPD manufacturers. The majority of our PCB
assembly and advanced semiconductor packaging customers are located in the U.S.
We derive most of our revenues from a small number of customers, and we
expect this to continue. Our top four customers, each of which is a FPD
manufacturer, contributed 55% of revenue in fiscal 1999, compared to 67% in
fiscal 1998. Our products for the FPD industry accounted for 69% of revenue in
fiscal 1999, compared to 72% in fiscal 1998. Sales to IHI, our value-added
reseller in Japan, represented approximately 18% of revenue in fiscal 1999 and
approximately 33% of revenue in fiscal 1998.
SALES AND SERVICE
We sell our products for the FPD industry directly to our customers in
Korea, through a sales representative in Taiwan, and through our value-added
reseller, IHI, in Japan. We sell our products for the PCB assembly and advanced
semiconductor packaging markets primarily through sales
35
<PAGE>
representatives. We service our products worldwide directly, except in Japan,
where IHI services our products.
We generally sell our products on net-30 day terms, with a small portion
held back until final acceptance. However, a substantial portion of our
customers, primarily foreign, remit payments on significantly longer terms. We
typically provide a limited warranty on our products for a period of one year
from final acceptance by customers. Our field service providers provide
customers with repair and maintenance services and customers may enter into
repair and maintenance service contracts covering our products.
As of November 30, 1999, we had approximately 30 sales and service
personnel, 16 of which are located in the U.S. and 14 of which are located in
Asia. We have increased the number of our sales and service personnel
approximately 30% over the last twelve months and we anticipate further
increases in the future.
In the FPD market, our sales and marketing strategy is to provide our
customers with increased manufacturing yields and throughput, improved quality
and greater overall efficiency in their manufacturing process. In the PCB
assembly and advanced semiconductor packaging industries, we focus on high-end
applications where our high-resolution, advanced image processing and optical
inspection technologies and products provide our customers with product quality
assurance capabilities. Our sales and marketing strategy is also to focus on the
rapidly expanding contract manufacturing industry. Operating on narrow margins,
contract manufacturers compete by reducing costs and improving quality, as well
as promoting their advanced capabilities. These customers require flexible
systems that are easy to set up and cost-efficient.
RESEARCH AND DEVELOPMENT
The FPD, PCB assembly and advanced semiconductor packaging industries are
characterized by rapid and continuous technological development and product
innovation. We believe that it is necessary to maintain our competitive position
through continued and timely development of new products and enhancements to
existing products. Accordingly, we devote a significant portion of our personnel
and financial resources to research and development. Our research and
development expenses, consisting primarily of salaries and project materials,
were $5.9 million in fiscal 1999, or 13% of revenue. We also maintain close
relationships with our customers which helps us remain responsive to their
product needs.
We are directing our current research and development for the FPD market to
increase the performance of our array test, repair and inspection systems and to
expand the application of our inspection systems for use in related markets.
Almost one-half of our research and development personnel are software
developers. Our current research and development for the PCB assembly and
advanced semiconductor packaging markets is focused on increasing the
performance, reliability and functionality of our inspection systems, expanding
the application of our inspection systems for use in related markets and
developing new X-ray and optical inspection products.
MANUFACTURING AND SUPPLIERS
We manufacture our products for the FPD industry in San Jose, California and
for the PCB assembly and advanced semiconductor packaging industries in Aliso
Viejo, California. Our manufacturing activities consist primarily of final
assembly and test of components and subassemblies which are purchased from third
party vendors.
We schedule production based upon customer purchase orders and anticipated
orders during the planning cycle. We generally expect to be able to accept a
customer order, build the required machinery and ship to the customer within
16 weeks for our FPD products and within 8 weeks for our
36
<PAGE>
the PCB assembly and advanced semiconductor packaging products. Quality control
is maintained through incoming inspection of components, in-process inspection
during equipment assembly and final inspection and operation of all manufactured
equipment prior to shipment. We work in close collaboration with our customers
and suppliers and train all of our employees in quality assurance. Although we
conduct assembly of some components and final testing of our systems under
limited clean room conditions, most of our manufacturing occurs in standard
manufacturing space.
Under the terms of our relationship with IHI, we retain the exclusive right
to manufacture some critical components based on technology not shared with IHI
and to sell these components to IHI at prices that are mutually established from
time to time. IHI has the right to manufacture, assemble and sell array test
systems incorporating these components. To date, we have manufactured all array
test systems sold by IHI. Furthermore, IHI has sold products only in its
capacity as our value-added reseller in Japan.
Some of the parts included in our systems are obtained from a single source
or a limited group of suppliers. The partial or complete loss of such suppliers
could increase our costs, delay shipments and/or require redesigns of our
products.
INTELLECTUAL PROPERTY
We have 35 patents issued and active and 7 patents pending in the U.S., some
of which are also issued or pending in Korea or Japan. None of these patents are
scheduled to expire before 2008, subject to payment of applicable maintenance
fees. In addition, PDI and IHI have jointly filed patent applications in Japan
relating to some aspects of the array test systems.
We frequently review our inventions and attempt to determine which
inventions will provide substantial differentiation between our products and
those of our competitors. In certain cases, we may also choose to keep an
invention or a process as a trade secret. Trade secrets are routinely employed
in our manufacturing processes. We have entered into non-disclosure agreements
to protect our proprietary technology with our employees and consultants and in
some instances with our suppliers, our customers and IHI.
The patent position of any manufacturer, including us, is subject to
uncertainties and may involve complex legal and factual issues. Claims allowed
by any existing or future patents issued to PDI may be challenged, invalidated
or circumvented, and any rights granted by those patents may not provide us with
adequate protection. Litigation may be necessary in the future to enforce our
patents and other intellectual property rights or to defend against claims of
infringement or invalidity.
BACKLOG
Our backlog was $21.4 million as of September 30, 1999, as compared to
$10.4 million as of September 30, 1998. Our backlog consists of orders for which
we have accepted purchase orders and assigned shipment dates within the next
eight to twelve months.
All orders are subject to delay or cancellation with limited or no penalty
to the customer. Because of possible changes in product delivery schedules and
cancellation of product orders, among other factors, our backlog may vary
significantly and at any particular date is not necessarily indicative of actual
sales for any succeeding period.
COMPETITION
The FPD equipment and the component inspection systems industries are highly
competitive. We face substantial competition from many established companies,
many of which have greater financial, engineering and manufacturing resources
than us and have larger service organizations and long-standing customer
relationships with key existing and potential customers. In addition, our
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<PAGE>
competitors can be expected to continue to improve the design and performance of
their products and to introduce new products with competitive price and
performance characteristics. PDI's customers may choose to develop proprietary
technology which may obviate or lessen their need to purchase PDI's products.
Moreover, competitive pressures may necessitate price reductions, which could
harm our results of operations.
In the FPD industry, our competitors include Micronics Japan Corporation in
array testing, NTN Corporation and Hoya Corporation in array repair, and several
competitors in the cell and module inspection market. In the X-ray inspection
market, our competitors include Nicolet Imaging, Agilent Technologies and
Feinfocus. In the optical inspection market, our competitors include GSI
Lumonics, Hewlett-Packard Company and Omron. In addition, some of our current
and potential competitors have also been acquired by larger companies who seek
to enter our markets. We may also face additional competition from new entrants
into the FPD, PCB assembly and advanced semiconductor packaging industries. In
addition, PDI may face increased competition if IHI elects to begin competing
with us.
