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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON,Washington, DC. 20549

                          ----------------------------

                                    FORM 10-Q

(Mark One)

   [X]   Quarterly report pursuant to Section 13 or 15(d) of the
         Securities Exchange Act of 1934

                  for the quarterly period ended June 30, 19992000
or

   [ ]   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 0-24085

                              --------------------

                                    AMERICAN XTAL TECHNOLOGY,AXT, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)(Exact name of registrant as specified in its charter)

                DELAWARE                               94-3031310
     (STATE OR OTHER JURISDICTION OF(State or other jurisdiction of                (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.Employer
     Incorporation or organization)                Identification No.)

                4311 SOLAR WAY, FREMONT, CALIFORNIA4281 Technology Drive, Fremont, California 94538
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)(Address of principal executive offices) (Zip code)
                                 (510) 683-5900
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)(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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at June 30, 1999 -----2000 ------- ---------------------------- Common Stock, $.001 par value 18,622,24018,947,781
================================================================================ 2 AMERICAN XTAL TECHNOLOGY,AXT, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets at June 30, 19992000 and December 31, 19981999 Condensed Consolidated Income Statements of Operations for the three and six months ended June 30, 19982000 and 1999 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 19982000 and 1999 Notes To Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 2 3 PART I. FINANCIAL INFORMATION ITEMItem 1. FINANCIAL STATEMENTS AMERICAN XTAL TECHNOLOGY,Financial Statements AXT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, unaudited)thousands)
June 30, December 31, 2000 1999 1998 -------------------- ------------ (Unaudited) Assets: Current assets Cash and cash equivalents $ 10,2045,149 $ 16,4386,062 Accounts receivable, net of allowance for doubtful accounts of $1,819$1,702 and $1,648 15,818 12,428$778 20,889 17,561 Inventories (Note 3) 30,777 25,30043,630 35,470 Prepaid expenses and other current assets 5,153 3,2716,071 8,945 Deferred income taxes 1,670 1,6704,585 3,210 --------- --------- Total current assets 63,622 59,10780,324 71,248 Property, plant and equipment 40,348 37,62452,476 40,865 Other assets 1,324 1,9272,427 1,405 Goodwill 2,543 2,8431,945 2,244 --------- --------- Total assets $ 107,837137,172 $ 101,501115,762 ========= ========= Liabilities and Stockholders' Equity: Current liabilities Short-term bank borrowing $ 5,40912,980 $ 3,33911,298 Note payable 4,000 -- Accounts payable 8,888 8,76212,575 8,294 Accrued liabilities 5,429 2,21910,801 7,464 Current portion of long-term debt 4,375 3,9251,862 1,568 Current portion of capital lease obligation 3,437 2,162 --------- --------- Total current liabilities 24,101 18,24545,655 30,786 Long-term debt, net of current portion 21,853 22,270 Notes payable to officers 411 60414,034 15,254 Long-term capital lease, net of current portion 8,137 6,853 Other long-term liabilities 100 410 --------- --------- Total liabilities 46,365 41,11967,926 53,303 --------- --------- Stockholders' equity: Preferred stock 4,000 4,000$.001 par value per share; 1,000,000 shares authorized; 980,655 shares issued and outstanding 1 1 Additional paid-in capital 3,989 3,989 Common stock 45,626 45,266$.001 par value per share; 100,000,000 shares authorized; 18,947,781 and 18,658,919 shares issued and outstanding respectively 19 19 Additional paid-in capital 48,606 46,321 Deferred compensation (272) (327)(162) (217) Retained earnings 12,137 11,41616,695 12,370 Cumulative translation adjustments (19) 2798 (24) --------- --------- Total stockholders' equity 61,472 60,38269,246 62,459 --------- --------- Total liabilities and stockholders' equity $ 107,837137,172 $ 101,501115,762 ========= =========
TheSee accompanying notes are an integral part ofto these unaudited condensed consolidated financial statements. 3 4 AMERICAN XTAL TECHNOLOGY,AXT, INC. CONDENSED CONSOLIDATED INCOME STATEMENTS OF OPERATIONS(Unaudited) (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- -------------------------------------------- --------------------- 2000 1999 19982000 1999 1998 -------- -------- -------- -------- Revenues: Product revenuesRevenue $ 20,63328,944 $ 13,03520,783 $ 39,23952,878 $ 25,729 Contract revenues 392 497 809 98939,680 Cost of revenue 17,859 13,971 32,198 30,211 -------- -------- -------- -------- Total revenues 21,025 13,532 40,048 26,718 Cost of revenues: Cost of product revenues 12,404 8,971 25,175 16,850 Cost of contract revenues 175 218 409 483 -------- -------- -------- -------- Total cost of revenues 12,579 9,189 25,584 17,333 Gross profit 8,446 4,343 14,464 9,38511,085 6,812 20,680 9,469 Operating expenses: Selling, general and administrative 2,634 2,238 6,086 4,6984,564 3,196 8,417 6,843 Research and development 637 714 1,173 1,354 Merger1,863 858 3,851 1,520 Acquisition costs and expenses-- 2,810 -- 2,810 -- -------- -------- -------- -------- Total operating expenses 6,081 2,952 10,069 6,0526,427 6,864 12,268 11,173 -------- -------- -------- -------- Income (loss) from operations 2,365 1,391 4,395 3,3334,658 (52) 8,412 (1,704) Interest expense (763) (274) (1,388) (512) Interest(1,149) (730) (1,918) (1,360) Other income and other income 53 (48) 678 (29)expense 303 29 499 722 -------- -------- -------- -------- Income (loss) before provision for income taxes 1,655 1,069 3,685 2,7923,812 (753) 6,993 (2,342) Provision for income taxes 1,685 438 2,456 1,1451,459 782 2,668 178 -------- -------- -------- -------- Net Income (loss) before extraordinary item (30) 631 1,229 1,6472,353 (1,535) 4,325 (2,520) Extraordinary item from early extinguishment of debt net of tax benefits (508) -- (508) --508 508 -------- -------- -------- -------- Net Income (loss) $ (538)2,353 $ 631(2,043) $ 7214,325 $ 1,647(3,028) ======== ======== ======== ======== Basic income/income (loss) per share: Income before extraordinary item $ (0.00)0.13 $ 0.04(0.08) $ 0.070.23 $ 0.11(0.14) Extraordinary item (0.03) -- (0.03) -- -------- -------- -------- -------- Net income $ (0.03) $ 0.04 $ 0.04 $ 0.11 ======== ======== ======== ========0.13 (0.11) 0.23 (0.16) Diluted income/income (loss) per share: Income before extraordinary item $ (0.00)0.12 $ 0.04(0.08) $ 0.060.23 $ 0.11(0.14) Extraordinary item (0.03) -- (0.02) -- -------- -------- -------- --------(0.03) Net income $ (0.03) $ 0.04 $ 0.04 $ 0.11 ======== ======== ======== ========0.12 (0.11) 0.21 (0.16) Shares used in net incomeper share calculations: Basic 18,620 15,075 18,601 14,49518,654 18,443 18,687 18,451 Diluted 18,620 15,878 19,724 15,29820,149 18,443 20,178 18,451
TheSee accompanying notes are an integral part ofto these unaudited condensed consolidated financial statements. 4 5 AMERICAN XTAL TECHNOLOGY,AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) (Unaudited)
Six Months Ended June 30, -------------------------------------------- 2000 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income:income (loss): $ 7214,325 $ 1,647(3,028) Adjustments to reconcile net income (loss) to cash used in operations: Depreciation and amortization 1,439 1,1072,917 1,162 Deferred income taxes -- (528)(1,375) (404) Amortization of goodwill 299 300 Stock compensation 55 (182)55 Changes in assets and liabilities: Services provided by shareholders (211) -- Accounts receivable (3,390) (405)(3,328) (929) Inventories (5,477) (1,004)(8,160) (4,491) Prepaid expenses and other current assets (980) (1,845)2,874 (4,407) Other assets (1,022) 790 Accounts payable 126 (932)4,281 189 Accrued liabilities 3,661 1,4383,337 3,764 Other long-term liabilities (310) (103) -------- -------- Net cash provided by (used in) operating activities (4,056) 7043,893 (7,102) -------- -------- CASH FLOWS FROM PURCHASE OF PROPERTY, PLANT AND EQUIPMENT: PurchaseINVESTING ACTIVITIES: Purchases of property, plant and equipment (4,348) (12,817)(11,101) (3,853) -------- -------- Net cash used in investing activities (4,348) (12,817)(11,101) (3,853) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments of): Issuance of common stock 756 34,764 Issuance of preferred stock -- (8,553)2,285 359 Capital leases (868) (268) Short-term bank borrowings 2,070 2,0595,682 4,526 Long-term debt borrowings (610) 634(926) 157 -------- -------- Net cash provided by financing activities 2,216 28,9046,173 4,774 -------- -------- Effect of exchange rate changes (46) 34122 (53) -------- -------- Net increase (decrease) in cash and cash equivalents (913) (6,234) 15,417 Cash and cash equivalents at the beginning of the period 6,062 16,438 3,199 -------- -------- Cash and cash equivalents at the end of the period $ 10,2045,149 $ 18,61610,204 ======== ======== SUPPLEMENTAL DISCLOSURES: Interest paidNon cash activity: Purchases of PP&E through capital leases $ 7953,427 $ 512 ======== ======== Income taxes paid $ 1,867 $ 1,38039 ======== ========
TheSee accompanying notes are an integral part ofto these unaudited condensed consolidated financial statements. 5 6 AMERICAN XTAL TECHNOLOGY,AXT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements for the three-month and six-month periods ended June 30, 2000 and 1999 are unaudited. The accompanying unaudited condensed consolidated financial statements as of December 31, 1998 and June 30, 1999, and for the three and six months ended June 30, 1998 and 1999 have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation ofto present fairly the Company's financial position, results of operations and cash flows as of June 30, 1999AXT, Inc. (the "Company") and its subsidiaries for the three and six months ended June 30, 1998 and 1999 have been included. Operating results for the three and six months ended June 30, 1999 are not necessarily indicative of the result that may be expected for the year ended December 31, 1999. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Form 10-K report for the year ended December 31, 1998 and the separate financial statements of Lyte Optronics, Inc. included in our current report on Form 8-K/A filed August 11, 1999. In May 1999, the Company acquired Lyte Optronics, Inc. which was accounted for as pooling of interests (see Note 4-"Acquisitions"). Accordingly, all financial information included herein has been restated to reflect the combined operations of American Xtal Technology, Inc. and the acquired company.periods presented. Certain prior period balancesreclassifications have been reclassifiedmade to conform to the current period presentation. Note 2. PrinciplesManagement of Consolidation Thethe Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated.in conformity with generally accepted accounting principles. Actual results could differ from those estimates. The functional currencies of the Company's subsidiaries are their respective local currencies. The assets and liabilities of the Company's subsidiaries are translated at the rates of exchange on the balance sheet date. Income and expenses items are translated at an average rate of exchange. Transaction gains and losses resulting from transactions denominated in currencies other than the US dollar for the Company or in the local currencies for the subsidiaries are included in the results of operations are not necessarily indicative of the results to be expected in the future or for the full fiscal year. It is recommended that these condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto included in its 1999 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2. Net Income Per Share Basic earnings per common share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per common and common equivalent share include the dilutive effect of common stock equivalents outstanding during the period calculated using the treasury stock method. Common stock equivalents consist of the shares issuable upon the exercise of stock options. Common equivalent shares of approximately 1.0 million are excluded from the computation for the three month and six months ended June 30, 1998 and 1999. Gains and losses from foreign currency translation are included as a separate component of stockholders' equity. Note 3. Inventories Components of inventory are as follows: 6 7 Inventory Details:
