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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 SeptemberJune 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)
DELAWARE 94-3031310
(State or other jurisdiction of (I.R.S. Employer
incorporationDELAWARE 94-3031310
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4281 Technology Drive, Fremont, California 94538
(Address of principal executive offices) (Zip Code)code)
(510) 683-5900
(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[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 SeptemberJune 30, 1999
----- ---------------------------------2000
------- ----------------------------
Common Stock, $.001 par value 18,725,26118,947,781
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AMERICAN XTAL TECHNOLOGY,AXT, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1999
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999
Condensed Consolidated Income Statements for the three and
six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999
Notes To Condensed Consolidated Financial Statements
Unaudited Proforma Condensed Consolidated Statement of
Operations Summary for the seven quarters from first
quarter 1998 to third quarter 1999
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
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PART I. FINANCIAL INFORMATION
ITEMItem 1. FINANCIAL STATEMENTS
AMERICAN XTAL TECHNOLOGY,Financial Statements
AXT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SeptemberJune 30, December 31,
2000 1999
1998
---------- --------------------- ------------
(Unaudited)
Assets:
Current assets
Cash and cash equivalents $ 4,8835,149 $ 16,4386,062
Accounts receivable, net of allowance for doubtful
accounts of $1,830$1,702 and $1,648 17,029 12,428$778 20,889 17,561
Inventories 34,660 25,30043,630 35,470
Prepaid expenses and other current assets 5,755 3,2716,071 8,945
Deferred income taxes 949 1,6704,585 3,210
--------- ---------
Total current assets 63,276 59,10780,324 71,248
Property, plant and equipment 40,305 37,62452,476 40,865
Other assets 4,545 1,9272,427 1,405
Goodwill 2,394 2,8431,945 2,244
--------- ---------
Total assets $ 110,520137,172 $ 101,501115,762
========= =========
Liabilities and Stockholders' Equity:
Current liabilities
Short-term bank borrowing $ 4,34512,980 $ 3,33911,298
Note payable 4,000 --
Accounts payable 9,409 8,76212,575 8,294
Accrued liabilities 5,904 2,21910,801 7,464
Current portion of long-term debt 4,282 3,9251,862 1,568
Current portion of capital lease obligation 3,437 2,162
--------- ---------
Total current liabilities 23,940 18,24545,655 30,786
Long-term debt, net of current portion 21,100 22,270
Note payable to officers 501 60414,034 15,254
Long-term capital lease, net of current portion 8,137 6,853
Other long-term liabilities 100 410
--------- ---------
Total liabilities 45,541 41,11967,926 53,303
--------- ---------
Stockholders' equity:
Preferred stock
4,000 4,000$.001 par value per share; 1,000,000 shares
authorized; 980,655 shares issued and outstanding 1 1
Additional paid-in capital 3,989 3,989
Common stock
46,222 45,266$.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 (244) (327)(162) (217)
Retained earnings 14,955 11,41616,695 12,370
Cumulative translation adjustments 46 2798 (24)
--------- ---------
Total stockholders' equity 64,979 60,38269,246 62,459
--------- ---------
Total liabilities and stockholders' equity $ 110,520137,172 $ 101,501115,762
========= =========
TheSee accompanying notes are an integral part ofto these unaudited condensed consolidated financial
statementsstatements.
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AMERICAN XTAL TECHNOLOGY,AXT, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS OF OPERATIONS(Unaudited)
(In thousands, except per share data)
(Unaudited)
Three Months Ended NineSix Months Ended
SeptemberJune 30, SeptemberJune 30,
--------------------- ---------------------
2000 1999 19982000 1999 1998
-------- -------- -------- --------
Revenues:
Product revenuesRevenue $ 20,70928,944 $ 13,43420,783 $ 59,94852,878 $ 39,163
Contract revenues 680 508 1,489 1,49739,680
Cost of revenue 17,859 13,971 32,198 30,211
-------- -------- -------- --------
Total revenues 21,389 13,942 61,437 40,660
Cost of revenues:
Cost of product revenues 12,419 8,754 37,594 25,604
Cost of contract revenues 295 157 704 640
-------- -------- -------- --------
Total cost of revenues 12,714 8,911 38,298 26,244
Gross profit 8,675 5,031 23,139 14,41611,085 6,812 20,680 9,469
Operating expenses:
Selling, general and administrative 2,582 2,540 8,668 7,2384,564 3,196 8,417 6,843
Research and development 684 819 1,857 2,1731,863 858 3,851 1,520
Acquisition cost --costs -- 2,810 -- 2,810
-------- -------- -------- --------
Total operating expenses 3,266 3,359 13,335 9,4116,427 6,864 12,268 11,173
-------- -------- -------- --------
Income (loss) from operations 5,409 1,672 9,804 5,0054,658 (52) 8,412 (1,704)
Interest expense (1,084) (325) (2,472) (837)
Interest(1,149) (730) (1,918) (1,360)
Other income and other income 220 248 898 219expense 303 29 499 722
-------- -------- -------- --------
Income (loss) before provision for income taxes 4,545 1,595 8,230 4,3873,812 (753) 6,993 (2,342)
Provision for income taxes 1,727 559 4,183 1,704
-------- -------- -------- --------
Income before extraordinary item 2,818 1,036 4,047 2,683
Extraordinary item, net of tax benefits -- -- (508) --1,459 782 2,668 178
-------- -------- -------- --------
Net Income (loss) before extraordinary item 2,353 (1,535) 4,325 (2,520)
Extraordinary item -- 508 508
-------- -------- -------- --------
Net Income (loss) $ 2,8182,353 $ 1,036(2,043) $ 3,5394,325 $ 2,683(3,028)
======== ======== ======== ========
Basic income (loss) per share:
Income before extraordinary item $ 0.150.13 $ 0.06(0.08) $ 0.220.23 $ 0.17(0.14)
Extraordinary item -- -- (0.03) --
-------- -------- -------- --------(0.03)
Net Income $ 0.15 $ 0.06 $ 0.19 $ 0.17
======== ======== ======== ========income 0.13 (0.11) 0.23 (0.16)
Diluted income (loss) per share:
Income before extraordinary item $ 0.140.12 $ 0.06(0.08) $ 0.200.23 $ 0.17(0.14)
Extraordinary item -- -- (0.02) --
-------- -------- -------- --------(0.03) (0.03)
Net Income $ 0.14 $ 0.06 $ 0.18 $ 0.17
======== ======== ======== ========income 0.12 (0.11) 0.21 (0.16)
Shares used in net income per share calculations:
Basic 18,662 16,915 18,610 15,38818,654 18,443 18,687 18,451
Diluted 20,059 17,705 19,785 16,17820,149 18,443 20,178 18,451
TheSee accompanying notes are an integral part ofto these unaudited condensed consolidated financial
statements.