We believe that we can compete effectively with our competitors by building
on our substantial installed customer base, providing technologically superior,
competitively priced products and continuing to emphasize our easy-to-use user
interfaces and customer support. However, realizing and maintaining such
advantages will require a continued high level of investment by PDI in
engineering, research and development, marketing and customer service and
support. We may not have sufficient resources to continue to make such
investments. Even if sufficient funds are available, we may not be able to make
the technological advances necessary to maintain such competitive advantages.
EMPLOYEES
As of November 30, 1999, we employed a total of 159 persons, including 46 in
engineering, 54 in manufacturing, 20 in service, 15 in sales and marketing, and
24 in administration. Of these employees, 143 are located in the U.S., 3 are
located in Taiwan, 9 are located in Korea and 4 are located in Japan. No
employees are represented by a labor union or covered by a collective bargaining
agreement. We consider our relationships with our employees to be good.
FACILITIES
Our corporate headquarters is located in San Jose, California and consists
of a 50,000 square foot facility. We also lease approximately 19,700 square feet
in Aliso Viejo, California. In addition, we lease office space for our sales and
service operations in Seoul, Korea and Tokyo, Japan.
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<PAGE>
MANAGEMENT
Our executive officers and directors, and their ages as of November 30,
1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Vincent F. Sollitto, Jr................... 51 President, Chief Executive Officer and
Director
Richard L. Dissly......................... 55 Chief Financial Officer, Vice President of
Operations and Secretary
William K. Pratt.......................... 62 Chief Technical Officer
Jeffrey A. Hawthorne...................... 41 Vice President of Development
Richard E. Amtower........................ 56 Vice President of PDI and President of CR
Technology, Inc.
Bruce P. Delmore.......................... 38 Vice President of Marketing, Strategy and
Business Development
Steve Song................................ 44 Vice President of Sales
E. Floyd Kvamme........................... 61 Chairman of the Board
Barry L. Cox.............................. 57 Director
Francois J. Henley........................ 40 Director
Michael J. Kim............................ 54 Director
Malcolm J. Thompson....................... 54 Director
</TABLE>
Set forth below is certain information relating to our executive officers
and directors.
VINCENT F. SOLLITTO became Chief Executive Officer in June 1996 and became a
member of our board of directors in July 1996. From August 1993 to 1996, he was
the General Manager of Business Unit Operations for Fujitsu
Microelectronics, Inc. From April 1991 to August 1993, he was the Executive Vice
President of Technical Operations at Supercomputer Systems, Incorporated. Prior
to joining Supercomputer Systems, Incorporated, Mr. Sollitto spent twenty-one
years in various management positions at IBM, including Director of Technology
and Process. Mr. Sollitto serves as a director of Irvine Sensors Corp. and
Applied Films Corporation. Mr. Sollitto holds a B.S. degree in Electrical
Engineering from Tufts College.
RICHARD L. DISSLY became Chief Financial Officer and Vice President of
Operations in November 1998 and became Secretary in October 1999. Prior to
joining PDI, he was the Chief Financial Officer at a number of companies,
including Semaphore Communications from January 1997 to October 1998, CrossCheck
Technology from July 1992 to December 1996, Award Software from 1989 to 1991,
and Megatest Corporation from 1980 to 1988. Mr. Dissly holds an M.B.A. from
Santa Clara University and is a licensed certified public accountant.
WILLIAM K. PRATT became the Chief Technical Officer in October 1996. In
1993, Dr. Pratt founded Pixelsoft, Inc., an image processing software
development company, and served in various management and technical positions
until 1996. From 1988 to 1994, he was Director of Multimedia and Imaging
Technology at Sun Microsystems, Inc. Prior to 1988, he was Senior Vice President
at Compression Labs, Incorporated. Dr. Pratt received a B.S. degree in
Electrical Engineering from Bradley University and an M.S. and Ph.D. in
Electrical Engineering from University of Southern California. He holds five
patents and is the author of several books on image processing.
JEFFREY A. HAWTHORNE joined PDI in November 1991 and became Vice President
of Development in September 1994. From June 1990 to November 1991, he was a
consultant with Display Tech, Inc., which provided consulting services in the
area of LCDs. He received a B.S. in Engineering Physics from the University of
Colorado in 1987 and a M.S. in Optical Engineering from the University of
Rochester in 1990.
RICHARD E. AMTOWER joined PDI as Vice President in November 1999. Since
1984, he was the President and Chief Executive Officer of CR Technology and
served as a member of its board of directors. Prior to 1984, Mr. Amtower was
Vice President and General Manager of EOCOM Electronic
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<PAGE>
Systems, a leading developer and manufacturer of laser imaging systems for the
newspaper and printed circuit board industries. Mr. Amtower is a graduate of the
University of California at Riverside, where he received a B.A. degree in
Physics in 1965.
BRUCE P. DELMORE became Vice President of Marketing, Strategy and Business
Development in August 1999. From 1997 to 1999, he was President of Strategos, a
marketing consulting firm. From 1994 to 1997, he was Director of EDA and
Strategic ASIC Development at Fujitsu Microelectronics, Inc. and from 1987 to
1994, he was Product Manager at Supercomputer Systems, Inc. Mr. Delmore holds a
B.S. degree in Mechanical Engineering from the University of Wisconsin-Madison.
STEVE SONG joined PDI in April 1994 and became Vice President of Sales in
August 1998. Prior to joining PDI, Mr. Song was the General Manager of Universal
Technology International, a manufacturer of helicopter and fixed-wing aircraft.
Mr. Song holds a B.S. degree in Electrical Engineering from Korea University in
Seoul Korea.
E. FLOYD KVAMME became a member of our board of directors in 1986. Since
1984, he has been a general partner of Kleiner Perkins Caufield & Byers.
Mr. Kvamme also serves on the boards of directors of Harmonic, Inc., Brio
Technology, National Semiconductor, Power Integrations, Inc. and several
privately held companies. Mr. Kvamme received a B.S. degree in Electrical
Engineering. from the University of California, Berkeley and an M.S. degree in
Engineering from Syracuse University.
BARRY L. COX became a member of our board of directors in 1990. Mr. Cox
joined Quantum Effect Devices in July 1998 and has served as its Chairman of the
Board since September 1999. From January 1996 to July 1998, he was a consultant
for various companies. From 1992 to 1993, he was the President, Chief Operating
Officer and a director of Weitek Corporation, and from 1993 to 1995, served as
its President and Chief Executive Officer. From 1987 to 1992 Mr. Cox served as
President and Chief Executive Officer of ATEQ Corporation, a semiconductor
capital equipment manufacturer. In addition to Quantum Effective Devices,
Mr. Cox serves on the boards of several privately held technology companies.
Mr. Cox received a B.S. degree in Engineering from the U.S. Air Force Academy
and an M.B.A. from Boston University.
FRANCOIS J. HENLEY founded PDI in 1986 and has been a member of our board of
directors since that time. From 1986 to July 1997, he also held various
management and technical positions at PDI, including President and Chief
Technical Officer. Since June 1997, he has served as Chief Executive Officer of
Silicon Genesis Corporation. Prior to 1986, he held various engineering
positions at Hewlett-Packard Company, Intel Corporation and Spectrum
Sciences, Inc. Mr. Henley received a B.S. degree in Electrical Engineering from
Rensselaer Polytechnic Institute in 1980 and an M.S. degree in Electrical
Engineering from the University of California, Berkeley in 1982.
