Document/Exhibit Description Pages Size
1: 10-K Form 10-K for Period Ended 12/31/98 55 315K
2: EX-3.1 Restated Cetificate of Incorporation 6 21K
5: EX-10.10 Bond Purchase Contract W/ Dain Raucher Inc. 16 69K
6: EX-10.11 Remarketing Agreement W/ Dain Rauscher Inc. 8 47K
3: EX-10.8 Loan Agreement W/ U.S. Bank National Association 22 91K
4: EX-10.9 Letter of Credit and Reimbursement Agreement 30 97K
7: EX-23.1 Consent of Independent Accountants 1 6K
8: EX-27.1 Financial Data Schedule 1 7K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
[Download Table]
DELAWARE 94-3031310
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4311 SOLAR WAY, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 683-5900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on
December 31, 1998 as reported on the Nasdaq National Market, was approximately
$115,515,000. Shares of common stock held by each officer, director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
As of December 31, 1998, 16,116,675 shares, $.001 par value, of the
registrant's common stock was outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant's 1999 annual
meeting of stockholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
form are incorporated by reference into Part III of this Form 10-K report.
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PART I
This report includes forward-looking statements which reflect our current
views with respect to future events and our potential financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in "Business", "Management's Discussion and Analysis
of Financial Condition and Results of Operations", 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," "intends," "future" 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 of this report.
ITEM 1. BUSINESS
GENERAL
We use a proprietary vertical gradient freeze, commonly referred to as
"VGF," technique to produce high-performance compound semiconductor substrates
which are used in a variety of electronic and opto-electronic applications such
as wireless and fiber optic telecommunications, lasers, LEDs, satellite solar
cells and consumer electronics. We primarily manufacture and sell gallium
arsenide, called GaAs, substrates. Sales of GaAs substrates accounted for
approximately 81.8% of our product revenues in 1998. We also manufacture and
sell indium phosphide, or InP, and germanium, or Ge, substrates and are
currently developing other high-performance compound substrates including
gallium phosphide, or GaP, and gallium nitride, or GaN. Our customers include:
- EMCORE,
- Hewlett Packard,
- Motorola,
- NEC,
- Nortel,
- Siemens,
- Sony,
- Spectrolab, and
- TRW.
BACKGROUND
Recent advances in communications and information technologies have created
a growing need for power efficient, high-performance electronic systems that
operate at very high frequencies, have increased computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. Silicon-based
semiconductor devices, however, have performance limitations in power efficient,
high-performance electronic applications. In addition, silicon-based
semiconductor devices currently do not possess the electrical properties
necessary to be used effectively in most opto-electronic applications such as
LEDs and lasers.
As a result of the limitations of silicon, semiconductor device
manufacturers are increasingly utilizing alternative substrates to improve the
performance of semiconductor devices or to enable new applications. These
alternative substrates may be composed of a single element, such as Ge, or
multiple elements which may include:
- gallium,
- aluminum,
- indium,
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- arsenic,
- phosphorus, and
- nitrogen.
Substrates that consist of more than one element are commonly referred to
as "compound substrates" and include GaAs, InP, GaP and GaN. GaAs is currently
the most widely used compound substrate. In comparison to silicon, compound
substrates have electrical properties that allow semiconductor devices to
operate at much higher speeds or at the same speed with lower power consumption.
For example, electrons move up to five times faster in GaAs than in silicon.
Compound substrates also have better opto-electronic characteristics than
silicon which allow them to convert energy into light and lasers, or to detect
light and convert light into electrical energy. The GaAs substrate market is
divided into two segments, semi-insulating and semi-conducting.
Semi-insulating GaAs substrates. The market for semi-insulating GaAs
substrates is the fastest growing segment of the GaAs market. According to
projections by Dataquest, IDC and Strategies Unlimited, the market for
semi-insulating GaAs substrates was estimated at $125 million in 1998 and is
expected to grow to approximately $400 million by the year 2002. This growth is
being driven by increasing demand for semi-insulating GaAs substrates in a
variety of power-efficient, high-performance applications, including cellular
phones, radars, satellite communication systems and direct broadcast systems.