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AMERICAN XTAL TECHNOLOGY,AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
(Unaudited)
NineSix Months Ended
SeptemberJune 30,
---------------------
2000 1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income:income (loss): $ 3,5394,325 $ 2,683(3,028)
Adjustments to reconcile net income (loss) to cash used in operations:
Depreciation and amortization 4,097 1,9612,917 1,162
Deferred income taxes 721 (1,152)(1,375) (404)
Amortization of goodwill 299 300
Stock compensation 83 (134)55 55
Changes in assets and liabilities:
Accounts receivable (4,601) (1,174)(3,328) (929)
Inventories (9,360) (5,057)(8,160) (4,491)
Prepaid expenses and other current assets (5,102) (1,877)2,874 (4,407)
Other assets (1,022) 790
Accounts payable 647 2,1024,281 189
Accrued liabilities 3,685 (512)3,337 3,764
Other long-term liabilities (310) (103)
-------- --------
Net cash provided by (used in) operating activities (6,291) (3,160)3,893 (7,102)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash flow from investing activities (6,329) (15,029)Purchases of property, plant and equipment (11,101) (3,853)
-------- --------
Net cash used in investing activities (6,329) (15,029)(11,101) (3,853)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of):
Issuance of common stock upon exercise of common stock options 956 34,577
Issuance of preferred stock -- (7,829)2,285 359
Capital leases (868) (268)
Short-term bank borrowings 1,006 3,087
Repayment of long-term5,682 4,526
Long-term debt borrowings (916) 398(926) 157
-------- --------
Net cash provided by financing activities 1,046 30,2336,173 4,774
-------- --------
Effect of exchange rate changes 19 (33)122 (53)
-------- --------
Net increase (decrease) in cash and cash equivalents (11,555) 12,011(913) (6,234)
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 $ 4,8835,149 $ 15,21010,204
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paidNon cash activity:
Purchases of PP&E through capital leases $ 1,1183,427 $ 631
======== ========
Income taxes paid $ 2,415 $ 2,75339
======== ========
TheSee accompanying notes are an integral part ofto these unaudited condensed consolidated financial
statements.
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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 September 30, 1999, and for the three and nine
months ended September 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 September 30, 1999AXT, Inc. (the
"Company") and its subsidiaries for the three and nine months ended have been included.
Operating results for the nine-month period ended September 30, 1999 are not
necessarily indicative of the result that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10K 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 November 15,
1999.
In May 1999, we acquired Lyte Optronics, Inc. which was accounted for
as a pooling of interests (see Note 4-"Acquisition"). 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.
The prior period consolidated financial information presented from
January 1, 1998 through September 30, 1998, however, does not includeManagement of the financial resultsCompany has made a number of Alpha Photonics ("Alpha"), that Lyte Optronics acquired on
September 29, 1998 (see Note A "Unaudited Proforma Financial Statement
Summary").
Note 2. Principlesestimates and assumptions
relating to the reporting of Consolidation
Theassets and liabilities and the disclosure of
contingent assets and liabilities to prepare these condensed consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
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 accountsdilutive
effect of common stock equivalents outstanding during the period calculated
using the treasury stock method. Common stock equivalents consist of the Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
The functional currenciesshares
issuable upon the exercise 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 expense items are translated at an average rate of exchange. The
cumulative translation adjustments in the year ended December 1998 and the nine
months ended September 30, 1999 resulted from fluctuations in foreign currency
exchange rates and its effects on the translation of balance sheet accounts.
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 (in thousands):
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September December 31,
1999 1998
------------- -------------
Inventories:
Raw materials $ 14,408 $ 9,928
Work in process 13,484 13,171
Finished goods 6,768 2,201
------------- -------------
$ 34,660 $ 25,300
============= =============
Note 4. Acquisition
On May 28, 1999, we acquired Lyte Optronics, Inc., a Nevada corporation
and all of its subsidiaries, including Lyte Optronics Ltd. (a United Kingdom
company) and Advanced Semiconductor (a Xiamen, People's Republic of China
company). Lyte Optronics, Inc. and its subsidiaries manufacture and distribute
micro-laser based products.
Under the terms of the merger agreement, the Company issued
approximately 2,363,000stock options. Common equivalent shares of
approximately 1.0 million are excluded from the Company's common stock in exchangecomputation 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 assumedthree month
and converted Lyte's options and warrants representing 455,000 shares of Lyte's
common stock to the Company's option 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 quartersix month 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 (in thousands):
Note 6. Net Income Per Share
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
Net income $ 2,818 $ 1,036 $ 3,539 $ 2,683
Foreign currency translation
gain (loss) 65 (63) 13 (26)
------- ------- ------- -------
Comprehensive income $ 2,883 $ 973 $ 3,552 $ 2,657
======= ======= ======= =======
7
8antidilutive.