June 30, December 31, 1999 1998 -------- ------------ (in thousands) Inventories: Raw materials $12,273 $ 9,928 Work in process 14,843 13,171 Finished goods 3,661 2,201 ------- ------- $30,777 $25,300 ======= =======
Note 4. Acquisition On May 28, 1999, the Company acquired Lyte Optronics, Inc., ("Lyte") a Nevada corporation and all of its subsidiary, including: Lyte Optronics Ltd. (a company in United Kingdom) and Advanced Semiconductor (a company in Xiamen, Peoples Republic of China). Lyte Optronics, Inc. and its subsidiaries design, manufacture and distribute micor-laser based products. Under the terms of the merger agreement, the Company issued approximately 2,363,000 shares of the Company's common stock in exchange for all the outstanding shares of Lyte's common stock as well as the outstanding shares of Lyte's Series A preferred stock. The Company also issued approximately 983,000 shares of Series A preferred stock in exchange for all the outstanding shares of Lyte's Series B preferred stock. In addition, the Company assumed and converted Lyte's options and warrants representing 455,000 shares of Lyte's common stock to the Company's options and warrants representing 115,000 shares of the Company's common stock. The merger has been accounted for as a pooling of interest. The Company incurred approximately $2,810,000 costs and expenses associated with the merger, which was charged to operations during the quartermonth periods ended June 30, 1999, the period in which the merger was consummated. Note 5. Comprehensive Income In January 1998, the Company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive incomeas their effect is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investment by owners and distribution to owners. The components of comprehensive income are as follows:
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1999 1998 1999 1998 ------ ------ ----- ------- Net income (loss) $ (538) $ 631 $ 721 $ 1,647 Foreign currency translation gain (loss) 32 (113) (46) 34 ------ ------ ----- ------- Comprehensive income $ (506) $ 518 $ 675 $ 1,681
Note 6. Net Income Per Shareantidilutive. A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands except per share data):
Three months endedMonths Ended June 30, ---------------------------------------------------------------------------------Six Months Ended June 30, ------------------------------------------------- -------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------------------- (unaudited)2000 1999 ----------------------- ----------------------- ----------------------- ------------------------- Per Per Per Per Net Share PerNet Share Net Share Net Share Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount ------ -------- ----------- -------- --------- ----------------- ------ ------- ------ ------ ------ ------ ------ ------- ------ ------ Basic EPS calculation $(538) 18,620 $(0.03) $ 631 15,075 $0.04$2,353 18,654 $0.13 $(2,043) 18,443 $(0.11) $4,325 18,687 $0.23 $(3,028) 18,451 $(0.16) Effect of dilutive securities Common stock options -- -- -- -- 803 -- Convertible preferred stock -- -- -- -- -- -- ----- ------ ------ ------1,495 1,491 Diluted EPS calculation $(538) 18,620 $(0.03) $ 631 15,878 $0.04$2,353 20,149 $0.12 $(2,043) 18,443 $(0.11) $4,325 20,178 $0.21 $(3,028) 18,451 $(0.16) ====== ====== ===== ======= ====== ====== ====== ====== ===== ======= ====== ======
6 7 Note 3. Inventories The components of inventory are summarized below (in thousands):
Six months ended June 30, ---------------------------------------------------------------------------------December 31, 2000 1999 1998 --------------------------------------------------------------------------------- (unaudited) Per Share Per Share Income Shares Amount Income Shares Amount ------ -------- ----------- -------- --------- ----------------------- Basic EPS calculationInventories: Raw materials $ 721 18,60116,693 $ 0.04 $1,647 14,495 $0.11 Effect of dilutive securities Common stock options -- 1,123 -- -- 803 -- Convertible preferred stock -- -- -- -- -- -- ----- ------ ------ ------ Diluted EPS calculation13,503 Work in process 20,987 16,151 Finished goods 5,950 5,816 -------- -------- $ 721 19,72443,630 $ 0.04 $1,647 15,298 $0.11 ===== ====== ====== ======35,470 ======== ========
7 8 Note 7. Segment Information: Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for reporting information about operating segments in annual financial statements and requires that certain selected information about operating segments be reported in interim financial reports. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are defined as4. Comprehensive Income The components of an enterprise about which separate financial information is evaluated regularly by the chief decision maker in order to allocate resources and in assessing performance. The Company has identified three primary operating segments: substrate, laser diodes / light emitting diode and consumer products. Segment selection is based upon the internal organization structure, the manner in which these operationscomprehensive income are managed and their performance evaluated by management, the availability of separate financial information, and overall materiality considerations. The operating information for the three segments identified are as follows,summarized below (in thousands):
Three months ended Six months ended June 30, June 30, -------------------- -------------------- 2000 1999 Consumer Laser Diodes Substrate Products & LED Consolidated --------- --------- --------- ---------2000 1999 ------ -------- ------ -------- Net Income (loss) $2,353 $ (2,043) $4,325 $ (3,028) Foreign currency translation gain (loss) 89 25 122 (53) ------ -------- ------ -------- Comprehensive income $2,442 $ (2,018) $4,447 $ (3,081) ====== ======== ====== ========
Note 5. Segment Information Selected industry segment information is summarized below (in thousands):
Three months ended Six months ended June 30, June 30, -------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Substrates Net revenues from external customers $ 14,66426,212 $ 1,44514,405 $ 4,91645,337 $ 21,025 ========= ========= ========= =========26,137 Gross profit 12,466 5,549 21,148 10,381 Operating income 8,782 1,164 14,418 4,023 Identifiable assets 105,151 82,068 105,151 82,068 Visible emitters Net revenues from external customers 1,728 4,792 4,868 9,391 Gross profit (loss) (1,409) 1,622 (1,120) (110) Operating income (loss) before amortization of intangibles, stock compensation, and merger related costs ............................ $ 4,218 $ 243 $ 891 $ 5,352 Interest and other(3,811) 111 (5,592) (2,884) Identifiable assets 26,920 20,675 26,920 20,675 Consumer products Net revenues from external customers 1,004 1,586 2,673 4,152 Gross profit (loss) 28 (359) 652 (802) Operating loss (313) (1,327) (414) (2,843) Identifiable assets 5,100 5,095 5,100 5,095 Total Net revenues from external customers 28,944 20,783 52,878 39,680 Gross profit 11,085 6,812 20,680 9,469 Operating income (expenses), net ................ 174 (188) 67 53 Interest expense .................... (310) (177) (276) (763) Amortization of intangibles, stock compensation, and merger related costs ............................ (2,837) (150) -- (2,987) --------- --------- --------- --------- Income (loss) before income taxes, as reported ...................... $ 1,245 $ (272) $ 682 $ 1,655 ========= ========= ========= ========= Total4,658 (52) 8,412 (1,704) Identifiable assets ........................ $ 79,215 $ 6,443 $ 22,179 $ 107,837 ========= ========= ========= =========137,171 107,838 137,171 107,838
7 8 The Company sells its products in the United States and in other parts of the world. Also, the Company has operations in China and Japan. Revenues by geographic location based on the country of the customer are summarized below (in thousands):
Three months ended Six months ended June 30, June 30, -------------------- -------------------- 2000 1999 Consumer Laser Diodes Substrate Products & LED Consolidated --------- --------- --------- ---------2000 1999 ------- ------- ------- ------- Net revenues from external customers $ 26,136 $ 3,870 $ 10,042 $ 40,048 ========= ========= ========= ========= Operating income (loss) before amortization of intangibles, stock compensation, and merger related costs ............................ $ 6,879 $ (665) $ 1,345 $ 7,559 Interestrevenues: United States $15,462 $10,807 $27,869 $19,991 Europe 3,265 1,889 5,956 3,694 Canada 1,203 48 1,211 124 Japan 2,311 1,627 4,436 3,081 Asia Pacific and other income (expenses), net .................. 964 (357) 71 678 Interest expense .................... (580) (422) (386) (1,388) Amortization of intangibles, stock compensation, and merger related costs ............................ (2,864) (300) -- (3,164) --------- --------- --------- --------- Income (loss) before income taxes, as reported ...................... $ 4,399 $ (1,744) $ 1,030 $ 3,685 ========= ========= ========= ========= Total assets ........................ $ 79,215 $ 6,443 $ 22,179 $ 107,837 ========= ========= ========= =========6,703 6,412 13,406 12,790 ------- ------- ------- ------- Consolidated $28,944 $20,783 $52,878 $39,680 ======= ======= ======= =======
Note 6. Short-Term Bank Borrowing The Company has a $15 million bank line of credit that expires on August 31, 2000. The Company has received a commitment from its bank for a new two-year $20 million line of credit and additional long-term debt of $6 million. Management expects that the new credit facility will be completed by August 31, 2000. Note 7. Notes Payable On June 15, 2000, the Company entered into a short-term note with its bank in the amount of $4 million. The note bears interest at 1% above the lender's variable prime rate that was 9.5% at June 30, 2000. The principal and unpaid interest of the note is due August 31, 2000. The proceeds of the note were primarily used to fund the current operating and capital expenditure needs of the Company. Note 8. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. In June 2000, SFAS No. 133 was amended by SFAS No. 138. The Company has not determined what the effect of SFAS No. 133 will be on the operations and financial position of the Company. The Company will be required to implement SFAS No. 133 as amended by SFAS No. 137, beginning in 2001. Adopting the provisions of SFAS 133 is not expected to have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the impact of SAB 101 would have no material effect on the financial position or results of operations of the Company. 8 9 ITEMIn March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence for various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The Company does not expect that the adoption of FIN 44 will have a material impact on its financial position or results of operations. Note 9. Subsequent Events On July 25, 2000 the Company completed a private securities offering, raising approximately $8.5 million in exchange for 234,115 shares of common stock. The shares issued have not been registered under the Securities Act of 1933 and are "restricted securities" as defined by rule 144 promulgated under the act. The securities may not be sold or offered for sale or otherwise distributed except in conjunction with an effective registration statement for the shares under the Act, in compliance with rule 144, or pursuant to an opinion of counsel satisfactory to the Company, that such registration or compliance is not required as to said sale, offer or distribution. The Company is obligated to register the shares no later than ten days after the completion of its next public securities offering. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements whichthat reflect current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties including those discussed in the "Factors Affecting Future Results" and elsewhere in this report that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "future," "intends," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations Overview. We use a proprietary VGF technique to produce high-performance compound semiconductor substrates for useincluded in a variety of electronic and opto-electronic applications. We were founded in 1986 and commenced product sales in 1990. We currently sell GaAs, InP and GaN substrates to manufacturers of semiconductor devices for use in applications such as wireless and fiber optic telecommunications, lasers, light emitting diodes, or LEDs, and consumer electronics. We also sell Ge substrates for use in satellite solar cells. On May 28, 1999 we consummated our acquisition of Lyte Optronics, Inc., a Nevada corporation with operations in Southern California and The People's Republic of China. Lyte Optronics is a manufacturer of LEDs and laser-diodes. Lyte Optronics also designs and markets laser-pointing and alignment productsthe Company's Annual Report on Form 10-K for the consumer, commercialyear ended December 31, 1999 as filed with the Securities and industrial markets. We intend to operate Lyte Optronics as two separate divisions, one focusing on the manufacture of LEDs and laser diodes,Exchange Commission and the other, a consumer products division, focusing on the design and marketing of laser-pointing and alignment products. Lyte Optronics had, and we have retained, approximately 380 employees, of which approximately 200 are locatedcondensed consolidated financial statements included elsewhere in China. Under the terms of the acquisition, we issued approximately 2,363,000 shares of common stock and 983,000 shares of preferred stock with a $4 million liquidation preference over common stock, in exchange for all of the issued and outstanding shares of capital stock of Lyte Optronics. Ten percent of the shares issuable to the Lyte Optronics' stockholders will be held in escrow for up to one year to satisfy any claims that we may bring under the agreement during that period. The transaction was accounted for as a pooling of interests. In connection with the acquisition, we reported a charge of $2.8 million in the second quarter to reflect transaction costs and other one-time charges incurred in connection with the acquisition.this report. Results of Operations.Operations The following table sets forth certain operating datainformation relating to the operations of the Company expressed as a percentage of total revenues for the periods indicated. The 1998 amounts do not include the financial results of the laser-diode and LED division, which Lyte Optronics did not acquire until September 30, 1998.indicated: 9 10