MICHAEL J. KIM has been a member of our board of directors since 1991. Since
September 1999, he has been the Vice President of Business Development at FDS,
Philips Components. From 1993 to February 1999, he was Senior Vice President of
LG Electronics, Inc., a manufacturer of FPDs, and served as the head of the San
Jose Technology Center of LG Electronics. From 1988 to 1992, Mr. Kim was Vice
President at Goldstar Technology, Inc., formerly a subsidiary of LG Electronics.
Mr. Kim received a B.S. degree in Electrical Engineering from the University of
Illinois, Chicago and an M.S. degree in Electrical Engineering from the
University of Santa Clara.
MALCOLM J. THOMPSON has been a member of our board of directors since 1992.
Since 1998, he has been President and Chief Executive Officer of Novalux, Inc.
From 1996 to 1998, he was President and Chief Executive Officer of dpiX Inc. and
from 1981 to 1996, he was the Chief Technologist for Xerox PARC. He also has
served as Chairman of the Board of the Unites States Display Consortium (USDC),
an industry-government consortium of over 135 member companies. Dr. Thompson
received a B.S. and a Ph.D. in Applied Physics from the University of Brighton,
Sussex in the United Kingdom.
40
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of our common stock as of November 30, 1999 by: (i) each director; (ii) each of
our executive officers; (iii) all executive officers and directors of the
Company as a group; (iv) all those known by us to be beneficial owners of more
than five percent (5%) of our common stock; and (v) each of our current
shareholders who is expected to sell in the offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO THE OWNED AFTER THE
OFFERING NUMBER OF OFFERING
------------------- SHARES BEING -------------------
BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------- -------- ------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
WFC Holdings Corporation(2).................... 760,971 7.9% 680,000 80,971 *
555 Montgomery Street
17th Floor
San Francisco, CA 94111
Kern Capital Management LLC(3)................. 689,600 7.1% -- 689,600 6.3 %
114 West 47th Street
Suite 1926
New York, NY 10036
Fidelity Management(4)......................... 520,600 5.4% -- 520,600 4.7 %
One Federal Street
Boston, MA 02109
Vincent F. Sollitto, Jr.(5).................... 171,586 1.8% -- 171,586 1.5 %
Richard L. Dissly(6)........................... 24,493 * -- 24,493 *
William K. Pratt(7)............................ 44,616 * -- 44,616 *
Jeffrey A. Hawthorne(8)........................ 82,811 * -- 82,811 *
Richard E. Amtower(9).......................... 203,169 2.1% -- 203,169 1.8 %
E. Floyd Kvamme(10)............................ 28,470 * -- 28,470 *
Barry L. Cox(11)............................... 26,667 * -- 26,667 *
Francois J. Henley(12)......................... 147,778 1.5% -- 147,778 1.3 %
Malcolm J. Thompson(13)........................ 26,667 * -- 26,667 *
Michael J. Kim(14)............................. 7,500 * -- 7,500 *
All executive officers and directors as a group
(12 persons)(15)............................. 800,040 7.9% -- 800,040 7.0 %
</TABLE>
- ------------------------
* Represents less than 1%.
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the shareholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
9,657,481 shares outstanding on November 30, 1999, adjusted as required by
rules promulgated by the SEC.
(2) Hall, Morris & Drufva II, L.P, or HMD, is currently the record owner of the
shares listed next to WFC Holdings Corporation's name. WFC Holdings is the
holder of a 99% limited partnership interest in HMD. Pursuant to the HMD
partnership agreement, HMD plans to distribute approximately 680,000 shares
of the common stock it holds to WFC Holdings. The number of shares which
WFC Holdings will receive will be determined based on the average of the
closing
41
<PAGE>
price of our common stock on the 20 days prior to the distribution of the
shares to WFC Holdings. WFC Holdings expects this distribution to take
place in January, 2000.
(3) Robert Kern and David Kern are controlling members of Kern Capital and may
be deemed the beneficial owner of the securities in that they might be
deemed to share the power to direct the voting or disposition of the
securities. This filing does not constitute an admission that either Robert
Kern or David Kern is, for any purpose, the beneficial owner of these
securities, and such beneficial ownership is expressly denied.
(4) As of November 30, 1999, Fidelity Management & Research Company indirectly
held 520,600 shares of the issued and outstanding shares of Photon
Dynamics. Fidelity had sole dispositive power with respect to the 520,600
shares of Photon Dynamics and sole voting power with respect to zero
shares. Fidelity carries out the voting of shares under written guidelines
by the funds' Board of Trustees.
(5) Includes 146,573 shares subject to stock options held by Mr. Sollitto
exercisable within 60 days of November 30, 1999.
(6) Includes 23,599 shares subject to stock options held by Mr. Dissly
exercisable within 60 days of November 30, 1999.
(7) Includes 44,018 shares subject to stock options held by Dr. Pratt
exercisable within 60 days of November 30, 1999.
(8) Includes 74,578 shares subject to stock options held by Mr. Hawthorne
exercisable within 60 days of November 30, 1999.
(9) Includes 10,288 shares subject to stock options held by Mr. Amtower
exercisable within 60 days of November 30, 1999.
(10) Includes 5,000 shares subject to stock options held by Mr. Kvamme
exercisable within 60 days of November 30, 1999.
(11) Includes 10,800 shares subject to stock options held by Mr. Cox
exercisable within 60 days of November 30, 1999.
(12) Includes 36,912 shares subject to stock options held by Mr. Henley
exercisable within 60 days of November 30, 1999.
(13) Includes 26,667 shares subject to stock options held by Dr. Thompson
exercisable within 60 days of November 30, 1999.
(14) Includes 7,500 shares subject to stock options held by Mr. Kim exercisable
within 60 days of November 30, 1999.
(15) Includes 408,584 shares which certain executive officers, directors and
principal shareholders of the Company have the right to acquire within
60 days of November 30, 1999 pursuant to outstanding options.
42
<PAGE>
UNDERWRITING
PDI and the selling shareholder are offering the shares of common stock
described in this prospectus through a number of underwriters. Banc of America
Securities LLC and Needham & Company, Inc. are the representatives of the
underwriters. PDI and the selling shareholder have entered into a firm
commitment underwriting agreement with the representatives. Subject to the terms
and conditions of the underwriting agreement, PDI and the selling shareholder
have agreed to sell to the underwriters, and each underwriter has agreed to
purchase, the number of shares of common stock listed next to its name below at
the public offering price less the underwriting discount and commissions on the
cover page of the prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Banc of America Securities LLC..............................
Needham & Company, Inc......................................
SoundView Technology Group, Inc.............................
-----------
Total..................................................... 2,000,000
===========
</TABLE>
The underwriting agreement is subject to a number of terms and conditions
and provides that the underwriters must buy all of the shares if they buy any of
them. The underwriters will sell the shares to the public when and if the
underwriters buy the shares from us and the selling shareholder.
