<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: November 21, 2000
Date of earliest event reported: November 21, 2000
PHOTON DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation)
000-27234 94-3007502
(Commission File No.) (IRS Employer Identification No.)
6352 SAN IGNACIO AVENUE, SAN JOSE, CA 95119-1202
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 226-9900
-------------------
<PAGE>
ITEM 5. OTHER EVENTS
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On September 27, 2000, Photon Dynamics, Inc. ("PDI" or the
"Company") entered into an Acquisition Agreement for Plan of Arrangement (the
"Arrangement") to acquire Image Processing Systems Inc. ("IPS"). In
connection with the Arrangement, the Company has prepared unaudited combined
condensed financial statements. The following unaudited pro forma combined
condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP")
to give effect to the merger using the pooling of interests method of
accounting. These unaudited pro forma combined condensed financial statements
reflect certain assumptions deemed probable by management regarding the
Arrangement (e.g., that share information used in the unaudited pro forma
information approximates actual share information at the effective date). No
adjustments to the unaudited pro forma combined condensed financial
statements have been made to account for different possible results in
connection with the foregoing, as management believes that the impact on such
information of varying outcomes, individually or in the aggregate, would not
be material.
PDI has a fiscal year ending on September 30 and IPS has a fiscal
year ending on March 31. If the Arrangement is consummated, the fiscal year
of IPS will be conformed to that of PDI commencing with the fiscal year
ending September 30, 2001. Accordingly, the unaudited pro forma combined
statement of operations data combine PDI's historical results for the fiscal
years ended September 30, 2000 and 1999 with IPS' historical results for the
years ended September 30, 2000 and March 31, 2000, respectively, giving
effect to the Arrangement as if it had occurred at the beginning of the
earliest period presented. As a result, the results for IPS for the six
months ended March 31, 2000 have been included in both pro forma combined
condensed statements of operations. The unaudited pro forma combined balance
sheet data combines PDI's consolidated balance sheet as of September 30, 2000
with IPS' consolidated balance sheet as of September 30, 2000, giving effect
to the Arrangement as if it had occurred on September 30, 2000.
These unaudited pro forma combined condensed financial statements
are presented in accordance with U.S. GAAP. The unaudited pro forma combined
condensed financial statements should be read in conjunction with the
historical consolidated financial statements of PDI and IPS, including the
notes thereto, as contained in each company's annual report.
The unaudited selected pro forma combined condensed financial
information set forth below gives effect to the merger as a pooling of
interests, assuming that 0.0447 shares of PDI common stock is issued in
exchange for each share of IPS common stock.
PDI and IPS estimate that they will incur direct transaction costs
of approximately U.S. $1.4 million associated with the merger, which will be
charged to operations upon consummation of the merger. In addition, it is
expected that following the merger, the combined company will incur
additional costs, which cannot currently be estimated, associated with
integrating the operations of the two companies. Integration-related costs
are not included in the accompanying unaudited pro forma combined condensed
financial statements.
Unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the earliest period
presented, nor is it necessarily indicative of future financial position or
results of operations. These unaudited pro forma combined condensed financial
statements are based upon the respective historical consolidated financial
statements of PDI and IPS and notes thereto. These unaudited pro forma
combined condensed financial statements do not incorporate, nor do they
assume, any anticipated benefits from cost savings or synergies of operations
of the combined company.