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2000 1999 19982000 1999 1998 ----- ----- ----- ----------- ------ ------ ------ Revenues: Product revenues 98.1% 96.3% 98.0% 96.3% Contract revenues 1.9 3.7 2.0 3.7 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0Revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues: Cost of product revenues 59.0 66.3 62.9 63.1 Cost of contract revenues 0.8 1.6 1.0 1.8 ----- ----- ----- ----- Total cost of revenues 59.8 67.9 63.9 64.961.7 67.2 60.9 76.1 ------ ------ ------ ------ Gross profit 40.2 32.1 36.1 35.138.3 32.8 39.1 23.9 Operating expenses: Selling, general and administrative 12.5 16.5 15.2 17.615.8 15.4 15.9 17.2 Research and development 3.0 5.3 2.9 5.16.4 4.1 7.3 3.8 Acquisition cost 13.4costs -- 7.013.5 -- ----- ----- ----- -----7.1 ------ ------ ------ ------ Total operating expenses 28.9 21.8 25.1 22.7 ----- ----- ----- -----22.2 33.0 23.2 28.1 ------ ------ ------ ------ Income (loss) from operations 11.2 10.3 11.0 12.516.1 (0.2) 15.9 (4.3) Interest expense (4.0) (3.5) (3.6) (2.0) (3.5) (1.9) Interest(3.4) Other income and other income 0.3 (0.4) 1.7 (0.1) ----- ----- ----- -----expense 1.0 0.1 0.9 1.8 ------ ------ ------ ------ Income (loss) before provision for income taxes 7.9 7.9 9.2 10.413.1 (3.6) 13.2 (5.9) Provision for income taxes 8.0 3.2 6.1 4.35.0 3.8 5.0 0.4 ------ ------ ------ ------ Net Incomeincome (loss) (0.1) 4.7 3.1 6.2 Extraordinarybefore extra ordinary item net of tax benefits8.1 (7.4) 8.2 (6.3) Extra ordinary item -- 2.4 -- 1.3 -- ===== ===== ===== =====------ ------ ------ ------ Net Income (loss) after extraordinaryextra ordinary item (2.6)8.1% (9.8)% 4.7 8.2% (7.6)% 1.8 % 6.2 % ===== ===== ===== =========== ====== ====== ======
Three months ended June 30, 2000 compared to three months ended June 30, 1999 Revenues. Total revenues consist of product revenues and contract revenues. Total revenuesRevenues increased 55.4% from $13.5$8.1 million, or 39.3%, to $28.9 million for the three months ended June 30, 19982000 compared to $21.0$20.8 million for the three months ended June 30, 1999. Product revenues increased 58.3% from $13.0 million for the three months ended June 30, 1998 to $20.6 million for the three months ended June 30, 1999. For the six months ended June 30, 1998, product revenues increased 52.5% from $25.7 million to $39.2 million in the six months ended June 30, 1999. The increase in product revenues for the three month and six month periods ended June 30, 1999, reflectedwas primarily due to an $11.8 million, or 82.0%, increase in the volumesubstrate sales comprised of a $12.5 million, or 98.8%, increase in sales of GaAs and InP substrates offset by a $718,000 decrease in Ge sales and contract revenues at the substrate division. The increase in GaAs and InP substrate sales was primarily due to increased sales volume to existing and new domestic and internationalforeign customers and the addition of new customers, which offset a declinedue in Lyte Optronics' sales. In addition, the 1999 results include the sale of laser diodes and LEDspart to strong growth in the amountfiber optic and wireless handset markets. The decrease in Ge sales is the result of $4.7 million and $9.6 million for the three months and six months, respectively, which amounts were not includeda cancellation of a contract by a major customer due to weakness in the 1998 results. We introduced LEDs in the second quartersatellite market. Additionally, sales at our visible emitter division decreased $3.1 million, or 63.9% of 1999. Ge substratevisible emitter sales were $800,000and sales at our consumer products division decreased $582,000, or 36.7% of consumer product sales, due to declining sales prices and lower in the second quarter of 1999 when compared to the second quarter of 1998, and were approximately equal in salesdemand for the six months ended June 30, 1998 and 1999, respectively.laser pointer products. International revenues excluding Canada, increased from 30.0%decreased to 46.6% of total revenues for the three months ended June 30, 19982000 compared to 44.4% for the three months ended June 30, 1999, and increased from 26.4% of total revenues for the six months ended June 30, 1998 to 44.3% for the six months ended June 30, 1999. These increases primarily reflect increased sales in Europe and Asia for GaAs substrates used for the LED market and the inclusion of laser-diode and LED sales in 1999 results, which are sold primarily to Asian markets. Contract revenues decreased 21.1% from $497,000 for the three months ended June 30, 1998 to $392,000 for the three months ended June 30, 1999, and decreased 18.2% from $989,000 for the six months ended June 30, 1998 to $809,000 for the six months ended June 30, 1999. Contract revenues declined during these periods primarily due to a lower level of contract work being performed on our Title 10 11 III Indium Phosphide contract. Contract revenues declined from 3.7% of total revenues for the three months ended June 30, 1998 to 1.9% for the three months ended June 30, 1999, and declined from 3.7% of total revenues for the six month period ended June 30, 1998 to 2.0% for the six month period ended June 30, 1999. Contract revenues as a percentage of total revenues declined primarily as a result of growth in our product revenue combined with a decrease in our contract revenues. Gross margin. Total gross margin increased from 35.6% of total revenues for the three months ended June 30, 1998 to 40.2%48.0% of total revenues for the three months ended June 30, 1999. Product grossThe decrease in the percentage of international revenue to total revenue was primarily the result of increased substrate sales to domestic customers. Gross margin. Gross margin increased from 34.8%to 38.3% of total revenues for the three months ended June 30, 1998 to 39.9% for the three months ended June 30,1999. For the six months ended June 30, 1998, product gross margin increased from 34.5% to 35.8%2000 compared to the same period in 1999. The increase in gross margins for the three months and six months ended June 30, 1999, reflect the inclusion32.8% of laser-diode and LED amounts in the 1999 results. In 1999, the laser-diode and LED business benefited from the transition of manufacturing operations to China, which lowered our labor costs and improved our gross margins. In 1999, gross margins from Ge substrates were lower, which offset in part the higher yields achieved in GaAs and InP production. The lower gross margins from Ge substrates in 1999 were primarily the result of pricing declines in the Ge industry generally. Gross margins for the six months ended June 30, 1999 were also adversely impacted by additional allowances set aside for returned merchandise and increased warranty amounts for the consumer products division. Contract gross margins decreased slightly from 56.1%total revenues for the three months ended June 30, 19981999. The gross margin at the substrate division increased to 55.4%47.6% of substrate revenues for the three months ended June 30, 1999, and decreased from 51.2%2000 compared to 38.5% of substrate revenues for the sixperiod ended June 30, 1999. The increase was primarily due to higher volume and the realization of lower labor and manufacturing overhead costs as a result of expanding our wafer production capacity in China. The gross margin at the visible emitter division decreased to negative 81.5% of visible emitter revenues for the three months ended June 30, 19982000 compared to 49.4%33.8% of visible emitter revenues for the sixperiod ended June 30, 1999. The decrease was primarily due to increased costs associated with the start-up of blue LED and other product production. The gross margin at the consumer products division increased to 2.8% of consumer product revenues for the three months ended June 30, 2000 compared to a negative 22.6% of consumer product 10 11 revenues for the three months ended June 30, 1999. These decreases wereThe increase was primarily due to a shift in contract revenue mix to contracts withmanufacturing process improvements and cost sharing agreements, which carry a lower gross margin.reductions. Selling, general and administrationadministrative expenses. Selling, general and administrative expenses increased 21.3% from $2.2$1.4 million, or 42.8%, to $4.6 million for the three months ended June 30, 19982000 compared to $2.6$3.2 million for the three months ended June 30, 1999. As a percentage of total revenues, selling, general and administrative expenses were 16.1% for the three months ended June 30, 2000 compared to 15.4% for the three months ended June 30, 1999. Selling, general and administrative expenses increased 42.8% compared to increased total revenues of 39.3% for the three months ended June 30, 2000. The increase in selling, general and administrative expenses was primarily due to increases in personnel and related expenses required to support current and future increases in sales volume. Research and development expenses. Research and development expenses increased $1.0 million, or 117.1%, to $1.9 million for the three months ended June 30, 2000 compared to $858,000 for the three months ended June 30, 1999. As a percentage of total revenues for these three-month periods, research and development expenses were 6.4% in 2000 and 4.1% in 1999. The increase was primarily the result of increases in personnel and related expenses and materials to support LED and other product research and development at the visible emitter division. Interest expense. Interest expense increased $419,000, or 57.4%, to $1.1 million for the three months ended June 30, 2000 compared to $730,000 for the three months ended June 30, 1999. The increase was primarily due to utilizing short-term debt to finance the short-term liquidity needs resulting from our increased sales volume and the addition of certain capital leases to finance equipment purchases. Other income and expense. Other income and expense increased $274,000 to $303,000 for the three months ended June 30, 2000 compared to $29,000 for the three months ended June 30, 1999. The increase was primarily due to increases in foreign exchange gains and rental and interest income. Provision for income taxes. Income tax expense remained at our effective tax rate of 38.0% for the three months ended June 30, 2000 and 1999. For the three months ended June 30, 1999, andincome tax expense was adjusted for non-deductible acquisition costs of $2.8 million. Six months ended June 30, 2000 compared to six months ended June 30, 1999 Revenues. Revenues increased 29.5% from $4.7$13.2 million, or 33.3%, to $52.9 million for the six months ended June 30, 19982000 compared to $6.1$39.7 million for the six months ended June 30, 1999. These increases resultedThe increase in revenues was primarily from the inclusiondue to a $19.2 million, or 