The underwriters initially will offer shares to the public at thc price
specified on the cover page of this prospectus. The underwriter may allow to
some dealers a concession of not more than $ per share. The underwriters
may also allow, and any other dealers may reallow, a concession of not more than
$ per share to some other dealers. If all the shares are not sold at the
public offering price, the underwriters may change the public offering price and
the other selling terms. No change in the selling terms will vary the proceeds
to be received by us as specified on the cover page to the prospectus. The
common stock is offered subject to a number of conditions, including:
- receipt and acceptance of the common stock by the underwriters; and
- the right on the part of the underwriters to reject orders in whole or in
part.
We have granted the underwriters an option to buy up to 300,000 additional
shares of common stock. These additional shares would cover sales of shares by
the underwriters that exceed the number of shares specified in the table above.
The underwriters may exercise this option at any time within 30 days after the
date of this prospectus. If the underwriters exercise this option, they will
each purchase, subject to a number of terms and conditions, additional shares
approximately in proportion to the amounts specified in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters. These amounts are shown assuming no
exercise and full exercise of thc underwriters' option to purchase additional
shares.
<TABLE>
<CAPTION>
FULL
NO EXERCISE EXERCISE
----------- --------
<S> <C> <C>
Per share underwriting discounts and commissions............ $ $
Total underwriting discounts and commissions to be paid
by us..................................................... $ $
Total underwriting discounts and commissions to be paid by
the selling shareholder................................... $ $
</TABLE>
The expenses of the offering, not including underwriting discounts and
commissions, are estimated to be approximately $ and will be paid by us and
the selling shareholder. Expenses of the offering, exclusive of underwriting
discounts and commissions, include the SEC filing fee, printing
43
<PAGE>
expenses, transfer agent and registration and other miscellaneous fees. Offering
expenses, excluding underwriting discounts and commissions, are estimated as
$ .
We, our executive officers and directors, certain of our shareholders and
the selling shareholder have entered into lock-up agreements with the
underwriters. Under these agreements, subject to exceptions, we may not issue
any new shares of common stock, and our executive officers and directors,
certain of our shareholders and the selling shareholder may not offer, sell,
contact to sell, or otherwise dispose of or hedge any common stock or securities
convertible into or exchangeable for shares of common stock. These restrictions
will be in effect for a period of 90 days after the date of this prospectus, At
any time and without notice, Banc of America Securities LLC and Needham &
Company, Inc. jointly may, in their sole discretion, release all or some of the
securities from these lock-up agreements.
PDI and the selling shareholder will indemnify the underwriters against some
liabilities, including some liabilities under the Securities Act. If we or the
selling shareholder are unable to provide this indemnification, PDI and the
selling shareholder will contribute to payments the underwriters may be required
to make in respect of those liabilities.
In connection with this offering, the underwriters may engage in activities
that stabilize, maintain or otherwise affect the price of the common stock.
These transactions may include:
- short sales;
- over-allotment;
- purchases to cover positions created by short sales; and
- stabilizing transactions.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. In order to cover a
short position, the underwriters may bid for and purchase shares of common stock
in the open market or may exercise their over-allotment option. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
The underwriters may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.
As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.
In connection with this offering, some underwriters and any selling group
members who are qualified market makers on the Nasdaq National Market may engage
in passive market making transactions in the common stock on thc Nasdaq National
Market in accordance with Rule 103 of Regulation M. Rule 103 permits passive
market making during thc period when Regulation M would otherwise prohibit
market making activity by the participants in this offering. Passive market
making may occur during the business day before the pricing of the offering,
before the commencement of offers or sales of the common stock. Passive market
makers must comply with applicable volume and price limitations and must be
identified as a passive market maker. In general, a passive market maker must
display its bid at a price not in excess of the highest independent bid for the
security. If all independent bids are lowered below the passive market maker's
bid, however, the bid must then be lowered when purchase limits are exceeded.
Net purchases by a passive market maker on each day are
44
<PAGE>
limited to a specified percentage of the passive market maker's average daily
trading volume in the common stock during a specified period and must be
discontinued when such limit is reached. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Heller Ehrman White & McAuliffe, San Francisco, California.
EXPERTS
The consolidated financial statements of Photon Dynamics, Inc. appearing in
Photon Dynamics, Inc.'s Annual Report on Form 10-KSB for the year ended
September 30, 1999, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements are incorporated by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The supplemental consolidated financial statements of Photon Dynamics, Inc.
at September 30, 1998 and 1999 and for the years then ended, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein which, as to the year ended 1998 are based in part on the report of the
Cacciamatta Accountancy Corporation, independent auditors. The financial
statements referred to above are included in reliance upon such reports given on
the authority of such firms as experts in accounting and auditing.
The consolidated financial statements of CR Technology, Inc. appearing in
Photon Dynamics, Inc.'s Current Report on Form 8-K dated December 15, 1999, have
been audited by the Cacciamatta Accountancy Corporation, independent auditors,
as set forth in their report thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission, or the SEC. You may read and copy such materials at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain copies of such material from the SEC
at prescribed rates for the cost of copying by writing to the Public Reference
Section of the SEC at the same address. You may call the SEC at 1-800-SEC-0330
for more information on the public reference rooms. You can also find our SEC
filings at the SEC's web site at www.sec.gov.
45
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
- Annual Report on Form 10-KSB filed October 27, 1999.
- Current Report on Form 8-K filed December 15, 1999.
- The description of the common stock contained in PDI's Registration
Statement on Form 8-A filed on November 14, 1995.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Photon Dynamics, Inc.
6325 San Ignacio Avenue
San Jose, California 95119-1202
(408) 226-9900
46
<PAGE>
PHOTON DYNAMICS, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of Cacciamatta Accountancy Corporation, Independent
Auditors.................................................. F-3
Supplemental Consolidated Balance Sheets as of
September 30, 1998 and September 30, 1999................. F-4
Supplemental Consolidated Statements of Operations for the
Fiscal Years Ended September 30, 1998 and 1999............ F-5
Supplemental Consolidated Statements of Cash Flows for the
Fiscal Years Ended September 30, 1998 and 1999............ F-6
Supplemental Consolidated Statements of Shareholders' Equity
for the Fiscal Years Ended September 30, 1998 and 1999.... F-7
Notes to Supplemental Consolidated Financial Statements..... F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Photon Dynamics, Inc.
We have audited the supplemental consolidated balance sheets of Photon
Dynamics, Inc. (formed as a result of the consolidation of Photon
Dynamics, Inc. and CR Technology, Inc.) as of September 30, 1998 and 1999, and
the related supplemental consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. The supplemental consolidated
financial statements give retroactive effect to the merger of Photon
Dynamics, Inc. and CR Technology, Inc. on November 30, 1999, which has been
accounted for using the pooling of interests method as described in the notes to
the supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of Photon Dynamics, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of CR Technology, Inc. for
the year ended December 31, 1998, which statements reflect total assets of
$4.2 million included in the related supplemental consolidated financial
statement totals as of September 30, 1998, and which reflect net income of
$258,000 included in the related 1998 supplemental consolidated financial
statement totals for the year ended September 30, 1998. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for CR Technology, Inc., is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the supplemental consolidated financial position of Photon
Dynamics, Inc. as of September 30, 1998 and 1999, and the supplemental
consolidated results of its operations and its cash flows for the years then
ended, after giving retroactive effect to the merger of CR Technology, Inc., as
described in the notes to the supplemental consolidated financial statements, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
October 18, 1999 (except for the
second paragraph
under "Principles of Consolidation and
Basis of
Presentation" in Note 1 and except for
Note 2
as to which the date is November 30,
1999)
F-2
<PAGE>
REPORT OF CACCIAMATTA ACCOUNTANCY CORPORATION, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CR Technology, Inc.
