UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-27234
PHOTON DYNAMICS, INC.
| California (State or other jurisdiction of incorporation or organization) |
94-3007502 (I.R.S. Employer Identification No.) |
17 Great Oaks Blvd.
San Jose, California 95119
(Address of principal executive offices including zip code)
(408) 360-3550
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). Yes x No o
As of April 30, 2003, there were 15,975,007 shares outstanding of the Registrant’s Common Stock, no par value.
INDEX
| Page | ||||
| PART I | FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements (unaudited) | |||
| Condensed Consolidated Balance Sheets as of March 31, 2003 and September 30, 2002 | 3 | |||
| Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended March 31, 2003 and 2002 | 4 | |||
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2003 and 2002 | 5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 31 | ||
| Item 4. | Controls and Procedures | 31 | ||
| PART II | OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 33 | ||
| Item 2. | Changes in Securities and Use of Proceeds | 33 | ||
| Item 3. | Defaults Upon Senior Securities | 33 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 33 | ||
| Item 5. | Other Information | 34 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 34 | ||
| Signatures | 36 | |||
| Certifications | 37 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PHOTON DYNAMICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | September 30, | |||||||||
| 2003 | 2002 | |||||||||
| (in thousands) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 13,380 | $ | 25,580 | ||||||
Short-term investments |
104,480 | 144,563 | ||||||||
Accounts receivable, net |
16,314 | 16,579 | ||||||||
Inventories |
13,458 | 18,650 | ||||||||
Other current assets |
6,268 | 6,367 | ||||||||
Total current assets |
153,900 | 211,739 | ||||||||
Land, property and equipment, net |
12,584 | 12,404 | ||||||||
Other assets |
2,613 | 2,925 | ||||||||
Intangible assets, net |
6,287 | 3,554 | ||||||||
Goodwill |
10,520 | 18,537 | ||||||||
Total assets |
$ | 185,904 | $ | 249,159 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 6,942 | $ | 10,610 | ||||||
Other current liabilities |
10,044 | 10,637 | ||||||||
Deferred revenue |
5,554 | 304 | ||||||||
Total current liabilities |
22,540 | 21,551 | ||||||||
Other liabilities |
1,155 | 1,465 | ||||||||
Commitments and contingencies
|
||||||||||
Shareholders’ equity: |
||||||||||
Common stock, no par value |
272,783 | 288,833 | ||||||||
Accumulated deficit |
(111,531 | ) | (63,500 | ) | ||||||
Accumulated other comprehensive income |
957 | 810 | ||||||||
Total shareholders’ equity |
162,209 | 226,143 | ||||||||
Total liabilities and shareholders’ equity |
$ | 185,904 | $ | 249,159 | ||||||
See accompanying notes to condensed consolidated financial statements.
3
PHOTON DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Six months ended | |||||||||||||||||
| March 31, | March 31, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||
Revenue |
$ | 10,133 | $ | 13,932 | $ | 30,005 | $ | 25,301 | ||||||||||
Cost of revenue |
8,658 | 7,392 | 20,725 | 14,370 | ||||||||||||||
Gross margin |
1,475 | 6,540 | 9,280 | 10,931 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Research and development |
5,594 | 3,293 | 10,241 | 6,226 | ||||||||||||||
Selling, general and administrative |
4,110 | 3,095 | 7,608 | 5,829 | ||||||||||||||
Long-lived asset impairment charge |
— | — | 303 | — | ||||||||||||||
Acquired in-process research and
development |
— | — | 1,849 | — | ||||||||||||||
Amortization of intangible assets |
367 | — | 627 | — | ||||||||||||||
Total operating expenses |
10,071 | 6,388 | 20,628 | 12,055 | ||||||||||||||
Income (loss) from operations |
(8,596 | ) | 152 | (11,348 | ) | (1,124 | ) | |||||||||||
Interest income and other, net |
680 | 639 | 1,494 | 1,161 | ||||||||||||||
Income (loss) from continuing operations |
(7,916 | ) | 791 | (9,854 | ) | 37 | ||||||||||||
Loss from discontinued operations |