73.5% increase in substrate sales comprised of the laser-diodea $22.8 million, or 106.9% increase in sales of GaAs and LED division in the 1999 results. The laser-diode and LED division added $1.1 million and $1.9 million to selling, general and administrative expenses in the three months and six months ended June 30, 1999, respectively. This increase wasInP substrates offset by a $3.6 million decrease in selling, generalGe sales and administrative expensescontract revenues at the substrate division. The increase in GaAs and InP substrate sales was due to increased sales volume to existing and new domestic and foreign customers due in part to strong growth in the fiber optic wireless handset markets. The decrease in Ge sales is the result of a cancellation of a contract by Lyte Optronics'a major customer due to weakness in the satellite market. Additionally, sales at our visible emitter division decreased $4.5 million, or 48.2% of visible emitter sales, and sales at our consumer products division as a resultdecreased $1.5 million, or 35.6% of the closing of a manufacturing facility located in Arizona in 1998. Selling, generalconsumer product sales, due to declining sales prices and administrative expenses as a percentagelower demand for laser pointer products. International revenues decreased to 47.3% of total revenues decreased from 16.0% for the three months ended June 30,1998 to 12.5% for the three months ended June 30, 1999, and decreased as a percentage of total revenues from 15.9% for the six months ended June 30, 19982000 compared to 15.2%49.6% of total revenues for the six months ended June 30, 1999. These decreasesThe decrease in the percentage of international revenue to total revenue was primarily reflect the closingresult of the facility in Arizona by Lyte Optronics and the maintenanceincreased substrate sales to domestic customers. Gross margin. Gross margin increased to 39.1% of our expenses combined with an increase in our total revenues. Research and development expenses. Research and development expenses decreased 10.8% from $714,000revenues for the threesix months ended June 30, 19982000 compared to $637,00023.9% of revenues for the threesix months ended June 30, 1999,1999. The gross margin at the substrate division increased to 46.6% of substrate revenues for the six months ended June 30, 2000 compared to 39.7% of substrate revenues for the period ended June 30, 1999. The increase was primarily due to higher volume and the realization of lower labor and manufacturing overhead costs as a result of expanding our wafer production capacity in China. The gross margin at the visible emitter division decreased 13.40% from $1.4to negative 23.0% of visible emitter revenues for the six 11 12 months ended June 30, 2000 compared to negative 1.2% of visible emitter revenues for the period ended June 30, 1999. The decrease was primarily due to increased costs associated with the start-up of blue LED and other product production. The gross margin at the consumer products division increased to 24.4% of consumer product revenues for the six months ended June 30, 2000 compared to negative 19.3% of consumer product revenues for the six months ended June 30, 1999. The increase was primarily due to manufacturing process improvements and cost reductions. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.6 million, or 23.0%, to $8.4 million for the six months ended June 30, 19982000 compared to $1.2$6.8 million for the six months ended June 30, 1999. This decrease resulted primarily from the reductionAs a percentage of materials purchased to develop new products and to enhance existing products, which offset an increase in personnel, outside consulting and licensing fees. Also, historically Lyte Optronics did not separately account for its research and development expenses, which are included as part of its cost of producttotal revenues, and selling, general and administrative expenses. In addition to our internally funded research and development, we incurred research and development expenses relating to government and customer-funded research contracts, which are included in the cost of contract revenues. Acquisition cost. As part of the acquisition of Lyte Optronics in May 1999, we incurred a number of one-time expenses associated with the transaction in the approximate amount of $2.8 million. Such expenses include the fees paid to our investment bankers, accountants, attorneys, and other outside consultants and related transaction expenses. 11 12 Interest expense. Interest expense increased from $274,000 for the three months ended June 30, 1998 to $763,000 for the three months ended June 30, 1999, and increased from $512,000were 15.9% for the six months ended June 30, 19982000 and 17.2% for the six months ended June 30,1999. Selling, general and administrative expenses increased 23.0% compared to increased total revenues of 33.3% for the six months ended June 30, 2000. The increase in selling, general and administrative expenses were primarily due to increases in personnel and related expenses required to support current and future increases in sales volume. Research and development expenses. Research and development expenses increased $2.3 million, or 153.4%, to $3.9 million for the six months ended June 30, 2000 compared to $1.5 million for the six months ended June 30, 1999. As a percentage of total revenues for these six-month periods, research and development expenses were 7.3% in 2000 and 3.8% in 1999. The increase was primarily the result of increases in personnel and related expenses and materials to support LED and other product research and development at the visible emitter division. Interest expense. Interest expense increased $558,000, or 41.0%, to $1.9 million for the six months ended June 30, 2000 compared to $1.4 million for the six months ended June 30, 1999. These increasesThe increase was primarily reflectdue to utilizing short-term debt to finance the inclusion of the laser-diode and LED division in 1999 resultsshort-term liquidity needs resulting from our increased sales volume and the acquisitionaddition of Lyte Optronics in May 1999. As part of the acquisition, we added about $11.0 million in debt, of which we repaid approximately $6.0 million in June 1999. The additional interest from the inclusion of the laser-diode and LED division was $276,000 and $386,000 for the three months and six months ended June 30, 1999, respectively. Interest and other income (expense).certain capital leases to finance equipment purchases. Other income increased slightly from an expense of $48,000 for the three months ended June 30, 1998 to income of $53,000 for the three months ended June 30, 1999.and expense. Other income increased from anand expense of $29,000decreased $223,000 to $499,000 for the six months ended June 30, 19982000 compared to income of $678,000$722,000 for the six months ended June 30, 1999. This increaseThe decrease was primarily the result of two significant changes. First, we recognizeddue to smaller foreign exchange gains in the first quarter of 1999 of approximately $600,000 on short-term forward contracts to hedge against certain accounts receivable in Japanese yen. Second, there was an increase in investment income of approximately $80,000 earned on proceeds from the completion in May 1998 of our initial public offering and the raising of $25.8 million, net of offering expenses.gains. Provision for income taxes. Income tax expense as adjustedremained at our effective tax rate of 38.0% for acquisition costs, declined from 41.0% of income before provision for income taxes for the three and the six months ended June 30, 1998 to 37.7% for2000 and 1999. For the threesix months ended June 30, 1999, income tax expense was adjusted for non-deductible acquisition costs of $2.8 million. Financial Condition, Liquidity and Capital Resources Working capital decreased $5.8 million or 14% to 37.8%$34.7 million at June 30, 2000 compared to $40.5 million at December 31, 1999. The decrease was primarily due to increases in short-term obligations necessary to sustain additional revenue growth and the use of operating cash flows to procure capital equipment. Total long-term debt including capital leases increased $7.3 million while property, plant and equipment purchases were $14.5 million. Operating activities generated $3.9 million for the six months ended June 30, 2000 compared to negative $7.1 million for the six months ended June 30, 1999. This decrease in income tax expenseThe increase was primarily due to increased profitability at the inability to offset 1998 operating losses generated by Lyte Optronics against the separate income generated by American Xtal Technologysubstrate division. We invested $14.5 million in capital expenditures during this period. Extraordinary item, net of tax benefits. In connection with the acquisition of Lyte Optronics, we incurred fees associated with a loan that we repaid as part of the transaction. This one-time charge is shown, net of tax benefits, as an extraordinary item. Liquidity and Capital Resources During the past five years, we have funded our operations primarily from cash provided by operations, short-term and long-term borrowings and a private financing of $5.9 million for preferred stock completed in March 1997. We completed our initial public offering in May 1998, and raised approximately $25.8 million, net of offering expenses. In December 1998 we completed our taxable bond offering and raised approximately $11.6 million. As of June 30, 1999, we had working capital of $37.8 million, including cash and cash equivalents of $10.2 million, compared to working capital at December 31, 1998 of $39.7 million, including cash of $16.4 million. During the six months ended June 30, 1999, net cash used in operations of $3.72000 compared to $3.9 million was primarily due to increases in inventories of $5.5 million, accounts receivable of $3.4 million and prepaid and other current assets of $1.1 million, offset in part by net income of $225,000, depreciation and amortization of $1.6 million, and increases in accrued liabilities of $4.2 million. The increases in accounts receivable and inventory were primarilyduring the result of the increase in total revenues from the prior year. In addition, work-in-process inventories increased in anticipation of large orders for the upcoming quarters. The inventory turnover ratio remained at 1.7 turns as of December 31, 1998 andsix months ended June 30, 1999. The increase in prepaid and other assetsspending was primarily due to deposits for Ge raw materialfacility expansion and equipment prepaid researchadditions to increase crystal growth and development expenseswafer processing capacity at the substrate division as well as facility expansion and equipment additions at the visible emitter division to begin volume epitaxy, wafer processing and chip production for LED's. We are currently engaged in constructing an additional 31,000 square foot building in Beijing, China to expand substrate wafer processing facilities, a 27,000 square foot building in El Monte, California to expand epitaxy 12 13 production, as well as constructing leasehold improvements in a 20,000 square foot building and a 9,000 square foot building to expand administration offices and material storage areas in Fremont, California. We are also constructing improvements to the existing production facilities in Fremont, California to increase crystal growth and wafer processing capacity. We expect to invest approximately $47 million in unrealized gains on hedging ofadditional facilities and equipment over the Japanese yen. The increase in accrued liabilities was primarily the result of increased income tax expense and accruals for the one-time acquisition costs. Days sales outstanding improved from 62 days at December 31, 1998 to 60 days at June 30, 1999. Net cash used in investingnext 12 months. Cash provided by financing activities was $4.3 million for the six months ended June 30, 1999,2000 included a $4.0 million note from our bank and $2.3 million in proceeds from the exercise of stock options from the employee stock option plan. Total debt was due$44.5 million (39% of total capital) at June 30, 2000 compared to $37.1 million (37% of total capital) at December 31, 1999. We currently have a $15.0 million line of credit with a commercial bank at an interest rate equal to the purchase of property, plant and equipment. Net cash provided by financing activitiesbank's prime rate plus one-half percent. The bank's prime rate was $1.8 million for the six months ended9.5% at June 30, 1999,2000. This line of credit is secured by all business assets, less equipment, and expires on