We have audited the accompanying consolidated balance sheet of CR
Technology, Inc. and Subsidiary as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CR
Technology, Inc. and Subsidiary as of December 31, 1998, and the results of
their consolidated operations and cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ CACCIAMATTA ACCOUNTANCY
CORPORATION
Irvine, California
May 7, 1999
(except for Note 11, as to which the
date is August 25, 1999)
F-3
<PAGE>
PHOTON DYNAMICS, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,117 $ 6,421
Short-term investments.................................... 178 1,605
Accounts receivable, net of allowance of $1,010 and $1,301
as of September 30, 1998 and 1999, respectively......... 7,449 13,630
Inventories............................................... 8,234 7,112
Prepaid expenses and other current assets................. 638 714
-------- --------
Total current assets........................................ 22,616 29,482
Property, equipment and leasehold improvements, net......... 1,949 1,817
Other assets................................................ 626 768
-------- --------
Total assets................................................ $ 25,191 $ 32,067
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,858 $ 2,831
Accrued expenses and other liabilities.................... 3,647 5,535
Deferred revenue and customer deposits.................... 118 655
-------- --------
Total current liabilities................................... 5,623 9,021
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock, no par value, 20,000,000 shares authorized,
9,030,108 and 9,648,571 shares issued and outstanding as
of September 30, 1998 and 1999, respectively............ 44,985 45,972
Accumulated deficit....................................... (25,135) (22,929)
Accumulated other comprehensive income (loss)............. (197) 3
Notes receivable from shareholders........................ (85) --
-------- --------
Total shareholders' equity.................................. 19,568 23,046
-------- --------
Total liabilities and shareholders' equity.................. $ 25,191 $ 32,067
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<PAGE>
PHOTON DYNAMICS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $30,970 $45,431
Cost of revenue............................................. 17,879 25,573
------- -------
Gross margin................................................ 13,091 19,858
------- -------
Operating expenses:
Research and development.................................. 6,523 5,943
Selling, general and administrative....................... 8,321 11,140
Asset recovery related to product line disposal........... (350) --
------- -------
Total operating expenses.................................... 14,494 17,083
------- -------
Operating income (loss)..................................... (1,403) 2,775
Interest income............................................. 282 305
Interest expense and other.................................. (13) (134)
------- -------
Income (loss) before provision for income taxes............. (1,134) 2,946
Provision for income taxes.................................. 73 673
------- -------
Net income (loss)........................................... $(1,207) $ 2,273
======= =======
Basic net income (loss) per share........................... $ (0.14) $ 0.24
======= =======
Diluted net income (loss) per share......................... $ (0.14) $ 0.23
======= =======
Shares used in computing basic net income (loss) per
share..................................................... 8,930 9,282
Shares used in computing diluted net income (loss) per
share..................................................... 8,930 9,935
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-5
<PAGE>
PHOTON DYNAMICS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income (loss)......................................... $(1,207) $ 2,273
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 1,378 1,093
Unrealized loss on investments.......................... -- (2)
Changes in operating assets and liabilities:
Accounts receivable................................... 3,910 (6,074)
Inventories........................................... (1,727) 1,399
Prepaid expenses and other current assets............. 243 (422)
Other assets.......................................... 14 69
Accounts payable...................................... (1,573) 555
Accrued expenses and other liabilities................ 794 2,061
Deferred revenue and customer deposits................ (305) 423
------- -------
Net cash provided by operating activities........... 1,527 1,375
Investing activities:
Purchases of property and equipment, net.................. (790) (908)
Purchases of short-term investments....................... (25) (1,500)
Proceeds from sale of short-term investments.............. 140 177
------- -------
Net cash used in investing activities............... (675) (2,231)
Financing activities:
Payments on line of credit................................ (50) --
Repurchase of common stock................................ (45) --
Proceeds from issuance of common stock.................... 405 989
Proceeds from notes receivable to shareholders............ 30 85
------- -------
Net cash provided by financing activities........... 340 1,074
------- -------
Adjustment to conform fiscal year of CR Technology, Inc..... -- (116)
Effect of exchange rate changes on cash..................... (183) 202
------- -------
Net increase in cash and cash equivalents................... 1,009 304
Cash and cash equivalents at beginning of year.............. 5,108 6,117
------- -------
Cash and cash equivalents at end of year.................... $ 6,117 $ 6,421
======= =======
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 10 $ 20
======= =======
Income taxes paid......................................... $ 84 $ 201
======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-6
<PAGE>
PHOTON DYNAMICS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED NOTES
COMMON STOCK OTHER RECEIVABLE TOTAL
-------------------- ACCUMULATED COMPREHENSIVE FROM SHAREHOLDERS'
SHARES AMOUNT DEFICIT INCOME (LOSS) SHAREHOLDERS EQUITY
--------- -------- ----------- ------------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997... 8,841,391 $44,625 $(23,928) $ (14) $(115) $20,568
Net loss........................ -- -- (1,207) -- -- (1,207)
Net translation adjustments..... -- -- -- (183) -- (183)
-------
Total comprehensive loss........ (1,390)
-------
Issuance of common stock........ 234,486 405 -- -- -- 405
Repurchase of common stock...... (45,769) (45) -- -- -- (45)
Repayment of notes receivable... -- -- -- -- 30 30
--------- ------- -------- ----- ----- -------
Balance at September 30, 1998... 9,030,108 44,985 (25,135) (197) (85) 19,568
Net income...................... -- -- 2,273 -- -- 2,273
Net translation adjustment...... -- -- -- 202 -- 202
Net unrealized loss on
investments................... -- -- -- (2) -- (2)
-------
Total comprehensive income...... 2,473
-------
Pooling adjustment with CR
Technology, Inc............... -- -- (67) -- -- (67)
Issuance of common stock........ 618,463 987 -- -- -- 987
Repayment of notes receivable... -- -- -- -- 85 85
--------- ------- -------- ----- ----- -------
Balance at September 30, 1999... 9,648,571 $45,972 $(22,929) $ 3 $ -- $23,046
========= ======= ======== ===== ===== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-7
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Photon Dynamics, Inc. ("PDI" or the "Company") is a leading
provider of yield management solutions to the flat panel display ("FPD")
industry. The Company also offers yield management solutions to the printed
circuit board ("PCB") assembly and advanced semiconductor packaging industries.
The Company's test, repair and inspection systems are used by manufacturers to
collect data, analyze product quality, and identify and repair product defects
at critical steps in the manufacturing process.
The Company sells its products for the FPD industry directly to customers in
Korea, through a sales representative in Taiwan, and through a value-added
reseller, IHI, in Japan. The Company sells products for the PCB assembly and
advanced semiconductor packaging markets primarily through sales
representatives. A significant portion of the Company's revenue is derived from
a small number of customers in the FPD industry. Most of the Company's FPD
customers are located in Japan, Taiwan and Korea, where FPD production is
concentrated. The majority of the Company's PCB assembly and advanced
semiconductor packaging customers are located in the U.S.
REVENUE RECOGNITION. The Company generally recognizes revenues from product
sales upon shipment, which usually precedes final acceptance. The Company
generally recognizes revenues from service contracts ratably over the contract
period.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned. Significant intercompany accounts and
transactions have been eliminated in consolidation.