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 ended SeptemberMonths Ended June 30, -----------------------------------------------------------------------------Six Months Ended June 30,
------------------------------------------------- --------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
(unaudited)2000 1999
----------------------- ----------------------- ----------------------- -------------------------
Per Per Per Per
Net Share Net Share Net Share Net Share
Income Shares Amount Income Shares Amount --------Income Shares Amount Income Shares Amount
------ -------- -------- ------ -------------- ------- ------ ------ ------ ------ ------ ------- ------ ------
Basic EPS calculation $ 2,818 18,662 $ 0.15 $ 1,036 16,915 $ 0.06$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 - 1,397 - - 790 -
Convertible preferred stock - - - - - -
-------- ------ -------- ------1,495 1,491
Diluted EPS calculation $ 2,818 20,059 $ 0.14 $ 1,036 17,705 $ 0.06
========$2,353 20,149 $0.12 $(2,043) 18,443 $(0.11) $4,325 20,178 $0.21 $(3,028) 18,451 $(0.16)
====== ============== ===== ======= ====== ====== ====== ====== ===== ======= ====== ======
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Note 3. Inventories
The components of inventory are summarized below (in thousands):
NineJune 30, December 31,
2000 1999
-------- ------------
Inventories:
Raw materials $ 16,693 $ 13,503
Work in process 20,987 16,151
Finished goods 5,950 5,816
-------- --------
$ 43,630 $ 35,470
======== ========
Note 4. Comprehensive Income
The components of comprehensive income are summarized below (in
thousands):
Three months ended SeptemberSix months ended
June 30, -----------------------------------------------------------------------------June 30,
-------------------- --------------------
2000 1999 1998
-----------------------------------------------------------------------------
(unaudited)
Per Per
Share Share
Income Shares Amount Income Shares Amount
--------2000 1999
------ -------- -------- ------ --------
Basic EPS calculationNet Income (loss) $2,353 $ 3,539 18,610(2,043) $4,325 $ 0.19 $ 2,683 15,388 $ 0.17
Effect of dilutive securities
Common stock options - 1,175 - - 790 -
Convertible preferred stock - - - - - -(3,028)
Foreign currency translation gain (loss) 89 25 122 (53)
------ -------- ------ --------
------
Diluted EPS calculationComprehensive income $2,442 $ 3,539 19,785(2,018) $4,447 $ 0.18 $ 2,683 16,178 $ 0.17(3,081)
====== ======== ====== ======== ======
Note 7.5. 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 as components of an enterprise about which
separate financialInformation
Selected industry segment information is evaluated regularly by the chief
decision-maker in order to allocate resources and assess performance.
The Company has identified three primary operating segments: AXT
division (substrates product line), Lyte division (consumer products) and Alpha
division (laser diode/LED product line).
Segment selection is based upon the internal organization structure, the
manner in which these operations 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, (in thousands):
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Segment Datasummarized below (in thousands):
AXT Lyte Alpha Consolidated
--------- --------- --------- ------------
Three months ended SeptemberSix months ended
June 30, June 30,
-------------------- -------------------
2000 1999 ---------------------------------------------------------------2000 1999
-------- -------- -------- --------
Substrates
Net revenues from external customers $ 26,212 $ 14,405 $ 45,337 $ 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) (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 (loss) 4,658 (52) 8,412 (1,704)
Identifiable assets 137,171 107,838 137,171 107,838
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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 2000 1999
------- ------- ------- -------
Net revenues from external customers $ 15,030 $ 1,499 $ 4,860 $ 21,389
========= ========= ========= =========
Operating income (loss) 4,453 (180) 1,136 5,409
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 147 48 25 220
Interest expense (494) (267) (323) (1,084)
--------- --------- --------- ---------
Income (loss) before income taxes $ 4,106 $ (399) $ 838 $ 4,545
========= ========= ========= =========
Total assets $ 78,712 $ 6,937 $ 25,363 $ 111,012
========= ========= ========= =========6,703 6,412 13,406 12,790
------- ------- ------- -------
Consolidated $28,944 $20,783 $52,878 $39,680
======= ======= ======= =======
Three months ended September 30, 1998
---------------------------------------------------------------
Net revenues from external customers $ 11,395 $ 2,547 $ 13,942
========= ========= =========
Operating income (loss) 2,708 (1,036) 1,672
Interest and other income
(expenses), net 206 42 248
Interest expense (169) (156) (325)
--------- --------- ---------
Income (loss) before income taxes $ 2,745 $ (1,150) $ 1,595
========= ========= =========
Total assets $ 66,380 $ 4,973 $ 71,353
========= ========= =========
Nine months ended September 30, 1999
---------------------------------------------------------------
Net revenues from external customers $ 41,166 $ 5,369 $ 14,902 $ 61,437
========= ========= ========= =========
Operating income (loss) 8,467 (1,145) 2,482 9,804
Interest and other income
(expenses), net 1,111 (309) 96 898
Interest expense (1,074) (689) (709) (2,472)
--------- --------- --------- ---------
Income (loss) before income taxes $ 8,505 $ (2,143) $ 1,868 $ 8,230
========= ========= ========= =========
Nine months ended September 30, 1998
---------------------------------------------------------------
Net revenues from external customers $ 31,915 $ 8,745 40,660
========= ========= ========
Operating income (loss) 7,752 (2,747) 5,005
Interest and other income
(expenses), net 202 17 219
Interest expense (507) (330) (837)
--------- --------- --------
Income (loss) before income taxes $ 7,447 $ (3,060) 4,387
========= ========= ========
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AMERICAN XTAL TECHNOLOGY, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SUMMARY
(In thousands)
UNAUDITED CONSOLIDATED FINANCIALS SUMMARY
------------------------------------------------------------------------
AXT and Lyte AXT, Lyte and Alpha
------------------------------------------------------------------------
Q1 1998 Q2 1998 Q3 1998 Q4 1998 Q1 1999 Q2 1999 Q3 1999
------------------------------------------------------------------------
As Reported in 10Q
Consolidated Results:
Revenue (Note A) $ 13,186 13,532 13,942 20,654 19,023 21,025 21,389
Gross Margin (Note A) 5,042 4,343 5,031 7,949 6,018 8,446 8,675
Income from Operations (Note A) 1,942 1,391 1,672 3,138 2,030 2,365 5,409
Net Income (Note A) $ 1,016 631 1,036 1,600 1,259 (538) 2,818
UNAUDITED PRO-FORMA REVENUE DETAIL BY ENTITY
------------------------------------------------------------------------
Q1 1998 Q2 1998 Q3 1998 Q4 1998 Q1 1999 Q2 1999 Q3 1999
------------------------------------------------------------------------
Lyte Optronics $ 3,456 2,742 2,547 3,495 2,364 1,506 1,499
Alpha Photonics (after acquisition) - - - 5,784 4,928 5,114 4,860
------------------------------------------------------------------------
Lyte total company as reported 3,456 2,742 2,547 9,279 7,292 6,620 6,359
AXT 9,730 10,790 11,395 11,375 11,731 14,405 15,030
------------------------------------------------------------------------
Total Consolidated Revenue
as reported in 10Q 13,186 13,532 13,942 20,654 19,023 21,025 21,389
Alpha Photonics (before acquisition) 5,452 3,405 4,085 - - - -
------------------------------------------------------------------------
Total Pro-forma Unaudited
Consolidated Revenue for AXT, Lyte and
Alpha (Note B) $ 18,638 16,937 18,027 20,654 19,023 21,025 21,389
========================================================================
Note 6. Short-Term Bank Borrowing
The accompanying notes are an integral partCompany has a $15 million bank line of these condensed consolidated
financial statements.