August 31, 2000. This line of credit is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which were met as of June 30, 2000. We must obtain the lender's approval to obtain additional borrowings or to further pledge our assets, except for borrowings obtained in the normal course of business or the pledging of equipment. At June 30, 2000, $13.0 million was generated primarilyoutstanding under the $15 million line of credit. We have received a commitment from our issuancebank for a new two-year $20 million line of common stockcredit and additional long-term debt of $6 million. Management expects that the new credit facility will be completed by August 31, 2000. On June 15, 2000, we entered into a short-term note with our bank in the amount of $360,000$4 million. The note bears interest at 1% above the lender's variable prime rate that was 9.5% at June 30, 2000. The principal and short-term borrowingsunpaid interest of $2.1 million, offset in part by repaymentsthe note is due August 31, 2000. We expect to repay this note with the proceeds of long-term borrowingsthe new line of $610,000.credit. The 12 13 Common Stock was issuedproceeds of the note were primarily used to employees exercising their stock options or purchasing stock throughfund our employee stock purchase plan.current operating and capital expenditure needs. We have generally financed ourfinance equipment purchases through secured equipment loans and capital leases over five-year terms at interest rates ranging from 6.0% to 9.0%10.0% per annum. Our manufacturing facilities have been financed by long-term borrowings, which were repaid by the taxable variable rate revenue bonds in 1998. These bonds have a term of twenty-five years and mature in 2023 with an interest rate at 200 basis points below the prime rate and are traded in the public market. Repayment of principal and interest under the bonds is secured by a letter of credit from our bank and is paid on a quarterly basis. We have the option to redeem in whole or in part the bonds during their term. At June 30, 1999, $11.02000, $10.7 million was outstanding under the taxable variable rate revenue bonds. We currently have a $15.0 million line of credit with a commercial bank at an interest rate equal to the prime rate plus one-half percent. This line of credit is secured by all business assets, less equipment, and expires in October 1999. We are currently negotiating an extension to this line of credit. This line of credit is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which were met as of June 30, 1999. We must obtain the lender's approval to obtain additional borrowings or to further pledge our assets, except for borrowings obtained in the normal course of business or the pledging of equipment. At June 30, 1999, $5.4 million was outstanding under the $15.0 million line of credit. We anticipate that the combination of existing working capital and the borrowings available under the current and committed credit agreements will be sufficient to fund working capital and capital expenditure requirements for the next 12 months. Our future capital requirements will be dependdependent on many factors including the rate of revenue growth, our profitability, the timing and extent of spending to support research and development programs, the expansion of manufacturing facilities, the expansion of selling and marketing and administrative activities, and market acceptance of our products. We expect that we may need to raise additional equity orand debt financing in the future, although we are not currently negotiating for additional financing nor do we have any current plans to obtain additional financing.future. We cannot assure you that additional equity or debt financing, if required, will be available on the acceptable terms or at all. If we are unable to obtain such additional capital, if needed, we may be required to reduce the scope of our planned product development, the expansion of our manufacturing facilities, and selling and marketing activities, which would have a material adverse effect on our business, financial condition and results of operations. In the event that we do raise additional equity financing, further dilution to our investors maywill result. 13 14 FACTORS AFFECTING FUTURE RESULTS In addition to the other information in this report, the following factors should be considered carefully in evaluating our business before purchasing shares of our stock. Risks Relating Our Acquisition of Lyte Optronics, Inc. Our success depends on our ability to assumeItem 3. Quantitative and integrate the operations of Lyte Optronics with our operations. The success of our acquisition of Lyte Optronics depends in substantial part on our ability to assume and integrate the operations of Lyte Optronics in an efficient and effective manner. The assumption of a new business will require the dedication of management resources which may temporarily distract attention from our day-to-day operations. We cannot assure you that we will be able to integrate the business operations of Lyte 14 15 Optronics smoothly or successfully. Our inability to do so could hurt the performance of our business, which may cause the price of our stock to decline The success of our acquisition of Lyte Optronics depends in part on our ability to retain Lyte Optronics' current customers. We cannot guarantee that the current customers of Lyte Optronics will continue to seek our services now that the acquisition is completed. If a substantial number of Lyte Optronics' customers elect not to seek our services, our operating results will suffer. We incurred substantial costs in connection with our acquisition of Lyte Optronics, including the assumption of approximately $11 million of debt, much of which has had to be repaid or renegotiated, resulting in a decline of cash available. We incurred one-time charges and merger-related expenses of $2.8 million and the extraordinary item of $508.000 in the quarter ended June 30, 1999 as a result of the acquisition. We may incur additional unanticipated expenses related to our assumption of Lyte Optronics' business. If these expenses are substantial, they may adversely affect our operating results and cause our stock price to fall. Risks Relating to Our Operations A number of factors could cause our quarterly financial results to be worse than expected, resulting in a decline in our stock price. Although we have been profitable on an annualized basis since 1990, we believe that period-to-period comparisons of our operating results cannot be relied upon as an indicator of our future performance. It is likely that in some future quarter, our operating results may be below the expectations of public market analysts or investors. If this occurs, the price of our common stock would likely decrease. For more information regarding our results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our quarterly and annual revenues and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including: o our recent acquisition of Lyte Optronics and the integration of its business and separate operations and facilities with our operations; o fluctuations in demand for our substrates due to reduction in the value of Asian currencies and the turmoil in the Asian financial markets; o fluctuations in demand for laser pointing and alignment products and decreases in the prices of these products; o our expense levels and expected research and development requirements; o our ability to develop and bring to market new products on a timely basis; o the volume and timing of orders from our customers; o the availability of raw materials; o fluctuations in manufacturing yields; o our manufacturing expansion in Beijing, China and the assumption, integration and operation of the Chinese operations of Lyte Optronics; o introduction of products and technologies by our competitors; and o costs relating to possible acquisitions and integration of technologies or businesses. 15 16 For more information regarding our results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." VGF is a new technique for producing substrates which must achieve widespread acceptance if we are to succeed. We believe that our competitors principally utilize the traditional LEC or HB crystal growing processes for producing semi-insulating and semi-conducting GaAs substrates. We further believe that we are the only high-volume supplier of semi-insulating and semi-conducting GaAs substrates which utilize the VGF technique, a newer technology than either the LEC or HB techniques. We cannot assure you that our current customers will continue to use our VGF-produced substrates or that additional companies will purchase our products manufactured from the VGF technique. Failure to gain increased market acceptance of our VGF technique by either current or prospective customers could materially adversely affect our operating results which in turn could cause our stock price to fall. A significant portion of our prospective customers for our substrates are wireless communications manufacturers, fiber optic communications manufacturers and manufacturers of other high-speed semiconductor devices that are produced from GaAs substrates using either the LEC or HB techniques. To establish the VGF technique as a preferred process for producing substrates for these prospective customers, we must offer products with superior prices and performance on a timely basis and in sufficient volumes. We must also overcome the reluctance of these customers to purchase our GaAs substrates due to possible perceptions of risks relating to concerns about the quality and cost-effectiveness of our GaAs substrates when compared to substrates produced by the traditional LEC or HB techniques. In addition, potential GaAs substrate customers may be reluctant to rely on a relatively small company for critical materials used to manufacture their semiconductor devices. If we do not achieve acceptable yields of crystals and the successful and timely production of substrates, the shipment of our products will be delayed and our revenues will decline. The highly complex processes of growing crystals as well as other steps involved in manufacturing substrates which we engage in can be adversely affected by the following factors: o chemical or physical defects in the crystals; o contamination of the manufacturing environment; o substrate breakage; o equipment failure; and o performance of personnel involved in the manufacturing process. Our operating results have been adversely affected in the past due to the occurrence of a combination of these factors which resulted in product shipment delays and adversely affected our business. A significant portion of our manufacturing costs are fixed. As a result, we must increase the production volume of substrates and improve yields in order to reduce unit costs, increase margins and maintain and improve our results of operations. Any significant decrease in production volume and yields could materially harm our business. In the past, we have sometimes manufactured substrates which have not met the manufacturing process requirements of our customers. We have fixed these occurrences through minor changes to the substrates or the manufacturing process. Recurrence of these problems and our inability to solve them may materially hurt our performance. We have begun producing and shipping Ge and InP substrates in commercial volume. We also understand that we must achieve the same manufacturing capability for six inch GaAs wafers. We cannot assure you that we will be able to manufacture the Ge and InP substrate or the larger GaAs substrate in commercial volumes with 16 17 acceptable yields. Our business and results of operations will be materially adversely affected if we experience low yields of these successfully developed substrates. Because substantially all of our revenues of our substrate division are derived from sales of our GaAs substrates, we are dependent on widespread market acceptance of these products. We currently derive substantially all of our revenues from sales of our GaAs substrates. If there is a decrease on demand for GaAs substrates by semiconductor device manufacturers or if our competitors introduce new substrates for electronics applications, such as wireless communications, fiber optic communications and other high-speed semiconductor devices, and opto-electronic applications, such as lasers and LEDs, our revenues may decline and our business will be materially adversely affected. We expect that revenues from GaAs substrates will account for a significant majority of our revenues for the next several years. Further, other companies, including IBM, are actively