On November 30, 1999, the Company acquired CR Technology, Inc. ("CR
Technology"), a California corporation. This transaction was accounted for as a
pooling of interests. The consolidated financial statements for the years ended
September 30, 1998 and 1999 have been restated to include the financial
position, results of operations and cash flows of CR Technology. Financial
information for PDI's fiscal years ended September 30, 1998 and 1999 have been
combined with CR Technology for the fiscal year ended December 31, 1998 and the
twelve months ended September 30, 1999, respectively. Therefore, the results of
operations for the three months ended December 31, 1998 for CR Technology has
been included in both years. CR Technology's net income for the three months
ended December 31, 1998 has been reflected as an adjustment to shareholders'
equity in the accompanying financial statements during the year ended
September 30, 1999. 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>
These supplemental consolidated financial statements will become the
historical financial statements upon the issuance of the financial statements
for the quarter ended December 31, 1999. See Note 2.
USE OF ESTIMATES. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the
F-8
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
SHORT-TERM INVESTMENTS. Short-term investments consist of marketable
securities with a maturity of less than one year but not less than three months.
Short-term investments are available for sale and are recorded at fair value.
INVENTORIES. Inventories are priced at the lower of cost or market using
the first-in, first-out ("FIFO") method for all inventories. Inventories
consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................ $2,475 $3,769
Work-in-progress......................................... 3,024 2,686
Finished goods........................................... 2,735 657
------ ------
$8,234 $7,112
====== ======
</TABLE>
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Property, equipment and
leasehold improvements are stated on the basis of cost. Depreciation is computed
principally by the straight-line method for financial reporting purposes.
Estimated useful lives for financial reporting purposes range from three to five
years.
Property, equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equipment................................................ $ 4,979 $ 5,853
Office furniture and fixtures............................ 407 417
Leasehold improvements................................... 521 545
------- -------
5,907 6,815
Less accumulated depreciation and amortization........... (3,958) (4,998)
------- -------
$ 1,949 $ 1,817
======= =======
</TABLE>
WARRANTY. The Company typically provides a limited warranty on its products
for a period of one year from final acceptance by customers. A provision for
estimated warranty costs is recorded upon shipment.
FOREIGN CURRENCY TRANSLATION. The financial statements of foreign
subsidiaries have been translated into U.S. dollars in accordance with FASB
Statement No. 52, FOREIGN CURRENCY TRANSLATION. All balance sheet accounts have
been translated using the exchange rates in effect at the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year.
F-9
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation adjustments are included as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included in results of
operations and have been immaterial for all periods presented.
STOCK BASED COMPENSATION. The Company accounts for its stock option and
employee stock purchase plans in accordance with the provisions of APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations. Pro forma information regarding earnings per share is disclosed
as required by FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123"). See Note 12.
ADVERTISING EXPENSES
Advertising expenditures are charged to operations as incurred. Advertising
expense for the fiscal years ended September 30, 1998 and 1999 amounted to
$81,000 and $122,000, respectively.
EARNINGS PER SHARE. Basic and diluted earnings per share are calculated in
accordance with FASB Statement No. 128, EARNINGS PER SHARE ("FAS 128"). See
Note 14.
COMPREHENSIVE INCOME. As of October 1998, the Company adopted FASB
Statement No. 130, REPORTING COMPREHENSIVE INCOME ("FAS 130") which establishes
new rules for the reporting and display of comprehensive income and its
components. FAS 130 requires unrealized gains or losses on the Company's
available-for-sale investments and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in accumulated other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of FAS 130. The
adoption of FAS 130 had no impact on the Company's net income (loss) or
shareholder's equity.
SEGMENT INFORMATION. As of October 1998, the Company adopted FASB Statement
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
("FAS 131"). FAS 131 superseded FASB Statement No. 14, FINANCIAL REPORTING FOR
SEGMENTS OF A BUSINESS ENTERPRISE. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. FAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of FAS 131 did not affect
consolidated results of operations or financial position. See Note 11.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the FASB
issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("FAS 133"). FAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company does not anticipate
that the adoption of FAS 133 will have a significant effect on its results of
operations or financial condition.
In July 1999, the FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FAS 133
("FAS 137"). FAS 137 defers the effective date of FAS 133 to fiscal quarters
ended and years beginning after June 15, 2000. Accordingly, the Company is
required to adopt FAS 133 for the fiscal year ending September 30, 2001.
F-10
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BUSINESS COMBINATION
On November 30, 1999, the Company acquired CR Technology, a supplier of
advanced X-ray and optical inspection systems to the PCB assembly and advanced
semiconductor packaging industries. In exchange for 1,834,251 shares of the
Company's common stock, the Company acquired all of the outstanding capital
stock of CR Technology, using an exchange ratio of 1.203343 shares of the
Company's common stock for each share of CR Technology. In addition, all
outstanding CR Technology stock options were converted, at the common stock
exchange ratio, into options to purchase the Company's common stock. This
transaction was approved by a vote of the Company's and CR Technology's
shareholders.
As of September 30, 1999, direct acquisition costs of $404,000 in connection
with the acquisition, primarily relating to legal, investment banking and
accounting fees, have been capitalized as prepaid expenses and will be expensed
during the three months ended December 31, 1999, the period in which the
transaction was consummated.
The following presents certain statement of operations data of the Company
and CR Technology for the periods prior to the acquisition:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net revenue:
PDI..................................................... $22,420 $31,562
CR Technology........................................... 8,550 13,869
------- -------
Consolidated net revenue................................ $30,970 $45,431
======= =======
Net income (loss):
PDI..................................................... $(1,465) $ 1,170
CR Technology........................................... 258 1,103
------- -------
Consolidated net income (loss).......................... $(1,207) $ 2,273
======= =======
</TABLE>
NOTE 3--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Warranty................................................. $1,199 $1,640
Compensation............................................. 1,159 1,518
Commissions.............................................. 371 968
Other accrued expenses................................... 918 1,409
------ ------
$3,647 $5,535
====== ======
</TABLE>
F-11
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--NOTES RECEIVABLE FROM SHAREHOLDERS
Notes receivable from shareholders arose from certain employees exercising
their stock options and advances to purchase stock on the open market. The notes
bear interest at 6.83% per annum and are secured by the shares purchased. As of
September 30, 1999, all notes receivable from shareholders had been collected.
NOTE 5--ASSET RECOVERY RELATED TO PRODUCT LINE DISPOSAL
During the quarter ended December 31, 1997, the Company received $350,000
related to discontinuing its defect monitoring tool product in September 1996.
The Company had expensed the inventory and assets associated with this product
in the previous year.
NOTE 6--CREDIT ARRANGEMENTS
The Company has entered into a $3.5 million bank line of credit which
expires in March 2000. 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 accounts receivable and a portion of
inventories. Borrowings under this line of credit bear interest at prime rate
plus 1.00% to 1.25% (9.25% to 9.50% as of September 30, 1999). As of
September 30, 1999, no amounts were outstanding under this bank line of credit,
and the Company was in compliance with all bank covenants.