Manufacturers integrate semi-insulating GaAs substrates into devices using
either an ion implantation or epitaxial process. Ion implantation is the process
of implanting ions directly into the semi-insulating GaAs substrate to modify
the electrical parameters of the substrate so that it can be used to manufacture
many of today's high-performance electronic devices. This process requires the
electrical parameters of the substrate to be as uniform as possible. Epitaxy, a
more recently developed process, involves the growth of layers of other
materials onto the semi-insulating GaAs substrate. While generally more
expensive than the ion implantation process, the epitaxial process enables
devices to achieve even greater performance advantages. The epitaxial process
requires that the GaAs substrate have an extremely smooth surface, few physical
imperfections, uniform electrical properties and low dislocation density, which
is a measurement of the crystalline perfection of the substrate material.
Traditionally, crystals for semi-insulating GaAs substrates for the ion
implantation and epitaxy markets have been grown using the liquid-encapsulated
czochralski, or LEC technique. The LEC technique requires a high temperature
gradient in the manufacturing process. Because the temperature gradient in the
LEC technique is high, the resulting crystals have a relatively high dislocation
density which weakens a crystal's physical structure and increases the risk of
breakage of the GaAs substrate during device manufacturing. In addition, as
semi-insulating GaAs substrates continue to grow in size to support increasingly
complex devices, the manufacturing challenges facing the LEC technique increase.
Semi-conducting GaAs substrates. We believe that the market for
semi-conducting GaAs substrates, based on 1998 market data and annual growth
rates projected by Dataquest, IDC and Strategies Unlimited, was approximately
$90 million in 1998 and we expect that the market will continue to grow. The
market for semi-conducting GaAs substrates is being driven by increasing demand
for a number of opto-electronic applications such as LEDs and lasers, which are
incorporated into a variety of products including:
- traffic lights,
- digital versatile discs, more commonly known as DVD players,
- CD players,
- CD-ROMs,
- laser printers,
- automobile lights and
- electronic displays.
2
In contrast to semi-insulating GaAs substrates which undergo either an ion
implantation or epitaxial process, semi-conducting GaAs substrates only undergo
an epitaxial process. As with semi-insulating GaAs substrates, semi-conducting
GaAs substrates that undergo the epitaxial process must have a smooth surface,
few physical imperfections, uniform electrical properties and a low dislocation
density. The traditional method of growing crystals for producing
semi-conducting GaAs substrates is the Horizontal Bridgeman, or HB, technique.
With the HB technique, the crystal is grown in a semi-cylindrical container
which results in a semi-circular, or D-shaped, substrate. In order to produce a
round semi-conducting GaAs substrate, the HB technique requires that the
D-shaped substrate be cut into a circle, resulting in a large amount of
discarded substrate. In addition, crystals grown using the HB technique
generally have a relatively high dislocation density and less uniform electrical
properties. These and other inherent technical difficulties limit the ability of
the HB technique to be used to cost-effectively produce high-quality substrates
greater than three inches in diameter.
Other high-performance substrates. We believe there are significant growth
opportunities in manufacturing other high-performance substrates. For example,
we believe that the markets for InP and GaP substrates, based on 1997 market
data and annual growth rates projected by Dataquest, IDC and Strategies
Unlimited, were an aggregate of approximately $150 million in 1998 and we expect
that these markets will continue to grow. Semi-insulating InP substrates are
used in power-efficient, high-performance electronic applications such as
wireless and high-bandwidth communications and semi-conducting InP substrates
are used in such applications as fiber optic communications and lasers. GaP
substrates are used by manufacturers of LEDs. The traditional method for growing
crystals for InP and GaP substrates has been the LEC, technique. In addition to
compound substrates, the market for the element Ge is developing in response to
the growing demand for solar cells in satellite communications. We believe that
the market for Ge substrates used to manufacture solar cells was approximately
$60 million in 1998 and we expect that the market will continue to grow. This
application requires the use of Ge substrates which must be manufactured with
few defects and minimal breakage. We believe the further development of these
markets depends on the ability of suppliers to cost-effectively manufacture
power-efficient, high-performance compound and single-element substrates.