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AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SUMMARY
(Unaudited)
Note A. Unaudited Proforma Financial Statement Summary:credit that expires on August
31, 2000. The unaudited pro forma consolidated financial statement summary gives
effect to both (i) the mergerCompany has received a commitment from its bank for a new two-year
$20 million line of American Xtal Technology, Inc. ("AXT" or the
"Company") with Lyte Optronics, Inc. ("Lyte") on May 28, 1999, which was
accounted for as a poolingcredit and additional long-term debt of interests, and (ii) acquisition by Lyte of Alpha
Photonics, Inc. ("Alpha") on September 29, 1998, which was accounted for as a
purchase. The unaudited pro forma condensed statements of operations summary
gives effect to the merger of AXT and Lyte, assuming$6 million.
Management expects that the merger had
occurrednew 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 January 1, 1998,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 combiningSFAS 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 AXT
and Lytethe Company.
8
9
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44")
Accounting for eachCertain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the three months ended Q1 1998: March 31, 1998; Q2 1998:
June 30 1998; Q3 1998: September 30, 1998; Q4 1998: December 31, 1998; Q1 1999:
March 31, 1999; Q2 1999: June 30, 1999, and; Q3 1999: September 30, 1999, onapplication of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a pooling of interests basis. The unaudited proforma condensed consolidated
statements of operations summary also gives effectplan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the acquisitionterms 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 Lyte of
Alpha on September 29, 1998 as Alpha's operating resultsrule 144 promulgated under the act. The
securities may not be sold or offered for the period from
September 29, 1998 to December 31, 1998 and the three months ended March 31,
1999, June 30, 1999 and September 30, 1999 have been included in Lyte's
consolidated statements of operations for the three months ended Q4 1998:
December 31, 1998; Q1 1999: March 31, 1999; Q2 1999: June 30, 1999, and; Q3
1999: September 30, 1999, respectively. These unaudited pro forma financial
statements should be readsale or otherwise distributed except
in conjunction with the historical financial
statements and notes thereto of AXT included in its Annual Report on Form 10-Kan effective registration statement for the year ended December 31, 1998 andshares under the
historical financial statements and
notes theretoAct, in compliance with rule 144, or pursuant to an opinion of Lyte included as an exhibit therein.
The unaudited pro forma information is presented for illustrative
purposes only andcounsel
satisfactory to the Company, that such registration or compliance is not
necessarily indicativerequired as to said sale, offer or distribution. The Company is obligated to
register the shares no later than ten days after the completion of the operating results or
financial position that would have occurred if the merger had been consummated
at the beginningits next
public securities offering.
Item 2. Management's Discussion and Analysis of the periods presented, nor is it necessarily indicativeFinancial Condition and Results
of future operating results or financial position.
Note B. Unaudited Proforma Revenue Detail:
The unaudited proforma revenue detail gives effect to (i) the merger of
American Xtal Technology, Inc. ("AXT" or the "Company") with Lyte Optronics,
Inc. ("Lyte") on May 28, 1999, which was accounted for as a pooling of
interests, and (ii) acquisition by Lyte of Alpha Photonics, Inc. ("Alpha") on
September 29, 1998, which was accounted for as a purchase. The unaudited pro
forma revenue detail gives effect to the merger of AXT and Lyte, and the
purchase of Alpha by Lyte assuming that all events had occurred as of January 1,
1998, by combining the revenues of all entities (less intercompany sales) for a
total proforma unaudited consolidated total for the three months ended Q1 1998:
March 31, 1998; Q2 1998: June 30 1998; Q3 1998: September 30, 1998; Q4 1998:
December 31, 1998; Q1 1999: March 31, 1999; Q2 1999: June 30, 1999, and; Q3
1999: September 30, 1999.
The unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the merger had been consummated
at the beginning of the periods presented, nor is it necessarily indicative of
future operating results or financial position.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONSOperations
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 ("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 LED's 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, commercial and industrial markets. Lyte Optronics is operatedyear ended December 31, 1999 as
two separate divisions of AXT: Alpha, focusing on the manufacture of LED's
and laser diodes, and Lyte, a consumer products division focusing on the design
and marketing of laser-pointing and alignment products. The approximately 380
employees of Lyte Optronics retained after the acquisition are split between the
two divisions, with about 200 employees located 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
connectionfiled with the acquisition, we reported a charge of $2.8 millionSecurities and Exchange Commission and the condensed consolidated
financial statements included elsewhere 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 Alpha division, which Lyte
Optronics did not acquire until September 29, 1998.