The Company has assumed a $1.5 million revolving bank line of credit which
was acquired as part of the CR Technology acquisition. This bank line of credit
expires in February 2001. This line of credit is secured by substantially all of
CR Technology's assets and contains certain financial and other covenants. CR
Technology is eligible to borrow on an unsecured basis. Borrowings under this
line of credit bear interest at prime rate (8.25% as of September 30, 1999). As
of September 30, 1999, no amounts were outstanding under this revolving line of
credit, and CR Technology was in compliance with all bank covenants.
NOTE 7--SHAREHOLDERS' EQUITY
STOCK RESERVED FOR FUTURE ISSUANCE. As of September 30, 1999, the Company
has reserved 1,664,655 shares of common stock for future issuance.
WARRANTS. There are warrants outstanding to purchase from the Company
12,067 shares of common stock. The purchase price for the shares is $5.40 per
share. These warrants will expire in June 2000.
F-12
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal................................................. $ 7 $111
State................................................... 118 151
Foreign................................................. 108 71
Deferred:
Federal................................................. (160) 340
----- ----
Total............................................... $ 73 $673
===== ====
</TABLE>
The provisions for taxes on income differed from the provisions calculated
by applying the federal statutory rate to income before taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Expected provision (benefit) at statutory rate............ $(385) $1,002
Alternative minimum taxes................................. 28 66
State taxes............................................... 117 151
Losses (benefited)/not benefited.......................... 313 (546)
----- ------
$ 73 $ 673
===== ======
</TABLE>
As of September 30, 1999, the Company has federal and state net operating
loss carryforwards of approximately $12.1 million and $320,000, respectively.
The Company also has federal and state research and development tax credit
carryforwards of $1.3 million and $750,000, respectively. The net operating loss
and credit carryforwards will expire at various times beginning in 2000 through
2018, if not utilized.
Under certain provisions of the Internal Revenue Code of 1986, as amended,
the availability of the Company's net operating loss and tax credit
carryforwards may be subject to limitation if it should be determined that there
has been a change in ownership of more that 50% of the value of the Company's
stock. Such determination could limit the utilization of net operating loss and
tax credit carryforwards.
Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, the amounts used for income tax purposes and net operating loss and
credit carryforwards.
F-13
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 5,410 $ 4,150
Research credit carryforwards.......................... 1,698 1,800
Capitalized research costs............................. 538 419
Inventory writedowns................................... 754 980
Depreciation........................................... 613 462
Other individually immaterial items.................... 1,539 1,859
-------- -------
Total deferred tax assets................................ 10,552 9,670
Valuation allowance...................................... (10,212) (9,670)
-------- -------
Net deferred tax assets.................................. $ 340 $ --
======== =======
</TABLE>
NOTE 9--COMMITMENTS
The Company leases two facilities under non-cancelable operating lease
agreements. The lease for the building in San Jose, California may be renewed
for one five-year period during fiscal 2002. The lease for the building in Aliso
Viejo, California may be renewed for one five-year period during fiscal 2005.
Total future minimum payments under non-cancelable operating leases with initial
terms of one year or more consisted of the following as of September 30, 1999:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 925
2001........................................................ 1,013
2002........................................................ 358
2003........................................................ 309
2004........................................................ 321
------
Total minimum lease payments................................ $2,926
======
</TABLE>
Rental expense for the years ended September 30, 1998 and 1999 was $895,000
and $910,000, respectively.
F-14
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of trade accounts receivable. Most of the Company's principle
customers are located in Asia, primarily Japan, Taiwan and Korea. Therefore, the
Company's sales to these countries may be adversely affected by the overall
health of these economies, including the effects of currency exchange rate
fluctuations. The Company generally sells its products on net-30 day terms to
its customers with a small portion held back until final acceptance. Although a
substantial portion of its customers, primarily foreign, remit payments on
significantly longer terms, the Company generally does not require collateral
for its trade accounts receivable. The Company believes its credit evaluation
and monitoring mitigates this credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company has evaluated its fair
value disclosures for financial instruments. The carrying amount reported in the
balance sheet for cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses approximates its fair value.
NOTE 11--OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company conducts business in two operating segments: FPD products and
PCB assembly and advanced semiconductor packaging inspection products
(collectively, "semiconductor inspection products"). The Company's FPD yield
management 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 tune their processes to produce zero defect
displays at high yields. The Company's X-ray and optical inspection systems
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 how 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 markets are Asian-based FPD manufacturers and North
American-based PCB assembly and advanced semiconductor packaging manufacturers.
F-15
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
The Company's operating segments consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales to external customers:
FPD products............................................ $22,420 $31,562
Semiconductor inspection products....................... 8,550 13,869
------- -------
Consolidated net sales to external customers............ $30,970 $45,431
======= =======
Operating income (loss):
FPD products............................................ $(1,589) $ 1,180
Semiconductor inspection products....................... 186 1,595
------- -------
Consolidated operating income (loss).................... $(1,403) $ 2,775
======= =======
Identifiable assets:
FPD products............................................ $21,033 $25,288
Semiconductor inspection products....................... 4,158 6,779
------- -------
Consolidated identifiable assets........................ $25,191 $32,067
======= =======
</TABLE>
The Company's geographic operations consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales to external customers:
Asia.................................................... $21,710 $33,313
North America........................................... 8,825 11,116
Other................................................... 435 1,002
------- -------
Consolidated net sales to external customers............ $30,970 $45,431
======= =======
</TABLE>
Sales outside North America accounted for 72% and 76% of revenue in fiscal
1998 and fiscal 1999, respectively.
Direct sales to the Company's top four customers, each of which is a FPD
manufacturer, in fiscal 1998 and fiscal 1999 accounted for 67% and 55% of total
revenue, respectively. In fiscal 1998, sales to two unaffiliated and one
affiliated customer in the FPD products segment accounted for 33%, 12% and 20%,
respectively. In fiscal 1999, sales to three unaffiliated and one affiliated
customer in the FPD products segment represented 18%, 16%, 10% and 11% of total
revenue, respectively.
F-16
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE STOCK PURCHASE AND STOCK OPTION PLANS
EMPLOYEE PURCHASE PLAN. In January 1999, the board of directors amended the
1995 Employee Stock Purchase Plan ("Purchase Plan") to increase the number of
shares authorized for issuance to an aggregate of 350,000 shares. The Purchase
Plan permits eligible employees to purchase common stock, through payroll
deductions, at 85% of the lower of the fair market value of the common stock at
market close on the date at the beginning of the two-year offering period or the
last day of the purchase period. Substantially all employees are eligible to
participate in the Purchase Plan. Employees purchased 120,445 shares in fiscal
1999 for $293,000 as compared to 102,343 shares for $239,000 in fiscal 1998. As
of September 30, 1999, 62,172 shares were available for issuance under the plan.
Employees of CR Technology did not participate in the Purchase Plan prior to the
acquisition.
STOCK OPTION PLANS. Under the 1987 and 1995 Stock Option Plans ("Option
Plans"), the board of directors may, at its discretion, grant incentive or
nonqualified stock options to employees and directors. Options granted under the
Option Plans have exercise prices at least equal to the market price at the date
of grant and, subject to termination of employment, expire 10 years from the
date of grant, are not transferable other than on death, and are generally
exercisable in 50 equal installments commencing 6 months from the date of grant.