THE AXT SOLUTION
We use a proprietary VGF technique to produce high-performance GaAs and
other substrates for use in a variety of electronic and opto-electronic
applications. We believe that our VGF technique, which we have developed over
the past 12 years, provides certain significant advantages over traditional
manufacturing methods for growing crystals used in the production of
semi-insulating and semi-conducting GaAs substrates. We believe that we are
currently the only high-volume supplier of GaAs substrates manufactured by using
the VGF technique and are positioned to become a leading manufacturer and
supplier of other compound and Ge substrates.
In the GaAs substrate market, crystals grown using our proprietary VGF
technique have a dislocation density that is significantly lower than crystals
grown using either the LEC or HB technique. As a result, we believe our GaAs
substrates have greater mechanical strength which often results in reduced
breakage during the ion implantation and epitaxial growth processes.
Furthermore, we believe the low dislocation density of our semi-insulating and
semi-conducting GaAs substrates translates into fewer defects in the materials
layered onto the substrate during the epitaxy process. In addition,
semi-insulating GaAs substrates produced using our VGF technique have more
uniform electrical properties than LEC-produced GaAs substrates, which is
important for the ion implantation process. In the semi-conducting GaAs
substrate market, VGF-grown crystals, unlike those grown using the traditional
HB technique, can be processed into round substrates with minimal wasted
material. Using our VGF technique, we have been able to produce GaAs substrates
as large as six inches in diameter.
In addition to the GaAs substrate market, we believe we can leverage our
expertise in the VGF technique to manufacture and produce commercial volumes of
other compound and single-element substrates. For example, in 1998, we shipped
Ge and InP substrates to customers and qualified our wafers with many more
potential customers.
3
STRATEGY
Our strategy is to be the leading developer and supplier of
high-performance GaAs substrates for both the semi-insulating and
semi-conducting markets, and to continue to expand into the development and
supply of other substrates. The key elements of our strategy include:
Advance VGF technology leadership. We pioneered the commercial use of the
VGF technique and have continued to develop and enhance our technology over the
course of 12 years through substantial investments in research and development.
Our efforts have led to significant improvements in the dislocation density,
mechanical strength and uniformity of the electrical properties of GaAs
substrates. We believe that our experience and expertise in VGF technology
provides us with a competitive advantage over more recent market entrants who
are utilizing variations of the VGF technology. We intend to continue to advance
our VGF technology through continued investment in research and development and
participation in certain government sponsored research programs.
Extend leadership in GaAs market. We are currently one of the largest
suppliers of GaAs substrates worldwide. Historically, we have been a leading
supplier of GaAs substrates in the epitaxy segment of the semi-insulating market
and in the semi-conducting market for GaAs substrates for lasers. We intend to
increase our share of these markets by continuing to provide high-quality,
price-competitive substrates. In addition, in the semi-insulating GaAs substrate
market, we intend to leverage our demonstrated success in the epitaxy segment to
further penetrate the ion implantation segment. In the semi-conducting GaAs
substrate market, we also intend to capitalize on our leadership to further
penetrate the high-volume, cost-sensitive LED market.
Leverage VGF technology to manufacture additional substrates. We believe
our VGF technology is a platform which we can leverage to rapidly develop and
cost-effectively manufacture additional high-quality compound substrates for
emerging applications in markets such as wireless and fiber optic
communications. For example, we recently began shipping InP and Ge substrates
developed using our VGF technique to customers. Unlike the more traditional
methods of growing crystals, we can use our VGF technology to grow the crystals
for these other substrates without having to make a significant investment in
new capital equipment.
Increase manufacturing capacity to target high-volume markets. We increased
our manufacturing capacity by approximately 30,000 square feet in the fourth
quarter of 1998. In addition, in June 1998, we have purchased an additional
58,000 square foot facility in Fremont, California. In January 1999, we
announced we had received a business license for operations in Beijing, China
and had purchased a 30,000 square foot facility in a major tax-free industrial
park in Beijing. These new facilities provide us with additional manufacturing
capacity. We believe that this increased manufacturing capacity will enable us
to further lower unit production costs and provide our high-performance
substrates at competitive prices for high-volume markets such as LEDs.
Leverage existing customer relationships. We currently sell our GaAs
substrates to over 200 customers, including:
- EMCORE,
- Hewlett Packard,
- Motorola,
- NEC,
- Nortel,
- Siemens,
- Sony,
- Spectrolab, and
- TRW.