12indicated:
9
1310
Three Months Ended NineSix Months Ended
SeptemberJune 30, SeptemberJune 30,
-------------------- --------------------
2000 1999 19982000 1999
1998
--------- --------- --------- --------------- ------ ------ ------
Revenues:
Product revenues 96.8% 96.4% 97.6% 96.3%
Contract revenues 3.2 3.6 2.4 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 58.0 62.8 61.2 63.0
Cost of contract revenues 1.4 1.1 1.1 1.6
--------- --------- --------- ---------
Total cost of revenues 59.4 63.9 62.3 64.661.7 67.2 60.9 76.1
------ ------ ------ ------
Gross profit 40.6 36.1 37.7 35.438.3 32.8 39.1 23.9
Operating expenses:
Selling, general and administrative 12.1 18.2 14.1 17.815.8 15.4 15.9 17.2
Research and development 3.2 5.9 3.0 5.36.4 4.1 7.3 3.8
Acquisition costs - - 4.6 0.0
--------- --------- --------- ----------- 13.5 -- 7.1
------ ------ ------ ------
Total operating expenses 15.3 24.1 21.7 23.1
--------- --------- --------- ---------22.2 33.0 23.2 28.1
------ ------ ------ ------
Income (loss) from operations 25.3 12.0 16.0 12.316.1 (0.2) 15.9 (4.3)
Interest expense (5.1) (2.3) (4.0) (2.1)
Interest(3.5) (3.6) (3.4)
Other income and other incomeexpense 1.0 0.1 0.9 1.8
1.5 0.5
--------- --------- --------- --------------- ------ ------ ------
Income (loss) before provision for income taxes 21.2 11.5 13.5 10.713.1 (3.6) 13.2 (5.9)
Provision for income taxes 8.0 4.0 6.8 4.2
--------- --------- --------- ---------
Income5.0 3.8 5.0 0.4
------ ------ ------ ------
Net income (loss) before extraordinaryextra ordinary item 13.2 7.5 6.7 6.5
Extraordinary8.1 (7.4) 8.2 (6.3)
Extra ordinary item net of tax benefits - - 0.8 -
--------- --------- --------- ----------- 2.4 -- 1.3
------ ------ ------ ------
Net Income 13.2% 7.5% 5.9% 6.5%
========= ========= ========= =========(loss) after extra ordinary item 8.1% (9.8)% 8.2% (7.6)%
====== ====== ====== ======
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 53.4% from $13.9$8.1 million, or 39.3%, to $28.9 million for
the three months ended SeptemberJune 30, 19982000 compared to $21.4 million for three months ended September 30,
1999. Product revenues increased 54.1% from $13.4$20.8 million for the three
months ended SeptemberJune 30, 1998 to $20.7 million for the three months ended September
30, 1999. For the nine months ended September 30, 1998 compared to September 30,
1999, product revenue increased 53.1% from $39.1 million to $59.9 million. The increase in product revenues for the three month and nine month periods ended
September 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 decline in Lyte Optronics' sales. In addition, the
1999 results include the sale of laser diodes and LED's from the Alpha division,
in the amount of $4.9 million and $14.9 million for the three months and nine
months, respectively, which amounts were not included in the 1998 results. We
introduced LED's in the second quarter of 1999. Ge substrate sales were $315,000
lower in the third quarter of 1999 when compared to the third quarter of 1998,
and were $527,000 lower in sales for the nine months ended September 30, 1999
when compared to the nine months ended September 30, 1998. These decreases were due in part to
strong growth in the fiber optic and wireless handset markets. The decrease in
Ge sales is the result of a requestcancellation of a contract by a major Ge customer for a two-month suspension in
shipments due
to their excess inventory.weakness in the satellite market. Additionally, sales at our visible emitter
division decreased $3.1 million, or 63.9% of visible emitter sales and sales at
our consumer products division decreased $582,000, or 36.7% of consumer product
sales, due to declining sales prices and lower demand for laser pointer
products.
International revenues excluding Canada, increased from 17.2%decreased to 46.6% of total revenues for the three
months ended SeptemberJune 30, 19982000 compared to 44.7%48.0% of total revenues for the three
months ended September 30, 1999, and increased from 22.3%
of total revenues for the nine months ended September 30, 1998 to 43.5% for the
nine months ended SeptemberJune 30, 1999. These increases primarily reflect
increased sales in Europe and Asia for GaAs substrates used for the LED market,
and the inclusion of Alpha division's sales in 1999 results, which are sold
primarily to Asian markets.
13
14
Contract revenues increased 33.8% from $508,000 for the three months ended
September 30, 1998 to $680,000 for the three months ended September 30, 1999,
and decreased 0.5% from $1,497,000 for the nine months ended September 30, 1998
to $1,489,000 for the nine months ended September 30, 1999. Contract revenuesThe decrease in the third quarterpercentage of 1999international
revenue to total revenue was primarily the result of increased primarily duesubstrate sales
to the higher level of
contract work being performed on our Title III Indium Phosphide contract.
Contract revenues declined from 3.6%domestic customers.
Gross margin. Gross margin increased to 38.3% of total revenues for the
three months ended SeptemberJune 30, 19982000 compared to 3.2%32.8% of total revenues for the
three months ended September 30, 1999, and declined from 3.7% for the nine months ended September
30, 1998 to 2.4% for the nine months ended SeptemberJune 30, 1999. Contract revenues
as a percentage of total revenues declined primarily as a result of growth in
our product revenue combined with a decline in our contract revenues. In future
periods, we expect contract revenues to continue to decline as a percentage of
total revenues.
Gross margin. TotalThe gross margin at the substrate division
increased from 36.1% to 40.6%47.6% of totalsubstrate revenues for the three months ended SeptemberJune 30,
1998,2000 compared to 38.5% of substrate revenues for the period ended June 30, 1999.
The increase was primarily due to higher volume and September 30, 1999,
respectively. Productthe realization of lower
labor and manufacturing overhead costs as a result of expanding our wafer
production capacity in China. The gross margin increased from 34.8%at the visible emitter division
decreased to negative 81.5% of visible emitter revenues for the three months
ended SeptemberJune 30, 19982000 compared to 40.0%33.8% 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 2.8% of consumer product
revenues for the three months ended September 30,1999.