<PAGE>
PHOTON DYNAMICS, INC. AND IMAGE PROCESSING SYSTEMS INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AT SEPTEMBER 30, 2000
(UNAUDITED)
EXPRESSED IN THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PDI IPS ADJUSTMENTS COMBINED
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,389 $ 1,334 $ - $ 9,723
Short-term investments 93,003 - - 93,003
Accounts receivable, net 22,478 2,350 - 24,828
Inventories 13,090 3,433 - 16,523
Other current assets 1,375 1,135 - 2,510
----------- ----------- ----------- -----------
Total current assets 138,335 8,252 - 146,587
Property, equipment and
leasehold improvements, net 2,568 1,543 - 4,111
Other assets 1,354 702 - 2,056
----------- ----------- ----------- -----------
Total assets $ 142,257 $ 10,497 $ - $ 152,754
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,289 $ 3,059 $ - $ 8,348
Other current liabilities 10,267 46 - 10,313
Accrued transaction costs - - 1,400 1,400
Deferred revenue and customer 146 1,738 - 1,884
----------- ----------- ----------- -----------
Total current liabilities 15,702 4,843 1,400 21,945
Other liabilities - 409 - 409
----------- ----------- ----------- -----------
Total liabilities 15,702 5,252 1,400 22,354
Shareholders' equity:
Common stock 134,728 24,995 - 159,723
Accumulated deficit (8,176) (19,750) (1,400) (29,326)
Accumulated other comprehensive
income 3 - - 3
----------- ----------- ----------- -----------
Total shareholders' equity 126,555 5,245 (1,400) 130,400
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 142,257 $ 10,497 $ - $ 152,754
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
<PAGE>
PHOTON DYNAMICS, INC. AND IMAGE PROCESSING SYSTEMS INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
(UNAUDITED)
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
PDI IPS COMBINED
----------------------------------------------
<S> <C> <C> <C>
Revenue $ 82,234 $ 12,523 $ 94,757
Cost of revenue 43,336 7,288 50,624
----------------------------------------------
Gross margin 38,898 5,235 44,133
Operating expenses:
Research and development 11,774 2,422 14,196
Selling, general and administrative 12,448 4,075 16,523
Non-recurring acquisition charges 860 - 860
----------------------------------------------
Total operating expenses 25,082 6,497 31,579
----------------------------------------------
Income (loss) from operations 13,816 (1,262) 12,554
Interest income and other, net 4,175 44 4,219
----------------------------------------------
Income (loss) before income taxes 17,991 (1,218) 16,773
Provision for income taxes 3,238 - 3,238
----------------------------------------------
Net income (loss) $ 14,753 $ (1,218) $ 13,535
==============================================
Basic earnings (loss) per share $ 1.35 $ (1.21) $ 1.13
==============================================
Diluted earnings (loss) per share $ 1.23 $ (1.21) $ 1.04
==============================================
Shares used in computing
basic earnings (loss) per share 10,941 1,008 11,949
Shares used in computing
diluted earnings (loss) per share 11,958 1,008 13,050
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
<PAGE>
PHOTON DYNAMICS, INC. AND IMAGE PROCESSING SYSTEMS INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
(UNAUDITED)
EXPRESSED IN THOUSANDS IN U.S. DOLLARS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, MARCH 31,
1999 2000
----------------------------------------
PRO FORMA
PDI IPS COMBINED
----------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 45,431 $ 16,580 $ 62,011
Cost of revenue 25,573 8,818 34,391
---------------------------------------------------------
Gross margin 19,858 7,762 27,620
Operating expenses:
Research and development 5,943 2,204 8,147
Selling, general and administrative 11,140 4,696 15,836
---------------------------------------------------------
Total operating expenses 17,083 6,900 23,983
---------------------------------------------------------
Income from operations 2,775 862 3,637
Interest income and other, net 171 (17) 154
---------------------------------------------------------
Income before income taxes 2,946 845 3,791
Provision for income taxes 673 - 673
---------------------------------------------------------
Net income $ 2,273 $ 845 $ 3,118
=========================================================
Basic earnings per share $ 0.24 $ 0.94 $ 0.31
=========================================================
Diluted earnings per share $ 0.23 $ 0.87 $ 0.29
=========================================================
Shares used in computing basic earnings per share 9,282 896 10,178
Shares used in computing diluted earnings per share 9,935 974 10,909
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
<PAGE>
PHOTON DYNAMICS, INC. AND IMAGE PROCESSING SYSTEMS INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - PERIODS COMBINED
The consolidated balance sheet of Photon Dynamics, Inc. ("PDI") as
of September 30, 2000 has been combined with the consolidated balance sheet
of Image Processing Systems Inc. ("IPS") as of September 30, 2000. The PDI
consolidated statements of operations for the years ended September 30, 2000
and 1999 have been combined with the IPS consolidated statements of
operations for the years ended September 30, 2000 and March 31, 2000,
respectively. The unaudited combined condensed statements of operations for
the years ended September 30, 2000 and 1999 both include the IPS results of
operations for the six months ended March 31, 2000. The results of operations
for those six months are summarized as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
Unaudited
---------
<S> <C>
Revenue................... $7,050
Operating income.......... $ 14
Net income................ $ (15)
</TABLE>
NOTE 2 - MERGER COSTS
PDI and IPS estimate they will incur direct transaction costs of
approximately U.S. $1.4 million associated with the merger, consisting
primarily of fees for investment banking, filings with regulatory agencies,
legal, accounting, financial printing and other related costs. These
non-recurring costs will be charged to operations in the fiscal quarter in
which the merger is consummated. The unaudited pro forma combined balance
sheet gives effect to such charges as if they had been incurred as of
September 30, 2000, but the effects of these costs have not been reflected in
the unaudited pro forma combined statements of operations as they are
non-recurring in nature. It is expected that substantially all of the costs
will be paid out of existing cash reserves within six to twelve months after
the consummation of the merger.
In addition, it is expected that following the merger, the combined
company will incur additional costs, which cannot currently be estimated,
associated with integrating the operations of the two companies.
Integration-related costs are not included in the accompanying unaudited pro
forma combined condensed financial statements.