4
We believe our past success in providing high-quality GaAs substrates to
these customers will provide us with a competitive advantage in supplying them
additional substrates as their needs develop. For example, we recently began
shipments of InP substrates to TRW, which currently purchases a significant
portion of its GaAs substrates from us. In addition, we intend to establish
alliances and joint development arrangements with customers to develop new
products, increase manufacturing efficiencies and more effectively serve our
customers' needs.
CUSTOMERS
We sold our products to over 200 customers during 1998. Each of the
customers listed below purchased substrates in excess of $500,000 during 1998:
[Download Table]
Alpha Industries Picogiga
Alpha Photonics Quantum Epitaxial Designs
Electronics & Materials, Inc. RF Micro Devices
Epitaxial Products International SDL, Inc.
EMCORE Co. Siemens
Hewlett Packard Sony
Motorola Spectrolab
Nortel Sumitomo Chemical
Opto Power TRW Space & Defense
We have historically entered into significant contracts with a number of
government agencies and customers for the development of certain products. For
more information regarding our development efforts, see " Research and
Development."
In the twelve months ended December 31, 1998, one customer accounted for
13.7% of our total revenues. No customer accounted for more than 10.0% of our
total revenues in 1996 and 1997. In 1996, 1997 and 1998, our five largest
customers accounted for 35.5%, 34.9% and 39.5%, respectively, of our total
revenues. Generally, we do not have long-term or other non-cancelable
commitments from our customers and usually sell products pursuant to customer
purchase orders. The loss of any major customer could have a material adverse
effect on our business and operating results.
TECHNOLOGY
AXT's VGF technique. Our proprietary VGF technique produces high-quality
crystals from which we produce high-performance compound and single-element
substrates for use in a variety of electronic and opto-electronic applications.
Our VGF technique is designed to control the crystal-growth process with
minimal temperature variation. Unlike traditional techniques, our VGF technique
places the hot GaAs melt above the cool crystal, thereby reducing the turbulence
of the GaAs melt which results when the melt and crystal are inverted. The
temperature gradient between the melt and the crystal in the VGF technique is
significantly lower than in traditional techniques. These aspects of the VGF
technique enable us to grow crystals that have a relatively low dislocation
density and high uniformity. One of the benefits of these characteristics is
that the crystal, and the substrate into which the crystal is manufactured, are
mechanically strong. The mechanical strength often results in substrates with
lower breakage rates during a customer's manufacturing process.
Under the VGF technique, the GaAs melt and growing crystal are contained in
a closed chamber. A number of benefits result from the use of this closed
system. Because the VGF system is sealed and the crystal growth is isolated,
both semi-insulating and semi-conducting crystals can be grown in the same
system without the time consuming and expensive process of completely
reconfiguring the system. The closed system isolates the crystal from the
outside environment during growth and significantly reduces potential
contamination of the crystal by impurities. The closed system also allows for
more precise control of the gallium-to-arsenic ratio which results in better
consistency and uniformity of the crystals. Therefore, crystals grown using the
VGF technique are consistently of a high quality. In addition, the use of
cylindrical crucibles, which are sized to
5
meet a customer's requirements, enables us to produce circular substrates with a
minimum amount of discarded material.
The VGF technique is highly automated and the temperature gradient is
controlled electronically rather than by physically moving the crystal or
furnace. As a result, there is no physical movement to disturb the sensitive
crystal. The entire crystal growth process is run under computer control with
minimal operator intervention. A single operator can supervise the control of
many VGF furnaces which results in significant cost savings.
We believe the VGF technology is a platform which we can leverage to
rapidly develop and cost-effectively manufacture additional high-quality
substrates. Unlike the more traditional methods of growing crystals, we can use
the VGF technology to grow crystals from these other substrates without having
to make a significant investment in new capital equipment. For example, we use
the proprietary VGF technique to manufacture InP and Ge substrates.