involved in developing other devices which could provide the same high-performance, low power capabilities as GaAs-based devices at competitive prices, such as silicon-germanium based devices for use in certain wireless applications. If these silicon-germanium based devices are successfully developed and semiconductor device manufacturers adopt them, demand for GaAs substrates could decrease. This development could cause our revenues to fall. To be successful, we must develop and introduce in a timely manner new substrates and continue to improve our current substrates to address customer requirements and compete effectively on the basis of price and performance. We must also continue to develop our light-emitting and laser diode products, and develop new markets for this technology, as well as for our laser pointing and alignment products. We cannot assure you that our product development efforts will be successful or that our new products will achieve market acceptance. To the extent that product improvements and new product introductions do not achieve market acceptance, our business will be materially adversely affected. Recently, we have begun commercial shipments of Ge and InP substrates and are currently developing other substrates, including gallium phosphide and gallium nitride. Factors that may affect the success of product improvements and product introductions include the development of markets for such improvements and substrates, achievement of acceptable yields, price and market acceptance. Many of these factors are beyond our control. Our limited ability to protect our intellectual property may adversely affect our ability to compete. We rely on a combination of patents, copyrights, trademarks and trade secret laws and contractual restrictions on employees, consultants and third parties from disclosure to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We believe that, due to the rapid pace of technological innovation in the GaAs and other substrate markets, our ability to establish and maintain a position of technology leadership in the industry depends more on the skills of our development personnel than upon the legal protections afforded our existing technologies. To date, we have been issued one U.S. patent, which relates to the VGF technique, and have two U.S. patent applications pending, one which relates to the VGF technique. Additionally, we have one pending application for a Japanese patent but no issued foreign patents. We do not have any patents on our light-emitting or laser diode technology, although we do have six patents relating to our laser pointing and alignment products. We cannot assure you that: o the pending or any future U.S. or foreign patent applications will be approved; o any issued patents will protect our intellectual property; o third parties will not challenge the ownership rights of the patents or the validity of the patent applications; 17 18 o the patents owned by others will not have an adverse effect on our ability to do business; or o others will not independently develop similar or competing technology or design around any patents issued to us. Moreover, the laws of certain foreign countries may not lend protection to our patents to the same extent as the laws of the United States. If we infringe the proprietary rights of others, we may be forced to enter costly royalty or licensing agreements. We could in the future receive a claim that we are infringing the patent, trademark, copyright or other proprietary rights of other third parties. If any claims were asserted against us for violation of patent, trademark, copyright or other similar laws as a result of the use by us, our customers or other third parties of our products, those claims would be costly and time-consuming to defend, would divert our attention and could cause product delays. In addition, if we discovered we violated other third party rights, we could be required to enter into costly royalty or licensing agreements as a result of those claims. These royalty or licensing agreements may adversely affect our operating results. If we fail to comply with stringent environmental regulations, we may be subject to significant fines or the cessation of our operations. We are subject to federal, state and local environmental laws and regulations. Any failure to comply with present or future environmental laws and regulations could result in the imposition of significant fines on us, the suspension of production or a cessation of operations. In addition, existing or future changes in laws or regulations may require us to incur further significant expenditures or liabilities, or additional restriction in our operations. We purchase critical raw materials required to grow crystals from single or limited sources, and could lose sales if these sources fail to fill our needs. We do not have any long-term supply contracts with any of our suppliers, and we currently purchase raw materials required to grow crystals from single or a limited number of suppliers. For example, we purchase a majority of the gallium we use from Rhone-Poulenc. Due to our reliance on a limited group of suppliers, we are exposed to several risks including the potential inability to obtain adequate supply of materials, reduced control over pricing of our products and meeting customer delivery schedules. We have experienced delays receiving orders of certain materials due to shortages. We may continue to experience these delays due to shortages of materials and as a result be subject to higher costs. If we are unable to receive adequate and timely deliveries of critical raw materials, relationships with current and future customers could be harmed, which could cause our revenues to decline. We are subject to additional risks as a result of our recent acquisition of new manufacturing facilities. In connection with further expanding our manufacturing capacity, we purchased an additional 58,000 square foot facility in Fremont, California and a 30,000 square foot facility in Beijing, China, in 1998. These new facilities subject us to significant risks, including: o unavailability or late delivery of process equipment; o unforeseen engineering problems; o work stoppages; o unanticipated cost increases; and o unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits and building permits. If any of the above occur, our operations at the new facilities would be adversely affected, which may cause our sales to decline and the price of our stock to fall. 18 19 The additional fixed operating expenses associated with the new facilities may only be offset by sufficient increases in product revenues. We cannot assure you that the demand for our products will grow as we currently expect, and if this does not occur, we may not be able to offset the costs of operating the new facilities, which may materially adversely affect our results of operations. We currently only have two machines capable of producing light-emitting diode wafers. Damage to our failure of these machines could cause production to stop or delay while repairs or replacements are being made. We do not keep substantial inventory of LED wafers to continue while the MOCVD machine is being repaired. Any delay in production of the LED wafers while the MOCVD is being repaired could result in loss of revenue. We must effectively respond to rapid technological changes by continually introducing new products that achieve broad market acceptance. We and our customers compete in a market that is characterized by rapid technological changes and continuous improvements in substrates. Accordingly, our future success depends upon whether we can apply our proprietary VGF technique to develop new substrates that meet the needs of customers and compete effectively on the basis of quality, price and performance. Our success in the light-emitting and laser diode markets depends in part upon our ability to further our development of this technology and develop additional markets and uses for the products. If we are unable to timely develop new, economically viable products that meet market demands, our revenues will decline, which could adversely affect our results of operation and cause the price of our stock to fall. It is difficult to predict accurately the time required and the costs involved in researching, developing and engineering new products. Thus, our actual development costs could exceed budgeted amounts and our product development schedules could require extension. We have experienced product development delays in the past and may experience similar delays in the future. Any significant delays could harm our business. For example, our introduction of InP substrates was delayed approximately six months as a result of delays in the finalization of the manufacturing process for these substrates. In addition, if we are unable to introduce reliable quality products, we could suffer from reduced orders, higher manufacturing costs, product returns and additional service expenses, all of which could result in lower revenues. The sales cycle for our GaAs substrates is long and we may incur substantial, non-recoverable expenses or devote significant resources to sales that do not occur as anticipated. Our GaAs substrates typically have a lengthy sales cycle, ranging from three months to a year or more. During this time, we may expend substantial funds and sales, marketing and management efforts while the potential customer evaluates our substrates. However, there is a significant risk that these expenditures may not result in sales. If sales forecasted from a specific customer for a particular quarter are not delivered in that quarter, we may be unable to compensate for the shortfall, which could materially adversely affect our operating results. In addition, if a customer decides at the design stage not to incorporate our substrates into its products, we may not have another opportunity to sell substrates for those products for many months or even years. We anticipate that sales of any future products under development will have similar lengthy sales cycles and will, therefore, be subject to risks substantially similar to those inherent in the lengthy sales cycle of our GaAs substrates. The loss of one or more of our key customers would significantly hurt our operating results. A small number of customers have historically accounted for a substantial portion of our revenues. We expect that a significant portion of our future sales will be due to a limited number of customers. Our top five customers accounted for approximately 39.5% and 33.7% of our revenues in the year ended December 31, 1998 and six months ended June 30, 1999, respectively. If any of these major customers reduces, delays or cancels its orders with us, our revenues will decline, which will likely cause our stock price to fall. Our customers are not obligated to purchase any specified quantity of products or to provide us with binding forecasts of product purchases. In addition, our customers may reduce, delay or cancel orders at any time without any significant penalty. Our substrates are typically one of many components used in semiconductor devices that our customers produce. Demand for our products is therefore subject to many factors beyond our control, including: 19 20 o demand for our customers' products; o competition faced by our customers in their particular industries; o the technical, sales and marketing and management capabilities of our customers; and o the financial and other resources of our customers. If, as a result of any of these factors, demand for our products declines, our business will suffer. Intense competition in the market for GaAs substrates could prevent us from increasing revenues and sustaining profitability. The market for GaAs substrates is intensely competitive. If we cannot successfully compete in this market, our operating results will be harmed. In the semi-insulating GaAs substrates market, our principal competitors include: o Freiberger Compound Materials; o Hitachi Cable; o Litton Airtron; and o Sumitomo Electric Industries. We also compete with manufacturers that produce GaAs substrates for their own use. In addition, we compete with companies, such as IBM, that are actively developing alternative materials to GaAs. As we enter new markets, such as the Ge and InP substrate markets, we expect to face competitive risks similar to those for our GaAs substrates. Many of our competitors and potential competitors have a number of significant advantages over us, including: o having been in the business longer than we have; o more manufacturing experience; o more established technologies than our VGF technique; o