NOTE 3 - CONVERSION OF IPS TO U.S. GAAP
These unaudited pro forma combined financial statements have been
prepared in accordance with U.S. GAAP, which in the case of IPS, conforms in
all material respects with Canadian generally accepted accounting principles
("Canadian GAAP"), except as follows:
(a) The combined company has applied the Financial Accounting Standards Board
Statement No. 128, EARNINGS PER SHARE ("FAS 128"), concerning the
presentation of earnings per share under U.S. GAAP. Under FAS 128 the
earnings (loss) per share is calculated using the weighted average number
of common and common equivalent shares during the year using the treasury
stock method to account for stock options outstanding. (see Note 5)
(b) The combined company has accounted for capitalization of certain
research and development costs according to the Financial Accounting
Standards Board Statement No. 86, ACCOUNTING FOR THE COSTS OF SOFTWARE
TO BE SOLD, LEASED, OR OTHER-WISE MARKETED ("FAS 86"). Under FAS 86 no
costs would be capitalized. While under Canadian GAAP, some development
costs would be capitalized. Due to this difference, the September 30,
2000 IPS balance sheet reflects a
<PAGE>
decrease in other assets and an increase in the accumulated deficit of
U.S. $601,000 because of the additional charges to research and
development expenses in prior years. In addition, research and
development expenses in the statement of operations of IPS have been
decreased by U.S. $335,000 and U.S. $374,000 due to the amortization of
costs for years ended September 30, 2000 and March 31, 2000,
respectively. There were no costs capitalized for the years ended
September 30, 2000 and March 31, 2000.
NOTE 4 - CONVERSION OF IPS TO U.S. DOLLARS
The historical consolidated financial statements of IPS were
prepared under Canadian GAAP in Canadian dollars. For these unaudited pro
forma combined financial statements, the historical financial information of
IPS has been converted to U.S. dollars using the September 30, 2000 exchange
rate for the balance sheet and the average exchange rates for the statements
of operations for the years ended September 30, 2000 and March 31, 2000,
respectively.
NOTE 5 - PRO FORMA EARNINGS (LOSS) PER SHARE
The unaudited pro forma combined earnings (loss) per share amounts
are based upon the weighted average number of common and dilutive equivalent
shares of PDI and IPS outstanding at the exchange ratio for each period.
The following table reconciles the number of shares used in the pro
forma earnings per share computations to the numbers set forth in PDI's and
IPS' historical statements of operations (in thousands, except for exchange
ratio):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Weighted average shares used in basic earnings per share computation:
Historical IPS 22,561 20,038
Exchange ratio 0.0447 0.0447
-------------------- -----------------
IPS shares of PDI common stock 1,008 896
Historical PDI 10,941 9,282
-------------------- -----------------
Pro forma combined - basic 11,949 10,178
-------------------- -----------------
Pro forma combined earnings per share - basic $1.13 $0.31
-------------------- -----------------
Weighted average shares used in diluted earnings per share computation:
Pro forma combined - basic 11,949 10,178
Dilutive IPS securities 1,884 1,751
Exchange ratio 0.0447 0.0447
-------------------- -----------------
84 78
-------------------- -----------------
12,033 10,256
-------------------- -----------------
Dilutive PDI securities 1,017 653
-------------------- -----------------
Pro forma combined - diluted 13,050 10,909
-------------------- -----------------
Pro forma combined earnings per share - diluted $1.04 $0.29
-------------------- -----------------
</TABLE>
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statement of
operations data for each of the eight quarters ended September 30, 2000, as
well as such data expressed as a percentage of revenue. We believe that all
necessary adjustments have been included to present fairly the quarterly
information when read in conjunction with the historical consolidated
financial statements of the two companies. The operating results for any
quarter are not necessarily indicative of the results for any subsequent
quarter.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1998 1999 1999 1999 1999 2000 2000 2000
--------- --------- --------- --------- ---------- --------- ---------- ----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 12,214 $ 14,146 $ 16,312 $ 19,339 $ 19,483 $ 23,610 $ 25,288 $ 26,376
Cost of revenue 6,964 7,865 8,376 11,186 10,160 13,330 13,464 13,670
--------- --------- --------- ---------- ---------- --------- ---------- ----------