VGF compared to traditional techniques for producing GaAs substrates. We
believe our proprietary VGF technique provides significant advantages over the
traditional crystal growth techniques. The LEC technique is the traditional
method for producing semi-insulating GaAs substrates. Unlike the VGF technique,
the LEC technique is designed so that the hotter GaAs melt is located beneath
the cooler crystal, which results in greater turbulence in the melt. The LEC
technique requires a temperature gradient between the GaAs melt and the cool
crystal which is approximately 50 to 200 times higher than the temperature
gradient of the VGF technique. The turbulence and the high temperature gradient
cause LEC-grown crystals to have a higher dislocation density than VGF-grown
crystals. This characteristic results in a higher rate of breakage of the
LEC-developed substrate during the device manufacturing process. In addition,
the LEC technique is essentially an open process whereby the melt and growing
crystal are exposed to the environment for the entire duration of the crystal
growth process. This exposure results in greater propensity for impurity
contamination as well as difficulty in controlling the ratio of gallium to
arsenic. Because the crystal is not contained in a crucible, fluctuations in
temperature cause the diameter of the crystal to vary. Thus, to ensure proper
size with the LEC technique, the crystal must be grown significantly larger than
the desired size of the resulting substrate. During the LEC process, the crystal
is grown by dipping a seed crystal through molten boric oxide into a melt and
slowly pulling the seed up into the cool zone above the boric oxide where the
crystal hardens. As the GaAs melt is consumed, the crucible containing the
remaining liquid must be raised in coordination with the pulling of the crystal.
These moving parts and the relative complexity of the system result in higher
maintenance costs. Unlike the VGF technique, the LEC technique uses large,
complex electro-mechanical systems that are expensive to acquire and require
highly skilled personnel to operate.
The HB technique is the traditional method for producing semi-conducting
GaAs substrates. The HB technique holds the GaAs melt in a semi-cylindrical
"boat." Because of the semi-cylindrical shape of the boat, semi-conducting GaAs
crystals grown using the HB technique have a semi-circular cross-section. As a
result of this semi-circular shape, more crystal material must be discarded to
cut the crystal ingot into a cylindrical shape from which round substrates can
be produced. Furthermore, crystals grown using the HB technique have a higher
dislocation density than VGF-grown crystals. These and other inherent technical
difficulties limit the ability of the HB technique to be used to
cost-effectively produce high-quality substrates greater than three inches in
diameter. Since the HB technique uses a quartz crucible during the growth
process which can contaminate the GaAs melt with silicon impurities, the HB
technique is also unsuitable for making semi-insulating GaAs substrates.
PRODUCTS
We currently sell the compound substrates GaAs and InP, and the
single-element substrate Ge. We supply various sizes of substrates in 2, 3, 4,
and 6 square inches according to our customers' specifications and work closely
with our customers to ensure that we manufacture substrates to each customer's
particular specifications.
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The table below sets forth our products, their available sizes and selected
applications:
[Download Table]
SUBSTRATE MATERIAL DIAMETER (IN INCHES) APPLICATIONS
------------------ -------------------- ------------
GaAs semi-insulating 2,3,4,6 - Cellular phones
- Direct broadcast television
- High-performance transistors
- Satellite communications
GaAs semi-conducting 2,3,4 - LEDs
- Lasers
- Optical couplers
- Displays
InP semi-insulating 2,3 - Fiber optic communications
- Satellite communications
- High-performance transistors
- Automotive collision avoidance radars
InP semi-conducting 2 - Fiber optic communications
- Lasers
Ge 4 - Satellite solar cells
MANUFACTURING
Our manufacturing operations, which include crystal growth, slicing,
testing, edge grinding, polishing, inspecting and packaging the substrates for
shipment, are located at our headquarters in Fremont, California. Our Fremont
facilities are ISO 9002 certified. Many of our manufacturing operations are
computer monitored or controlled, enhancing reliability and yield.
We depend on a single or limited number of suppliers for certain critical
materials, including gallium, for use in the production of substrates. We
generally purchase these materials through standard purchase orders and not
pursuant to long-term supply contracts. We seek to maintain sufficient levels of
inventory for certain materials to guard against interruptions in supply and to
meet our near term needs. To date, we have been able to obtain sufficient
supplies of materials in a timely manner. However, a stoppage or delay in
supply, receipt of defective or contaminated materials, or increases in the
pricing of such raw materials could materially adversely affect our operating
results.