(15,099 | ) | (2,403 | ) | (38,177 | ) | (5,013 | ) | ||||||||||
Net loss |
$ | (23,015 | ) | $ | (1,612 | ) | $ | (48,031 | ) | $ | (4,976 | ) | ||||||
Net income (loss) per share from continuing
operations |
||||||||||||||||||
Basic |
$ | (0.50 | ) | $ | 0.05 | $ | (0.61 | ) | $ | 0.00 | ||||||||
Diluted |
$ | (0.50 | ) | $ | 0.05 | $ | (0.61 | ) | $ | 0.00 | ||||||||
Loss per share from discontinued operations |
||||||||||||||||||
Basic and diluted |
$ | (0.94 | ) | $ | (0.15 | ) | $ | (2.38 | ) | $ | (0.34 | ) | ||||||
Net loss per share |
||||||||||||||||||
Basic and diluted |
$ | (1.44 | ) | $ | (0.10 | ) | $ | (2.99 | ) | $ | (0.34 | ) | ||||||
Weighted average number of shares: |
||||||||||||||||||
Basic |
15,944 | 15,746 | 16,052 | 14,831 | ||||||||||||||
Diluted |
15,944 | 16,788 | 16,052 | 15,806 | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
PHOTON DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six months ended | |||||||||||
| March 31, | |||||||||||
| 2003 | 2002 | ||||||||||
| (in thousands) | |||||||||||
Cash flows from operating activities: |
|||||||||||
Net income (loss) from continuing operations |
$ | (9,854 | ) | $ | 37 | ||||||
Adjustments to reconcile net income (loss) from continuing operations
to net cash used in operating activities from continuing operations: |
|||||||||||
Depreciation |
1,305 | 980 | |||||||||
Amortization of intangible assets |
1,184 | — | |||||||||
Acquired in-process research and development |
1,849 | — | |||||||||
Long-lived asset impairment charge |
303 | — | |||||||||
Stock ownership expense |
— | 275 | |||||||||
Changes in assets and liabilities: |
|||||||||||
Accounts receivable |
(3,239 | ) | (3,855 | ) | |||||||
Inventories |
(569 | ) | 3,149 | ||||||||
Other current assets |
1,251 | (2,458 | ) | ||||||||
Other assets |
155 | 230 | |||||||||
Accounts payable |
(2,370 | ) | 1,778 | ||||||||
Other current liabilities |
(2,193 | ) | 1,071 | ||||||||
Deferred revenue |
5,354 | (2,008 | ) | ||||||||
Net cash used in operating activities from continuing operations |
(6,824 | ) | (801 | ) | |||||||
Net cash used in operating activities from discontinued operations |
(8,129 | ) | (4,244 | ) | |||||||
Net cash used by operating activites |
(14,953 | ) | (5,045 | ) | |||||||
Cash flows from investing activities: |
|||||||||||
Purchase of property and equipment |
(1,240 | ) | (312 | ) | |||||||
Acquisition of Rapid Thermal
Processing Division from Intevac, Inc. |
(20,000 | ) | — | ||||||||
Purchase of short-term investments |
(279,530 | ) | (234,051 | ) | |||||||
Redemption of short-term investments |
319,687 | 265,271 | |||||||||
Net cash provided by investing activities from continuing operations |
18,917 | 30,908 | |||||||||
Net
cash provided by (used) in investing activities from discontinued
operations |
(165 | ) | 1,195 | ||||||||
Net cash provided by investing activities |
18,752 | 32,103 | |||||||||
Cash flows from financing activities: |
|||||||||||
Issuance of common stock, net |
1,629 | 110,771 | |||||||||
Repurchase of common stock |
(17,678 | ) | — | ||||||||
Repayment of lease obligations |
(23 | ) | (26 | ) | |||||||
Net
cash provided by (used in) financing activities from continuing
operations |
(16,072 | ) | 110,745 | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
73 | (39 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents from continuing
operations |
(3,906 | ) | 140,813 | ||||||||
Net decrease in cash and cash equivalents from discontinued operations |
(8,294 | ) | (3,049 | ) | |||||||
Net increase (decrease) in cash and cash equivalents |
(12,200 | ) | 137,764 | ||||||||
Cash and cash equivalents at beginning of period |
25,580 | 16,528 | |||||||||
Cash and cash equivalents at end of period |
$ | 13,380 | $ | 154,292 | |||||||
See accompanying notes to condensed consolidated financial statements.
5
PHOTON DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Photon Dynamics, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending September 30, 2003. This financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002.