Gross margin 5,250 6,281 7,936 8,153 9,323 10,280 11,824 12,706
Operating expenses:
Research and development 1,974 1,943 2,209 2,021 2,742 3,044 3,853 4,557
Selling, general and administrative 4,250 3,706 3,823 4,057 3,718 4,154 4,356 4,295
Non-recurring acquisition
charges - - - - 860 - - -
--------- --------- --------- ---------- ---------- --------- ---------- ----------
Total operating expenses 6,224 5,649 6,032 6,078 7,320 7,198 8,209 8,852
Income (loss) from operations (974) 632 1,904 2,075 2,003 3,082 3,615 3,854
Interest income and other, net 43 12 (15) 114 1 919 1,627 1,672
--------- --------- --------- ---------- ---------- --------- ---------- ----------
Income (loss) before income taxes (931) 644 1,889 2,189 2,004 4,001 5,242 5,526
Provision (benefit) for income taxes (46) 110 319 290 390 730 1,000 1,118
--------- --------- --------- ---------- ---------- --------- ---------- ----------
Net income (loss) $ (885) $ 534 $ 1,570 $ 1,899 $ 1,614 $ 3,271 $ 4,242 $ 4,408
========= ========= ========= ========== ========== ========= ========== ==========
Basic earnings (loss) per share $ (0.09) $ 0.05 $ 0.15 $ 0.18 $ 0.15 $ 0.28 $ 0.33 $ 0.34
========= ========= ========= ========== ========== ========= ========== ==========
Diluted earnings (loss) per share $ (0.09) $ 0.05 $ 0.14 $ 0.16 $ 0.14 $ 0.25 $ 0.31 $ 0.32
========= ========= ========= ========== ========== ========= ========== ==========
Shares used in computing
basic earnings (loss) per share 9,956 10,082 10,231 10,443 10,548 11,646 12,724 12,884
Shares used in computing
diluted earnings (loss) per share 9,956 10,641 11,098 11,577 11,657 13,054 13,761 13,760
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1998 1999 1999 1999 1999 2000 2000 2000
--------- -------- -------- ---------- ---------- --------- ---------- ----------
(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 57.0 55.6 51.3 57.8 52.1 56.5 53.2 51.8
--------- -------- --------- ---------- ---------- --------- ---------- ----------
Gross margin 43.0 44.4 48.7 42.2 47.9 43.5 46.8 48.2
Operating expenses:
Research and development 16.2 13.7 13.6 10.5 14.1 12.9 15.3 17.3
Selling, general and administrative 34.8 26.2 23.4 21.0 19.1 17.6 17.2 16.3
Non-recurring acquisition
charges - - - - 4.4 - - -
--------- -------- --------- ---------- ---------- --------- ---------- ----------
Total operating expenses 51.0 39.9 37.0 31.5 37.6 30.5 32.5 33.6
Income (loss) from operations (8.0) 4.5 11.7 10.7 10.3 13.0 14.3 14.6
Interest income and other, net 0.4 0.1 (0.1) 0.6 - 3.9 6.4 6.3
--------- -------- --------- ---------- ---------- --------- ---------- ----------
Income (loss) before income taxes (7.6) 4.6 11.6 11.3 10.3 16.9 20.7 20.9
Provision (benefit) for income taxes (0.4) 0.8 2.0 1.5 2.0 3.1 3.9 4.2
--------- -------- --------- ---------- ---------- --------- ---------- ----------
Net income (loss) (7.2)% 3.8% 9.6% 9.8% 8.3% 13.8% 16.8% 16.7%
========== ======== ========= ========== ========== ========= ========== ==========
</TABLE>
<PAGE>
ITEM 7. EXHIBITS
The following Exhibits are filed as part of this report:
<TABLE>
<S> <C>
2.1(3) Acquisition Agreement for Plan of Arrangement By and Among
the Registrant, Photon Dynamics Nova Scotia Company and
Image Processing Systems Inc., dated September 27, 2000
4.1(1) Restated Articles of Incorporation, as amended, of Registrant
4.2(2) Bylaws of Registrant
</TABLE>
(1) Incorporated by reference to Registrant's Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission ("SEC") on November
15, 1995.
(2) Incorporated by reference to Registrant's Form 10-KSB filed with the SEC on
December 18, 1998.
(3) Incorporated by reference to Registrant's Registration Statement on Form
S-3 filed with the SEC on November 7, 2000.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHOTON DYNAMICS, INC.
Dated: November 21, 2000 By: /s/ Richard L. Dissly
--------------------------------------
Richard L. Dissly
Chief Financial Officer and Secretary
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
2.1(3) Acquisition Agreement for Plan of Arrangement By and Among
the Registrant, Photon Dynamics Nova Scotia Company and Image
Processing Systems Inc., dated September 27, 2000
4.1(1) Restated Articles of Incorporation, as amended, of Registrant
4.2(2) Bylaws of Registrant
</TABLE>
(1) Incorporated by reference to Registrant's Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission ("SEC") on November
15, 1995.
(2) Incorporated by reference to Registrant's Form 10-KSB filed with the SEC on
December 18, 1998.
(3) Incorporated by reference to Registrant's Registration Statement on Form
S-3 filed with the SEC on November 7, 2000.