In the third quarter of 1998, we completed the expansion of our
approximately 50,000 square feet facility located in Fremont, California by
approximately 30,000 square feet to meet anticipated production needs through
1999. Because we currently perform all steps in our manufacturing process at our
Fremont facility, any interruption resulting from earthquake, fire, equipment
failures or other causes would have a material adverse effect on our results of
operations. For more information regarding the risks relating to our
manufacturing process and our new facility, see "Factors Affecting Future
Results -- If we do not achieve acceptable yields of crystals and the successful
and timely production of substrates, the shipment of our products would be
delayed and our business adversely affected." and "Factors Affecting Future
Results -- We are subject to additional risks as a result of the recent
completion of a new manufacturing facility," respectively.
Additionally, 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.
SALES AND MARKETING
We sell our products worldwide through our direct sales force as well as
through independent international sales representatives. Our direct sales force
consists of highly trained, technically sophisticated sales engineers who are
knowledgeable in the manufacturing and use of compound and single-element
substrates. Our direct sales force operates out of our corporate office in
Fremont, California and our Japanese subsidiary. Our sales engineers work with
customers during all stages of the substrate manufacturing process, from
developing the precise composition of the substrate through manufacturing and
processing the substrate
7
to the customer's exact specifications. We believe that maintaining a close
relationship with customers and providing customers with ongoing technical
support improves customer satisfaction and will provide us with a competitive
advantage in selling other substrates to our customers.
International sales, excluding Canada, as a percentage of total revenues in
1996, 1997 and 1998 were 35.0%, 34.1% and 28.8%, respectively. In addition to
our direct sales force in Japan, we have independent sales representatives in
France, Japan, South Korea, Taiwan and the United Kingdom. Except for sales by
our Japanese subsidiary, which are denominated in yen, we receive all payments
for products in U.S. dollars.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, publish technical articles,
conduct marketing programs and participate in industry trade shows and
conferences. For more information regarding the risks relating to our
international operations, see "Factors Affecting Future Results -- We derive a
significant portion of our revenues from international sales and our ability to
sustain and increase our international sales involve significant risks".
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on developing new
substrates, improving the performance of existing products and processes, and
reducing costs in the manufacturing process. We have assembled a
multi-disciplinary team of highly skilled scientists, engineers and technicians
to meet our research and development objectives. Among other projects, we have
research and development projects involving the development of GaN and high
purity GaAs epitaxy substrates.
Our research and development expenses in 1996, 1997 and 1998 were $592,000,
$1.3 million and $2.5 million, respectively. In addition to internally funded
research and development, we have also funded a significant portion of our
research and development efforts through contracts with the U.S. government and
customer funded research projects. In 1996, 1997 and 1998, we received $2.0
million, $2.3 million and $1.8 million, respectively, from U.S. government
agencies and customer funded research contracts. Under our contracts, we retain
rights to the VGF and wafer fabrication technology which we develop. The U.S.
government retains rights to utilize the technologies we develop for government
purposes only.
Our total research and development costs, including both contract funded
and internally funded research and development expenses, for 1996, 1997 and 1998
totaled $1.4 million, $2.8 million and $3.3 million, respectively. We expect to
continue to expend substantial resources on research and development. The
development of compound and single-element substrates is highly complex. There
can be no assurance that we will successfully develop and introduce new products
in a timely and cost-effective manner or that our development efforts will
successfully permit our products to meet changing market demands. For more
information regarding the risks relating to our research and development
efforts, see "Factors Affecting Future Results -- We must effectively respond to
rapid technological changes by continually introducing new products that achieve
broad market acceptance."
COMPETITION
The markets for GaAs substrates are intensely competitive. Our principal
competitors in the market for semi-insulating GaAs substrates currently include:
- Freiberger;
- Hitachi Cable;
- Litton Airtron; and
- Sumitomo Electric.
In the semi-conducting GaAs substrate market, our principal competitors
currently are Sumitomo Electric and Hitachi Cable. We also face competition from
manufacturers that produce GaAs substrates for their own use. In addition, we
face competition from 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
8
to face competitive risks similar to those for its GaAs substrates. Many of our
competitors and potential competitors have been in the business longer than us
and have greater manufacturing experience, more established technologies than
our VGF technique, broader name recognition and significantly greater financial,
technical and marketing resources than us. We cannot assure you that we will
compete successfully against these competitors in the future or that our
competitors or potential competitors will not develop enhancements to the LEC,
HB or VGF techniques that will offer price and performance features that are
superior to ours. Increased competitive pressure could also lead to intensified
price-based competition, resulting in lower prices and margins, which would
materially adversely affect our business, financial condition and results of
operations.