For the nine months ended SeptemberJune 30, 1998,2000 compared to a negative 22.6%
of consumer product
gross margin increased
from 34.6% to 37.3% for the same period in 1999. This increase in product gross
margins for the three and nine months ended September 30, 1999, reflects the
inclusion of the Alpha laser-diode and LED division's amounts in the 1999
results. Alpha's laser-diode and LED division benefited from the transition of
manufacturing operations to China in the first quarter of 1999, and Lyte's
consumer products division benefited from the 1998 closing of their Arizona
manufacturing facility, which lowered our labor costs and improved our gross
margins in 1999. 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 nine months
ended September 30, 1999, were also adversely impacted by additional allowances
set aside in the first quarter of 1999 for returned merchandise and increased
warranty amounts for the Lyte division.
Contract gross margins decreased from 69.0%10
11
revenues for the three months ended September 30,1998 to 56.6% for the three months ended September 30, 1999, and
decreased from 57.2% for the nine months ended September 30, 1998 to 52.7% for
the nine months ended SeptemberJune 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 slightly from $2.5$1.4 million, or 42.8%, to $4.6 million for
the three months ended SeptemberJune 30, 19982000 compared to $2.6$3.2 million for the three
months ended September 30, 1999, and increased 19.7% from $7.2 million for the nine months
ended September 30, 1998 to $8.7 million for the nine months ended SeptemberJune 30, 1999. These increases resulted primarily from the inclusionAs a percentage of the Alpha
division in the 1999 results. The Alpha division added $652,000 and $2.6 million
to thetotal revenues, selling, general
and administrative expenses inwere 16.1% for the three months and nineended June 30, 2000
compared to 15.4% for the three months ended SeptemberJune 30, 1999, respectively. This1999. 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 was partially
offset by a decrease in selling, general
and administrative expenses by the Lyte
division, as a result of the closing of a manufacturing facility locatedwas primarily due to increases in Arizonapersonnel and
related expenses required to support current and future increases in 1998 as mentioned above. Selling, general and administrative expenses
as a percentage of total revenues decreased from 18.2% for the three months
ended September 30, 1998 to 12.1% for the three months ended September 30, 1999,
and decreased as a percentage of total revenues from 17.8% for the nine months
ended September 30, 1998 to 14.1% for the nine months ended September 30, 1999.
These decreases primarily reflect the closing of the facility in Arizona by Lyte
and the maintenance of our expenses combined with an increase in our total
revenues.sales
volume.
Research and development expenses. Research and development expenses
decreased 16.5% from $819,000increased $1.0 million, or 117.1%, to $1.9 million for the three months ended
SeptemberJune 30, 19982000 compared to $684,000$858,000 for the three months ended September 30, 1999, and decreased 14.5% from
$2.2 million for the nine months ended September 30, 1998 to $1.9 million for
the nine months ended SeptemberJune 30, 1999. These decreases resulted primarily
from the reductionAs
a percentage of consulting fees and materials purchased to develop new
products and to enhance existing products. Also, historically Lyte did not
separately accounttotal revenues for itsthese three-month periods, research and
development expenses which are included
as partwere 6.4% in 2000 and 4.1% in 1999. The increase was
primarily the result of its costs ofincreases in personnel and related expenses and
materials to support LED and other product 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 inat the
cost of contract
revenues.
14
15
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.visible emitter division.
Interest expense. Interest expense increased from $325,000 for the three
months ended September 30, 1998$419,000, or 57.4%, to $1.1
million for the three months ended SeptemberJune 30, 1999, and increased from $837,000 for the nine months ended
September 30, 19982000 compared to $2.5 million for the nine months ended September 30, 1999.
These increases primarily reflect the inclusion of the Alpha division in 1999
results and the acquisition of Lyte 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 Alpha division
was $213,000 and $599,000 for the three months and nine months ended September
30, 1999, respectively.
Interest and other income. Interest and other income decreased 11.2%
from $248,000$730,000 for the
three months ended SeptemberJune 30, 19981999. The increase was primarily due to $220,000utilizing
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 SeptemberJune 30, 2000 compared to $29,000 for the
three months ended June 30, 1999. Interest and other income increased from
$219,000 for the nine months ended September 30, 1998 to $898,000 for the nine
months ended September 30, 1999. ThisThe increase was primarily the result of two
significant changes. First, we recognizeddue to increases in
foreign exchange gains 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.rental and interest income.
Provision for income taxes. Income tax expense as adjusted for
acquisition costs, declined from 39.0%remained at our effective
tax rate of income before provision of income
taxes for the nine months ended September 30, 1998 to 38.0% for the ninethree months ended SeptemberJune 30, 2000 and 1999. For the
three months ended June 30, 1999, income 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 $13.2 million, or 33.3%, to $52.9 million for
the six months ended June 30, 2000 compared to $39.7 million for the six months
ended June 30, 1999. The increase in revenues was primarily due to a $19.2
million, or 73.5% increase in substrate sales comprised of a $22.8 million, or
106.9% increase in sales of GaAs and InP substrates offset by a $3.6 million
decrease in Ge sales and contract 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 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 decreased $1.5 million, or 35.6% of consumer product sales,
due to declining sales prices and lower demand for laser pointer products.
International revenues decreased to 47.3% of total revenues for the six
months ended June 30, 2000 compared to 49.6% of total revenues for the six
months ended June 30, 1999. The 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 to 39.1% of revenues for the six
months ended June 30, 2000 compared to 23.9% of revenues for the six months
ended June 30, 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 to
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, 2000 compared to $6.8 million for the six months
ended June 30, 1999. As a percentage of total revenues, selling, general and
administrative expenses were 15.9% for the six months ended June 30, 2000 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. 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 decreased $223,000 to
$499,000 for the six months ended June 30, 2000 compared to $722,000 for the six
months ended June 30, 1999. The decrease was primarily due to smaller foreign
exchange gains.
Provision for income taxes. Income tax expense was higher in 1998 than in 1999 due
toremained at our effective
tax rate of 38.0% for the inability to offset 1998 operating losses generated by Lyte Optronics
against the separate income generated by AXT during this period.