broader name recognition; and o significantly greater financial, technical and marketing resources. Our competitors could develop enhancements to the LEC, HB or VGF techniques that are superior to ours in terms of price and performance. Our competitors also could intensify price-based competition, which would result in lower prices and reduced margins. The market for laser-pointing and alignment devices is highly competitive and subject to pressure to decrease the price at which the devices are sold. Lyte Optronics has opened a manufacturing facility in China enabling production of components at reduced cost; however this facility has only recently begun operating and may not be able to handle the volume production that may be required to meet customer demand. In addition, while we continue to remain competitive in our pricing structure of laser pointing and alignment devices, if prices continue to fall, we may not be able to produce and sell these products at a profit. We derive a significant portion of our revenues from international sales and our ability to sustain and increase our international sales involve significant risks. Our ability to grow will depend in part on the expansion of 20 21 international sales and operations which have and are expected to constitute a significant portion of our revenues. Our failure to successfully expand our international operations may cause our revenues not to grow as much as we anticipate, which could cause our stock price to fall. International sales, excluding Canada, represented 28.8% and 44.2% of our total revenues in the year ended December 1998 and six months ended June 30, 1999, respectively. Sales to customers located in Japan and other Asian countries represented 18.7% and 35.6% of our total revenues in the year ended December 31, 1998 and six months ended June 30, 1999. Sales to customers in Japan, in particular, accounted for 11.5% and 7.9% of our total revenues in the year ended December 1998 and six months ended June 30, 1999, respectively. We expect that sales to customers outside the United States, including device manufacturers located in Japan and other Asian countries who sell their products worldwide, will continue to represent a significant portion of our revenues. Our dependence on international sales involves a number of risks, including: o import restrictions and other trade barriers; o unexpected changes in regulatory requirements; o longer periods to collect accounts receivable; o export license requirements; o political and economic instability, in particular, the current instability of the economies of Japan and other Asian countries; and o unexpected changes in diplomatic and trade relationships. Our sales, except for sales to our Japanese and Taiwanese customers, are denominated in U.S. dollars. Thus, increases in the value of the dollar could increase the price of our products in non-U.S. markets and make our products more expensive than competitors' products in such markets. For example, doing business in Japan subjects us to fluctuations in the exchange rates between the U.S. dollar and the Japanese yen. In the year ended December 31 1998, we incurred foreign exchange losses of $24,000, and foreign exchange gain of $646,000 in the six months ended June 30, 1999, respectively. If we do not effectively manage the risks associated with international sales, our business and financial condition could be materially adversely affected. To minimize our foreign exchange risk, we have bought foreign exchange contracts to hedge against certain trade accounts receivable in Japanese yen. Because we currently denominate sales in U.S. dollars except in Japan, we do not anticipate that the adoption of the Euro as a functional legal currency of certain European countries will materially affect our business. If we lose key personnel or are unable to hire additional qualified personnel as necessary, we may not be able to successfully manage our business or achieve our objectives. Our success depends to a significant degree upon the continued service of Morris S. Young, Ph.D., AXT's President and Chief Executive Officer, as well as other key management and technical personnel. We neither have long-term employment contracts with, nor key person life insurance on, any of our key personnel, including any of the key personnel from our acquisition of Lyte Optronics. In addition, our management team has limited experience as executive officers of a public company. We believe our future success will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, finance and manufacturing personnel. The competition for these employees is intense, especially in Silicon Valley, and we cannot assure you that we will be successful in attracting and retaining new personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers, could make it difficult for us to manage our business and meet key objectives, including the introduction of new products on time. 21 22 Continued rapid growth may strain our operations. In addition to our recent acquisition of Lyte Optronics, we have recently experienced a period of rapid growth and expansion which has placed, and continues to place, a significant strain on our operations. To accommodate this anticipated growth, we will be required to: o improve existing and implement new operational and financial systems, procedures and controls; o hire, train and manage additional qualified personnel; o effectively manage multiple relationships with our customers, suppliers and other third parties; and o maintain effective cost controls. If we are not able to install adequate control systems in an efficient and timely manner, or if our current or planned personnel systems, procedures and controls are not adequate to support our future operations, our sales may not grow and our business will suffer. We are in the process of installing a new management information system; however, the functionality of this new system has not been fully implemented. The difficulties associated with installing and implementing these new systems, procedures and controls has placed and will continue to place a significant burden on our management and our internal resources. In addition, international growth will require expansion of our worldwide operations and enhance our communications infrastructure. Any delay in the implementation of these new or enhanced systems, products and controls, or any disruption in the transition to these new or enhanced systems, products and controls, could adversely affect our ability to accurately forecast sales demand, manage manufacturing, purchasing and inventory levels, and record and report financial and management information on a timely and accurate basis. Our inability to manage growth effectively could affect our revenues and adversely impact our profitability. In addition, Lyte Optronics maintains separate operational and financial systems, procedures and controls that must be integrated with or replaced by our systems. This integration will take time and divert management attention and resources. If we are unable to timely integrate or replace these systems, we may be unable to accurately forecast sales demand, manage manufacturing, purchasing and inventory levels for the two divisions acquired with Lyte Optronics, nor record and report financial and management information on a timely basis for these divisions, which could adversely affect our ability to timely produce consolidated financial information. Our failure and the failure of our key suppliers and customers to be year 2000 compliant could negatively impact our business. The year 2000 computer issue creates significant risk for us. If systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on our operations. The risk exists in four areas: o potential warranty or other claims from our customers; o systems we used to run our business; o systems used by our suppliers; and o the potential reduced spending by other companies on networking solutions as a result of significant information systems spending on year 2000 remediation. We are currently evaluating our exposure in all of these areas. We are in the process of conducting a comprehensive inventory and evaluation of the information systems used to run our business. We have a number of projects underway to replace older systems that are known to be year 2000 non-compliant. Other systems, which are identified as non-compliant, will be upgraded or replaced. For the year 2000 non-compliance issues identified to date, the cost of remediation is not expected to be material to our operating results. However, if implementation of replacement systems is delayed, or if significant new non-compliance issues are identified, our operating results or financial condition could be materially adversely affected. 22 23 We have contacted more than thirty key suppliers to determine if their operations and the products and services they provide are year 2000 compliant. Where practicable, we will attempt to mitigate our risks with respect to the failure of suppliers to be year 2000 ready. However, these failures remain a possibility and could have an adverse impact on our operating results or financial condition. We believe our current products are year 2000 compliant; however, since all customer situations cannot be anticipated, we may see an increase in warranty and other claims as a result of the year 2000 transition. In addition, litigation regarding year 2000 compliance issues is expected to escalate. For these reasons, the impact of customer claims could have a material adverse impact on our operating results or financial condition. Year 2000 compliance is an issue for virtually all businesses whose computer systems and applications may require significant hardware and software upgrades or modifications. Companies owning and operating such systems may plan to devote a substantial portion of their information systems' spending to fund such upgrades and modifications and divert spending away from networking solutions. Such changes in customers' spending patterns could have a material adverse impact on our business, operating results or financial condition. We may engage in future acquisitions that we must successfully integrate into our business and that may dilute our stockholders and cause us to assume contingent liabilities. As part of our business strategy, we may in the future review acquisition prospects that would complement our current product offerings, augment our market coverage or enhance our technical capabilities, or that may otherwise offer growth opportunities. In the event of any future acquisitions, we could: o issue equity securities which would dilute current stockholders' percentage ownership; o incur substantial debt; or o assume contingent liabilities. Any of these actions could materially adversely affect our operating results and/or the price of our common stock. Any future acquisitions creates risks for us, including: o difficulties in the assimilation of acquired personnel, operations, technologies or products; o unanticipated costs associated with the acquisition could materially adversely affect our operating results; o diversion of management's attention from other business concerns; o adverse effects on existing business relationships with suppliers and customers; o risks of entering markets where we have no or limited prior experience; o potential loss of key employees of acquired organizations; and o loss of customers that, through product acquisition, now become competitors. These risks and difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could materially adversely affect our operating results. We may need additional capital to fund our future operations which may not be available. We believe that our cash balances and cash available from credit facilities and future operations will enable us to meet our working capital requirements for at least the next 12 months. If cash from future operations is insufficient, or if cash is used 23 24 for acquisitions or other currently unanticipated uses, we may need additional capital. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to existing stockholders. In December 1998, we raised approximately $11.6 million by issuing variable rate taxable demand revenue bonds series 1998 for: o the purchase of a commercial building and to finance tenant improvements at 4281 Technology Drive, Fremont, California; o the refinance an existing loan and to finance tenant improvements on our principal offices; and o the permanent financing for an existing bank construction loan. These debt securities have rights, preferences and privileges that are senior to holders of common stock. We cannot assure you that if we required additional capital, it will be available on acceptable terms, or at all. If we are unable to obtain additional capital, we may be required to reduce the scope of our planned product development and marketing efforts, which would materially adversely affect our business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our executive officers and directors control 19% of our common stock and are able to significantly influence matters requiring stockholder approval. Executive officers, directors and entities affiliated with them currently own approximately 19% of our outstanding common stock. These stockholders, if acting together, are able to significantly influence all matters requiring our stockholder approval, including the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership could delay or prevent a change of control of AXT and could reduce the likelihood of an acquisition of AXT at a premium price. Provisions in our charter or agreements may delay or prevent a change of control. Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a merger or acquisition or a change of control or changes in our management. These provisions include: o the division of the board of directors into three separate classes of three year terms; o the right of the board to elect the director to fill a space created by the expansion of the board; o the ability of the board to alter our bylaws; o authorizing the issuance of up to 2,000,000 shares of "blank check" preferred stock; and o the requirement that at least 10% of the outstanding shares are needed to call a special meeting of stockholders. Furthermore, because we are incorporated in Delaware, we are subject to the provisions of section 203 of the Delaware General Corporation Law. These provisions prohibit large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless: o 66 2/3% of the shares of voting stock not owned by this large stockholder approve the merger or combination, or o the board of directors approves the merger or combination or the transaction which resulted in the large stockholder owning 15% or more of our outstanding voting stock. 24 25 Our stock price has been and may continue to be volatile and is dependent on external and internal factors. Our stock has fluctuated significantly since we began trading on the Nasdaq national market. In the six months ended June 30, 1999, our stock price closed as low as $9.0625 and as high as $27.00. Various factors could cause the price of our common stock to continue to fluctuate substantially, including: o actual or anticipated fluctuations in our quarterly or annual operating results; o changes in expectations as to our future financial performance or changes in financial estimates of securities analysts; o announcements of technological innovations by us or our competitors; o new product introduction by us or our competitors; o large customer orders or order cancellations; and o the operating and stock price performance of other comparable companies. In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQualitative Disclosures About Market Risk Since many of ourthe Company's Japanese and Taiwanese invoices are denominated in yen, we have boughtthe Company has purchased foreign exchange contracts to hedge against certain trade accounts receivable in Japanese yen. As of June 30, 1999, our2000, the Company's outstanding commitments with respect to the foreign exchange contracts had a total value of approximately $4.1 million equivalent.$1.7 million. Many of the contracts were entered into six months prior to the due date and 13 14 the dates coincide with the receivable terms we have on thecustomer invoices. By matching the receivable collection date and contract due date, we attemptthe Company attempts to minimize the impact of foreign exchange fluctuation.fluctuations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) In connection with the acquisitionItem 4. Submission of Lyte Optronics, our BoardMatters to a Vote of Directors adopted resolutions designating 1,000,000 shares of Preferred Stock of theSecurity Holders The Company as Series A Preferred Stock (the "Series A Preferred Stock"), of which 983,039 shares were subsequently issued to the stockholders of Lyte Optronics in exchange for the shares of Series B Preferred Stock of Lyte Optronics, in connection with the Company's acquisition of Lyte Optronics. The holders of the Series A Preferred Stock shall be entitled to receive, out of any funds legally available therefor, dividends in cash in an amount equal to $0.20 per annum for each share of Series A Preferred Stock held by them, in each case as adjusted for stock splits, recapitalizations and the like. Dividends shall accrue quarterly and be payable as and when declared by the Board of Directors. Dividends that have accrued by but not been paid shall cumulate. Unless we have paid all dividends that have accrued on the Series A Preferred Stock, so long as any shares of Series A Preferred Stock are outstanding we shall not pay or declare any dividend or distribution of any nature on shares of Common Stock. In the event of a liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, after our debts have been paid, the holders of Series A Preferred Stock shall be entitled to receive out of our assets an amount per share equal to $4.00 before any payment shall be made or any assets distributed to the 25 26 holders of Common Stock. If the assets remaining after our debts have been paid or amounts set aside for such payment are insufficient to pay to the holders of Series A Preferred Stock the full amount to which they are entitled, then all of our assets available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock. After payment in full of this liquidation preference plus accrued but unpaid dividends of the shares of the Series A Preferred Stock, no further participation in any distribution of our assets shall be allowed in respect of such shares, and the holders of the Common Stock shall be entitled to receive all of our remaining assets to be distributed. Except as otherwise required by law, shares of Series A Preferred Stock shall not be entitled to vote on any matter to be voted on by our stockholders. (b) In connection with the acquisition of Lyte Optronics, we issued an aggregate of 2,247,465 shares of Common Stock and 983,039 shares of Series A Preferred Stock to the existing stockholders of Lyte Optronics in exchange for all of the outstanding shares of capital stock of Lyte Optronics, and we assumed options to acquire 101,501 shares of our Common Stock and warrants convertible into 13, 557 shares of our Common Stock (collectively the "Merger Shares"). The Merger Shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), afforded by Section 4(2). Lyte Optronics retained a purchaser representative on behalf of their stockholders who had knowledge and experience in financial and business matters such that the purchaser representative was capable of evaluating the merits and risks of the investment. The stockholders of Lyte Optronics had access to all relevant information regarding us necessary to evaluate the investment and represented that the shares were being acquired for investment intent. Additionally, the stockholders of Lyte Optronics were provided with an information statement setting forth information about the Company and the Merger. There was no general solicitation or advertising involved in the acquisition. We were advised on the acquisition by Prudential Securities, Inc., to whom we paid a fee of $847,000. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held ourits 2000 Annual Meeting of Stockholders on May 17, 1999. The following is a brief description of each matter voted uponJune 7, 2000. Of the 18,906,558 shares eligible to vote at the meeting, 14,473,242 were present either in person or by proxy. The following proposals were submitted to stockholders at the 2000 Annual Meeting of Stockholders. Proposal 1: Election of two class II directors to hold office for a three-year term and the number of votes cast for, withheld, or against and the number of abstentions with respect to each matter. Each director proposed by us wasuntil their successors are elected and the stockholders also approved the three management proposals we proposed. (a)qualified. The stockholders reelected the two nomineescandidates were Jesse Chen and Donald L. Tatzin. Election results for our Board of Directors:this proposal were as follows:
Director Shares voted for Shares withheldFor Withhold Abstain Not Voted ---------- -------- ---------------- ----------------------- --------- Morris S. Young 10,878,142 81,719 Theodore S. Young 10,945,142 14,719 Jesse Chen 14,392,983 80,259 0 0 Donald L. Tatzin 14,393,191 80,051 0 0
(b) The stockholders approved theProposal 2: To approve an amendment to American Xtal Technology's Certificate of Incorporation changing its name from "American Xtal Technology, Inc." to "AXT, Inc." Election results for this proposal were as follows:
For Withhold Abstain Not Voted ---------- -------- -------- --------- 14,294,328 96,921 81,993 0
Proposal 3: To approve amendments to American Xtal Technology's 1997 Stock Option Plan to increase in the number of shares reserved for issuance under our 1997 Stock Option Planthe plan from 2,800,0003,800,000 to 3,800,0005,800,000 shares of common stock and to limit the number of sharesstock. Election results for which options may be granted under such plan to any employee within any fiscal year to 250,000:this proposal were as follows:
For Withhold Abstain Not Voted ---------- -------- -------- --------- Shares voted for: 10,225,108 Shares voted against: 617,073 Shares abstaining: 117,280 Broker non-votes: 400 5,365,878 2,885,827 242,551 5,978,986
26 27 (c) The stockholders approved theProposal 4: To approve amendments to American Xtal Technology's 1998 Employee Stock Purchase Plan to increase in the number of shares reserved for issuance under our 1998 Employee Stock Purchase Planthe plan from 250,000400,000 to 400,000900,000 shares of common stock:stock. Election results for this proposal were as follows:
For Withhold Abstain Not Voted ---------- -------- -------- --------- Shares voted for: 10,483,279 Shares voted against: 360,002 Shares abstaining: 116,580 7,979,590 506,357 8,309 5,978,986
(d) The stockholders approvedProposal 5: To ratify the appointment of PricewaterhouseCoopers LLP as ourthe Company's independent auditors for the fiscal year ending December 31, 1999:2000. Election results for this proposal were as follows:
For Withhold Abstain Not Voted ---------- -------- -------- --------- Shares voted for: 10,803,699 Shares voted against: 38,632 Shares abstaining: 117,530 14,445,688 21,098 6,456 0
ITEM 5. OTHER INFORMATION None. ITEM14 15 Item 6. EXHIBITS AND REPORTS ON FORMExhibits and reports on Form 8-K a. Exhibits.
Exhibit No. Description ------------ ----------- 2.1 Agreement and Plan of Reorganization dated May 27, 1999 (which is incorporated herein by reference to Exhibit 2.1 to the Registrant's Form 8-K dated May 28, 1999). 2.2 Certificate of Merger dated May 27, 1999, filed with the Secretary of State of the State of Delaware on May 28, 1999 (which is incorporated herein by reference to Exhibit 2.1 to the Registrant's Form 8-K dated May 28, 1999). 2.3 Articles of Merger dated May 27, 1999, filed with the Secretary of State of the State of Nevada on May 28, 1999 (which is incorporated herein by reference to Exhibit 2.1 to the Registrant's Form 8-K dated May 28, 1999). 3.1 Certificate of Designation, Preferences and Rights of Series A Preferred Stock, as filed with the Secretary of State of the State of Delaware on May 27, 1999 (which is incorporated herein by reference to Exhibit 2.1 to the Registrant's Form 8-K dated May 28, 1999). 27.1 Financial Data Schedule.
Exhibits 3.1 Amended Certificate of Incorporation 27.1 Financial Data Schedule b. Reports on Form 8-K. (1) On June 14, 1999, we filed a report8-K None 15 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on Form 8-K reportingits behalf by the acquisition of Lyte Optronics, Inc. (2) On August 11, 1999, we filed a report on Form 8-K/A which amended the report on Form 8-K filed on June 14, 1999. 27 28 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.undersigned, thereunto duly authorized. AMERICAN XTAL TECHNOLOGY, INC. Dated: August 23 , 199911, 2000 By: /s/ Guy D. Atwood ------------------------------------- Guy D. AtwoodDonald L. Tatzin ---------------------------------- Donald L. Tatzin Chief Financial Officer 2816 2917 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- -----------Exhibits -------- 3.1 Amended Certificate of Incorporation 27.1 Financial Data Schedule