The condensed consolidated balance sheet as of September 30, 2002, is derived from the Company’s audited consolidated financial statements as of September 30, 2002, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
Basis of Presentation
Through January 14, 2003, the Company has conducted business in three operating segments: flat panel display products, cathode ray tube display and high quality glass inspection products and printed circuit board assembly inspection products. The Company’s flat panel display products include test, repair, inspection and rapid thermal process equipment. The Company’s flat panel display 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 flat panel display test and inspection products gather comprehensive data that enable flat panel display manufacturers to control and refine their manufacturing processes. The Company’s rapid thermal process equipment enables manufacturers of flat panel displays to thermally activate low temperature poly-silicon films at temperatures that would otherwise distort or destroy underlying glass substrates. The Company’s cathode ray tube display and high quality glass inspection products allow cathode ray tube display manufacturers to locate and characterize defects and glass manufacturers to detect and identify defects such as scratches, pits, bubbles, stones, inclusions and distortions, thereby increasing yields and quality and reducing costs. The Company’s printed circuit board assembly inspection products enable printed circuit board assembly inspection manufacturers to detect and identify defects, thereby increasing yields and quality and reducing costs. In January 2003, the Company implemented a plan to exit the printed circuit board assembly inspection business. Accordingly, the operating results of this business segment have been presented as discontinued operations in accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” (“FAS 144”) and the Company’s statements of operations and cash flows have been reclassified to conform with the current period’s basis of presentation.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
The Company accounts for certain of its product sales, including sales to a value added reseller, in its flat panel display and cathode ray tube display and high quality glass inspection product segments as arrangements with
6
multiple deliverables. For arrangements with multiple deliverables, the Company recognizes revenue for the delivered items if the delivered items have value to the customer on a standalone basis, the amount of revenue for delivered elements is not subject to refund, the Company has met defined customer acceptance experience levels for the delivered items, and the fair value of undelivered items, such as installation and system upgrade rights, can be reliably determined. The Company allocates revenue to the delivered items based on the amount due and billable upon shipment, with the remaining amount recognized after installation and acceptance when the final amount becomes due. The Company recognizes all other product sales upon customer acceptance. The Company recognizes revenue from the sale of spare parts upon shipment.
The Company records a provision for estimated sales returns in the same period as the related revenue is recorded, which is netted against revenue. These estimates are based on historical sales returns and other known factors. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, additional provisions may be required.
NOTE 2—Discontinued Operations
The Company’s printed circuit board assembly inspection products enable printed circuit board assembly inspection manufacturers to detect and identify defects, thereby increasing yields and quality and reducing costs. The Company previously sold its products for the printed circuit board assembly industry primarily through sales representatives and distributors. The Company generally recognized revenue from the sale of its printed circuit board assembly inspection products upon shipment, as such product sales were not subject to customer acceptance provisions. In January 2003, the Company implemented a plan to exit the printed circuit board assembly inspection business. Accordingly, the operating results of this business segment have been reclassified as a discontinued operation and the Company now conducts business in two segments. The Company is attempting to sell the assets and to sublease the facilities associated with the discontinued operations, but there can be no assurances that the Company will be successful in recovering any costs associated with the discontinued operations.
The following table summarizes the results of discontinuing the printed circuit board assembly inspection products reporting segment:
| Three months ended | Six months ended | |||||||||||||||||
| March 31, | March 31, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| (in thousands) | ||||||||||||||||||
Revenue |
$ | 972 | $ | 3,365 | $ | 2,827 | $ | 6,201 | ||||||||||
Cost of revenue |
9,302 | 2,676 | 11,175 | 4,910 | ||||||||||||||
Gross margin |
(8,330 | ) | 689 | (8,348 | ) | 1,291 | ||||||||||||
Operating expenses: |
||||||||||||||||||
Research and development |
2,618 | 907 | 3,693 | 1,900 | ||||||||||||||
Selling, general and administrative |
4,151 | 1,898 | 5,453 | 3,831 | ||||||||||||||
Goodwill impairment charge |
— | — | 15,083 | — | ||||||||||||||
Purchased intangibles and
long-lived assets
impairment charge |
— | — | 5,405 | — | ||||||||||||||
Amortization of intangible assets |
— | 287 | 195 | 573 | ||||||||||||||
Total operating expenses |
6,769 | 3,092 | 29,829 | 6,304 | ||||||||||||||
Loss from discontinued operations |
$ | (15,099 | ) | $ | (2,403 | ) | $ | (38,177 | ) | $ | (5,013 | ) | ||||||
The loss from discontinued operations for the three months ended March 31, 2003, includes a write-off of inventory of approximately $7.8 million, a write-off of accounts receivable of approximately $1.7 million, and a write-off of licensed technology of approximately $1.9 million. The loss from discontinued operations for the six