We believe that the primary competitive factors in the markets in which our
products compete are:
- quality,
- price,
- performance,
- customer support and satisfaction, and
- customer commitment to competing technologies.
Our ability to compete in target markets also depends on factors such as:
- the timing and success of the development and introduction of new
products by us and our competitors,
- the availability of adequate sources of raw materials, and
- protection of our products by effective utilization of intellectual
property laws and general economic conditions.
In order to remain competitive, we believe we must invest significant
resources in developing new substrates and in maintaining customer satisfaction
worldwide. There can be no assurance that our products will continue to compete
favorably or that we will be successful in the face of competition from existing
competitors or new companies entering our target markets. If we fail to compete
successfully, our financial condition and results of operation would be
materially adversely affected.
PROTECTION OF OUR INTELLECTUAL PROPERTY
Our success and competitive position for our VGF technique depends
materially on our ability to maintain trade secrets, patents and other
intellectual property protections. To protect our trade secrets, we take certain
measures to ensure their secrecy, such as executing non-disclosure agreements
with our employees, customers and suppliers. Despite our efforts, we cannot
assure you that others will not gain access to our trade secrets, or that we can
meaningfully protect our intellectual property. In addition, effective trade
secret protection may be unavailable or limited in certain foreign countries.
Although we intend to protect our rights vigorously, these measures may not be
successful.
We rely primarily on the technical and creative ability of our personnel,
rather than on patents, to maintain our competitive position. To date, we have
been issued one U.S. patent, which relates to our VGF technique, and have two
patent applications, one of which relates to our VGF technique, pending. We have
one pending application for a Japanese patent but no issued foreign patents.
There can be no assurance that our pending applications or any future U.S. or
foreign patent applications will be approved, that any issued patents will
protect our intellectual property or will not be challenged by third parties, or
that the patents of others will not have an adverse effect on our ability to do
business. Moreover, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as the laws of 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.
9
Although there are currently no pending material lawsuits against us or
unresolved notices that we are infringing intellectual property rights of
others, we may be notified in the future that we are infringing the patent
and/or other intellectual property rights of others. Litigation may be necessary
in the future to enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. We cannot assure you that we would prevail in any future litigation.
Any litigation, whether or not determined in our favor or settled by us, would
be costly and would divert the efforts and attention of our management and
technical personnel from normal business operations, which would have a material
adverse effect on our business, and results of operations. Adverse
determinations in litigation could result in the loss of our proprietary rights,
subject us to significant liabilities, require us to seek licenses from third
parties or prevent us from licensing our technology, any of which could have a
material adverse effect on our business and results of operations.
ENVIRONMENTAL REGULATIONS
We are subject to federal, state and local laws and regulations concerning
the use, storage, handling, generation, treatment, emission, release, discharge
and disposal of certain materials used in our research and development and
production operations, as well as laws and regulations concerning environmental
remediation and employee health and safety. The growing of crystals and the
production of substrates involve the use of certain hazardous raw materials,
including, but not limited to, arsenic. We cannot guarantee that our control
systems will be successful in preventing a release of these materials or other
adverse environmental conditions. Any release or other failure to comply with
present or future environmental laws and regulations could result in the
imposition of significant fines against us, the suspension of production or a
cessation of operations. In addition, there can be no assurance that existing or
future changes in laws or regulations will not require expenditures or
liabilities to be incurred by us, or in restrictions on our operations. At
December 31, 1998, we believe we were in substantial compliance with all
applicable environmental regulations.
BACKLOG
We include in backlog only those customer orders which have been accepted
by us and which shipment is generally expected within 12 months. As of December
31, 1998, our backlog was approximately $8.7 million. Backlog can fluctuate
greatly based upon, among other matters, the timing of orders. In addition,
purchase orders in our backlog are subject to changes in delivery schedules or
to reduction in size or cancellation at the option of the purchaser without
significant penalty. We have experienced, and may continue to experience,
cancellation, reduction and rescheduled delivery of orders in our backlog. Our
backlog may vary significantly from time to time depending upon the level of
capacity available to satisfy unfilled orders. Accordingly, although useful for
scheduling production, backlog as of any particular date may not be a reliable
indicator of sales for any future period.