In November 1998, the board of directors authorized the repricing of options
granted to employees effective as of the close of business on November 27, 1998
to the then fair market value of $4.50 per share. Under the terms of the
repricing, employees surrendered 431,833 of existing options in exchange for
353,464 replacement options, which contained a provision that the replacement
options could not be exercised for a six month period and that extended the
original option vesting schedule by six months. The number of replacement
options issued was determined based on a conversion formula. No members of the
Company's board of directors participated in the repricing.
On November 30, 1999, 104,500 outstanding CR Technology stock options were
converted, at the common stock exchange ratio in accordance with the business
acquisition agreement, into 125,742 options to purchase the Company's common
stock at an average converted exercise price of $0.26. The options are
exercisable in four equal annual installments commencing one year from the
original date of grant and expire ten years from the original date of grant.
The following table summarizes the stock option activity and related
information:
<TABLE>
<CAPTION>
WEIGHTED
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------ --------------
<S> <C> <C>
Outstanding as of September 30, 1997............... 1,252,174 $4.28
Granted............................................ 429,513 $3.76
Exercised.......................................... (131,639) $1.05
Canceled........................................... (276,200) $5.43
--------- -----
Outstanding as of September 30, 1998............... 1,273,848 $4.19
Granted............................................ 772,680 $5.75
Exercised.......................................... (299,825) $2.13
Canceled........................................... (548,951) $6.59
--------- -----
Outstanding as of September 30, 1999............... 1,197,752 $4.62
========= =====
</TABLE>
F-17
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE STOCK PURCHASE AND STOCK OPTION PLANS (CONTINUED)
404,345 and 392,664 stock option shares are available for grant as of
September 30, 1998 and 1999, respectively. 625,551 and 530,883 stock option
shares are exercisable as of September 30, 1998 and 1999, respectively.
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE OUTSTANDING AVERAGE
EXERCISE AS OF CONTRACTUAL LIFE EXERCISE AS OF EXERCISE
PRICES SEPTEMBER 30, 1999 (YEARS) PRICE SEPTEMBER 30, 1999 PRICE
- ----------------- ------------------- ----------------- -------- ------------------ --------
<S> <C> <C> <C> <C> <C>
0.$08-$0.90..... 186,716 5.32 $ 0.41 119,939 $ 0.43
2.$40-$3.60..... 212,454 8.09 $ 3.20 89,642 $ 3.09
4.$13-$4.13..... 165,000 9.14 $ 4.13 33,500 $ 4.13
4.$50-$4.50..... 291,651 9.16 $ 4.50 186,906 $ 4.50
4.$63-$7.50..... 205,631 8.52 $ 5.67 75,756 $ 5.91
8.$44-$10.63.... 60,500 9.13 $10.22 19,900 $ 9.39
11$.00-$14.38... 75,800 9.62 $13.10 5,240 $11.00
--------- ---- ------ ------- ------
0.$08-$14.38.... 1,197,752 8.29 $ 4.62 530,883 $ 3.77
</TABLE>
The weighted average fair value of stock options granted in fiscal 1998 and
fiscal 1999 was $1.99 and $2.66, respectively. The weighted average fair value
of stock purchases under the Purchase Plan in fiscal 1998 and fiscal 1999 was
$1.59 and $1.86, respectively.
ACCOUNTING FOR STOCK BASED COMPENSATION PLANS. In accordance with the
provisions of FAS 123, the Company applies APB 25 and related Interpretations in
accounting for its stock option and employee stock purchase plans and,
accordingly, does not recognize compensation expense in the statement of
operations because the exercise price of the employees' stock options equals the
market price of the underlying stock at market close on the date of grant. If
the Company had elected to recognize compensation expense based on the fair
value of the options granted at the grant date as prescribed by FAS 123,
earnings and earnings per share would have been adjusted to the pro forma
amounts as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net income (loss) as reported.............................. $(1,207) $2,273
Net income (loss) pro forma................................ $(1,833) $1,228
Basic net income (loss) per share--as reported............. $ (0.14) $ 0.24
Diluted net income (loss) per share--as reported........... $ (0.14) $ 0.23
Basic net income (loss) per share--pro forma............... $ (0.21) $ 0.13
Diluted net income (loss) per share--pro forma............. $ (0.21) $ 0.12
</TABLE>
F-18
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE STOCK PURCHASE AND STOCK OPTION PLANS (CONTINUED)
The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years
because FAS 123 is applicable only to options granted subsequent to October 1,
1995. Compensation expense for the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model for
the multiple option approach with the following weighted average assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
------------------- --------------------
1998 1999 1998 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Expected dividend yield................. -- -- -- --
Expected stock price volatility......... 0.80 0.80 0.79 0.80
Risk free interest rate................. 5.54% 4.73% 5.30% 5.31%
Expected life of options from date of
grant................................. 3 years 2 years 1.5 years 2 years
</TABLE>
NOTE 13--RETIREMENT SAVINGS PLAN
Under the Company's retirement savings plan (the "401(k) Plan"), a U.S.
employee may defer and invest up to 20% of his or her annual compensation,
subject to an annual dollar limitation. All U.S. full-time employees, twenty-one
years or older, are eligible to participate in the 401(k) Plan. The Company has
not elected to make matching contributions. Employees of CR Technology became
eligible under the 401(k) Plan after the acquisition.
NOTE 14--EARNINGS PER SHARE
For the years ended September 30, 1998 and 1999, basic and diluted earnings
per share is computed using the weighted average number of shares of common
stock outstanding. As the Company incurred a loss for the year ended
September 30, 1998, the effect of dilutive securities totaling approximately
468,000 from stock options and warrants has been excluded from the computation
of diluted earnings per share as their effect is antidilutive. The following
table sets forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Numerator for basic and diluted earnings per share--net
income (loss)............................................. $(1,207) $2,273
======= ======
Denominator for basic earnings per share--weighted average
shares.................................................... 8,930 9,282
Effect of dilutive securities:
Employee stock options.................................... -- 592
Warrants.................................................. -- 61
------- ------
Denominator for diluted earnings per share--adjusted for
weighted average shares from options and warrants......... 8,930 9,935
======= ======
Basic net income (loss) per share........................... $ (0.14) $ 0.24
Diluted net income (loss) per share......................... $ (0.14) $ 0.23
</TABLE>
F-19
<PAGE>
PHOTON DYNAMICS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTIES
During fiscal 1998, the Company sold $6.2 million of its systems to LG
Electronics, Inc. ("LG"), and accounts receivable as of September 30, 1998
included $1.1 million of receivable from LG. During fiscal 1999, the Company
sold $4.9 million of its systems to LG, and accounts receivable as of
September 30, 1999 included $298,000 of receivable from LG. At September 30,
1998, LG owned approximately 8% of the Company's common stock and warrants to
purchase 28,333 shares of the Company's common stock at an exercise price of
$0.60 per share and also held a seat on the Company's board of directors. At
September 30, 1999, LG owned less than 1% of the Company's common stock and is
no longer on the Company's board of directors.
F-20
<PAGE>
- ------------------------------------------------------------
- ------------------------------------------------------------
2,000,000 SHARES
[LOGO]
----------------
PROSPECTUS
, 2000
---------------------
BANC OF AMERICA SECURITIES LLC
NEEDHAM & COMPANY, INC.
----------------
SOUNDVIEW TECHNOLOGY GROUP
Until , 2000, all dealers that buy, sell or trade our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- ------------------------------------------------------------
- ------------------------------------------------------------