Extraordinary Item, net of tax benefits. In connection with the
acquisition of Lyte, 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 in the second quarter of 1999, which is reflected in the
ninesix months ended SeptemberJune 30, 2000 and 1999. For the six
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
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 $5.9Working capital decreased $5.8 million for Preferred Stock completed in March 1997. We
completed our initial public offering in May 1998, and raised approximately
$25.8or 14% to $34.7 million net of offering expenses. In December 1998 we completed our
taxable bond offering and raised approximately $11.6 million. As of Septemberat June 30,
1999, we had working capital of $39.3 million, including cash and cash
equivalents of $4.9 million,2000 compared to working capital$40.5 million at December 31, 1998 of
$40.9 million, including cash and cash equivalents of $16.4 million.
During the nine months ended September 30, 1999, net cash used in
operations of $6.3 million1999. The decrease was primarily
due to increases in inventoriesshort-term obligations necessary to sustain additional
revenue growth and the use of $9.4operating cash flows to procure capital equipment.
Total long-term debt including capital leases increased $7.3 million accounts receivable of $4.6while
property, plant and equipment purchases were $14.5 million.
Operating activities generated $3.9 million and prepaid and other assets of
$5.1 million, offset in part by net income of $3.5 million, depreciation and
amortization of $4.1 million, deferred income taxes of $721,000 and increases in
accounts payable of $647,000 and accrued liabilities of $3.7 million. The
increases in accounts receivable, inventory and accounts payable were primarilyfor the result of the 51.1% increase in total revenues from the prior ninesix months ended September 30. In addition, raw materials inventories increased in
anticipation of large ordersJune
30, 2000 compared to negative $7.1 million for the upcoming quarters. Accordingly,six months ended June 30,
1999. The increase was primarily due to increased profitability at the inventory turnover ratio declined from 1.7 turns at December 31, 1998substrate
division.
We invested $14.5 million in capital expenditures during the six months
ended June 30, 2000 compared to 1.5
turns at September$3.9 million during the six months ended June
30, 1999. The increase in prepaid and other assetsspending was primarily due to depositsfacility expansion and
equipment additions to increase crystal growth and wafer 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 Ge rawLED'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
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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 prepaid research and development
expenses and the increasestorage areas in unrealized gains on hedging of the Japanese yen.
The increase in accrued liabilities was primarily the result of increased income
tax
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expense and accruals for the one-time acquisition costs in the second quarter of
1999. Days sales outstanding increased from 62 days at December 31, 1998 to 70
days at September 30, 1999, reflecting large sales in the latter part of the
period, increases in international sales and increases in government contract
receivables.
Net cash used in investing activities was $6.3 million for the nine
months ended September 30, 1999, and was due primarilyFremont, California. We are also constructing
improvements to the purchase of
property, plantexisting production facilities in Fremont, California to
increase crystal growth and equipment.
Net cashwafer processing capacity. We expect to invest
approximately $47 million in additional facilities and equipment over the next
12 months.
Cash provided by financing activities was $1.0 million for the ninesix months ended SeptemberJune 30,
1999, and was generated primarily2000 included a $4.0 million note from our issuancebank and $2.3 million in proceeds
from the exercise of Common Stockstock options from the employee stock option plan.
Total debt was $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 bank's prime rate plus one-half percent. The
bank's prime rate was 9.5% at June 30, 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
outstanding under the $15 million line of credit. We have received a commitment
from our 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.
On June 15, 2000, we entered into a short-term note with our bank in the
amount of $956,000$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
$1.0
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 $916,000.credit. The 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 SeptemberJune 30,
1999,2000, $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
November 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 September 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 September 30, 1999, $4.3 million
was outstanding under the $15 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 dependent 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
have any 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 will result.
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
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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 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:
- our recent acquisition of Lyte Optronics and the integration of
its business and separate operations and facilities with our
operations;
- fluctuations in demand for our substrates due to reduction in
the value on Asian currencies and the turmoil in the Asian
financial markets;
- fluctuations in demand for laser pointing and alignment products
and decreases in the prices of these products;
- our expense levels and expected research and development
requirements;
- our ability to develop and bring to market new products on a
timely basis;
- the volume and timing of orders from our customers;
- the availability of raw materials;
- fluctuations in manufacturing yields;
- our manufacturing expansion in Beijing, China and the
assumption, integration and operation of the Chinese operations
of Lyte Optronics;
- introduction of products and technologies by our competitors;
and
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- costs relating to possible acquisitions and integration of
technologies or businesses.
For more information regarding our results, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We acquired Lyte Optronics in May 1999, as part of our business
strategy, and we may engage in future acquisitions. These acquisitions must be
successfully integrated into our business and 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:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- 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:
- difficulties in the assimilation of acquired personnel,
operations, technologies or products;
- unanticipated costs associated with the acquisition could
materially adversely affect our operating results;
- diversion of management's attention from other business
concerns;
- adverse effects on existing business relationships with
suppliers and customers;
- risks of entering markets where we have no or limited prior
experience;
- potential loss of key employees of acquired organizations; and
- 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.
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.
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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 29.8% of our revenues in the
year ended December 31, 1998 and nine months ended September 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. For example, we recently announced the two
month suspension of our Ge substrates from a major customer who had excess
inventories and was experiencing a slow down in business.
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, however, we believe that one of
our competitors has recently begun shipping, in low volume, GaAs substrates
which utilize a similar technology. 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 that we
engage in can be adversely affected by the following factors:
- chemical or physical defects in the crystals;
- contamination of the manufacturing environment;
- substrate breakage;
- equipment failure; and
- 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.
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In the past, we have sometimes manufactured substrates that 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.
In 1997, we began 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 larger GaAs substrate in commercial volumes with
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 AXT 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 substrate 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.
In 1997, we began commercial shipments of Ge and InP substrates and are
currently developing other substrates, including gallium phosphide, gallium
nitride and silicon carbide. 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 that 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:
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- the pending or any future U.S. or foreign patent applications
will be approved;
- any issued patents will protect our intellectual property;
- third parties will not challenge the ownership rights of the
patents or the validity of the patent applications;
- the patents owned by others will not have an adverse effect on
our ability to do business; or
- 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, except for Ge, 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:
- unavailability or late delivery of process equipment;
- unforeseen engineering problems;
- work stoppages;
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- unanticipated cost increases; and
- 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.
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 (MOCVD's) capable of producing
light-emitting diodes wafers. Damage to or 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 enable production 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.
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.
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:
- demand for our customers' products;
- competition faced by our customers in their particular
industries;
- the technical, sales and marketing and management capabilities
of our customers; and
- 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
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compete in this market, our operating results will be harmed. In the
semi-insulating GaAs substrates market, our principal competitors include:
- Freiberger Compound Materials;
- Hitachi Cable;
- Litton Airtron; and
- 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:
- having been in the business longer than we have;
- more manufacturing experience;
- more established technologies than our VGF technique;
- broader name recognition; and
- 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 involves
significant risks. Our ability to grow will depend in part on the expansion of
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 43.5% of
our total revenues in the year ended December 1998 and nine months ended
September 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 nine months ended September 30, 1999. We expect that
sales to customers outside the United States, including device manufacturers
located in Japan and other Asian countries that 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:
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- import restrictions and other trade barriers;
- unexpected changes in regulatory requirements;
- longer periods to collect accounts receivable;
- export license requirements;
- political and economic instability, in particular, the current
instability of the economies of Japan and other Asian countries;
and
- 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
$722,000 in the nine months ended September 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 purchased 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 and Taiwan, 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.
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 that has placed, and continues to place, a
significant strain on our operations. To accommodate this anticipated growth, we
will be required to:
- improve existing and implement new operational and financial
systems, procedures and controls;
- hire, train and manage additional qualified personnel;
- effectively manage multiple relationships with our customers,
suppliers and other third parties; and
- maintain effective cost controls.
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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:
- potential warranty or other claims from our customers;
- systems we use to run our business;
- systems used by our suppliers; and
- 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.
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
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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 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 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:
- the purchase of a commercial building and to finance tenant
improvements at 4281 Technology Drive, Fremont, California;
- the refinance an existing loan and to finance tenant
improvements on our principal offices; and
- 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."
As of September 30, 1999, our executive officers and directors control
17% 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 17% 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:
- the division of the board of directors into three separate
classes of three year terms;
- the right of the board to elect the director to fill a space
created by the expansion of the board;
- the ability of the board to alter our bylaws;
- authorizing the issuance of up to 2,000,000 shares of "blank
check" preferred stock; and
- 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:
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- - 66 2/3% of the shares of voting stock not owned by this large
stockholder approve the merger or combination, or
- - 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.
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 nine
months ended September 30, 1999, our stock price closed as low as $9.0625 and as
high as $35.125. Various factors could cause the price of our common stock to
continue to fluctuate substantially, including:
- actual or anticipated fluctuations in our quarterly or annual
operating results;
- changes in expectations as to our future financial performance
or changes in financial estimates of securities analysts;
- announcements of technological innovations by us or our
competitors;
- new product introduction by us or our competitors;
- large customer orders or order cancellations; and
- 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 SeptemberJune 30,
1999, our2000, the Company's outstanding commitments with respect to the foreign exchange
contracts had a total value of approximately $3.8 million equivalent.$1.7 million. Many of the contracts
were entered into six months prior to the due date and
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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 withItem 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 Annual Meeting of Stockholders on June 7, 2000. Of the
acquisition18,906,558 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 Lyte Optronics, our BoardStockholders.
Proposal 1: Election of Directors adopted resolutions designating 1,000,000two class II directors to hold office for a
three-year term and until their successors are elected and qualified. The
two candidates were Jesse Chen and Donald L. Tatzin.
Election results for this proposal were as follows:
For Withhold Abstain Not Voted
---------- -------- -------- ---------
Jesse Chen 14,392,983 80,259 0 0
Donald L. Tatzin 14,393,191 80,051 0 0
Proposal 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 the number of shares reserved for issuance under the
plan from 3,800,000 to 5,800,000 shares of Preferredcommon stock.
Election results for this proposal were as follows:
For Withhold Abstain Not Voted
---------- -------- -------- ---------
5,365,878 2,885,827 242,551 5,978,986
Proposal 4: To approve amendments to American Xtal Technology's 1998 Employee
Stock Purchase Plan to increase the number of shares reserved for issuance under
the Companyplan from 400,000 to 900,000 shares of common stock.
Election results for this proposal were as Series A Preferred Stock (the "Series A Preferred Stock"),follows:
For Withhold Abstain Not Voted
---------- -------- -------- ---------
7,979,590 506,357 8,309 5,978,986
Proposal 5: To ratify the appointment of which 983,039 shares were subsequently issued toPricewaterhouseCoopers LLP as the
stockholders of Lyte
Optronics in exchangeCompany's independent auditors 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 annumfiscal year ending December 31, 2000.
Election results for each share of Series A
27this proposal were as follows:
For Withhold Abstain Not Voted
---------- -------- -------- ---------
14,445,688 21,098 6,456 0
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Preferred Stock held by them, in each case as adjusted for stock splits,
recapitalizations15
Item 6. Exhibits and the like. Unless we have paid all dividends that have
accruedreports 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
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 2,363,000 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. Prudential Securities, Inc., to whom we paid a fee of $800,000,
advised us on the acquisition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORMForm 8-K
a. Exhibits.Exhibits
3.1 Amended Certificate of Incorporation
27.1 Financial Data Schedule.Schedule
b. Reports on Form 8-K.
(1) On June 14, 1999, we filed a report8-K
None
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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.
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(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.
(3) On November 15, 1999, we filed a report on Form 8-K/A
which amended the report on Form 8-K/A filed on August 11,
1999.
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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: November 15, 1999August 11, 2000 By: /s/ Guy D. Atwood
-------------------------------
Guy D. AtwoodDonald L. Tatzin
----------------------------------
Donald L. Tatzin
Chief Financial Officer
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EXHIBIT INDEX
Exhibits
--------
3.1 Amended Certificate of Incorporation
27.1 Financial Data Schedule