EMPLOYEES
As of December 31, 1998, we had 314 full-time employees, of whom 263 were
principally engaged in manufacturing, 32 in sales, general and administration
and 19 in research and development. Our success is in part dependent on our
ability to attract and retain highly skilled workers, who are in high demand in
the Silicon Valley area. None of our employees is represented by a union and we
have never experienced a work stoppage. Management considers its relations with
its employees to be good.
10
EXECUTIVE OFFICERS
As of December 31, 1998, our executive officers and directors were as
follows:
[Enlarge/Download Table]
NAME AGE POSITION
---- --- --------
Morris S. Young, Ph.D. ... 53 Chairman of the Board of Directors, President and Chief
Executive Officer
Theodore S. Young, 58 Senior Vice President, Marketing and Director
Ph.D. ..................
Davis Zhang............... 42 Senior Vice President, Production
Gary S. Young............. 55 Vice President, Sales
Guy D. Atwood............. 56 Vice President and Chief Financial Officer, Treasurer and
Secretary
Xiao Gordon Liu........... 34 Vice President, Engineering and Development
Jesse Chen(1)(2).......... 40 Director
B.J. Moore(1)(2).......... 62 Director
Donald L. Tatzin(1)(2).... 46 Director
------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Morris S. Young, Ph.D. co-founded AXT in 1986 and has served as our
Chairman of the Board of Directors since February 1998 and President and Chief
Executive Officer, as well as a director since 1989. Dr. Young holds a B.S. in
Metallurgical Engineering from Chengkung University, Taiwan, an M.S. in
Metallurgy from Syracuse University and a Ph.D. in Metallurgy from Polytechnic
University.
Theodore S. Young, Ph.D. co-founded AXT in 1986 and has served as our
Senior Vice President, Marketing since 1989 and served as President from 1987 to
1989. He has also acted as a director since our inception, including as the
Chairman of the Board of Directors from January 1987 to January 1998. Dr. Young
holds a B.S. in Physics from National Taiwan University, an M.S. in Geophysics
from the University of Alaska and a Ph.D. in Plasma Physics from the
Massachusetts Institute of Technology.
Davis Zhang co-founded AXT in 1986 and has served as our Senior Vice
President, Production since January 1994. From 1987 to 1993, Mr. Zhang served as
our Senior Production Manager. Mr. Zhang holds a B.S. in Mechanical Engineering
from Northern Communication University, Beijing, China.
Gary S. Young joined us in 1991 and has served as our Vice President, Sales
since July 1993. From 1991 to 1993, Mr. Young served as our Sales and
Administrative Manager. From 1973 to 1991, Mr. Young worked in various
capacities with several companies, including as a Systems Engineer for IBM and
as a software engineer for Boole & Babbage, Inc., an independent software
vendor. Mr. Young holds a B.S. in Mathematics from National Taiwan Normal
University, an M.A. in Mathematics from Northeast Missouri State University and
an M.S. in Operations Research from Purdue University.
Guy D. Atwood joined us in August 1997 as our Vice President and Chief
Financial Officer and has served as our Treasurer and Secretary since February
1998. From 1991 to August 1997, Mr. Atwood served at various times as Chief
Financial Officer for several private companies, most recently the alumni
association for the University of California at Berkeley and AvenuSoftware, a
film and video software company, of which he was also its President. Mr. Atwood
was self-employed as a financial consultant from 1994 to 1995, and also provided
services in such capacity to the Company from June to September 1995. Mr. Atwood
holds a B.S. in Accounting from the University of California at Berkeley.
Xiao Gordon Liu joined us in 1995 as Senior Engineer and was promoted to
Vice President, Engineering and Development in November 1998. Prior to joining
us, Mr. Liu was a postdoctoral fellow and associate specialist at University of
California at Berkeley and a research associate at the University of Lund,
Sweden. Mr. Liu holds a Ph.D. in Physics from the University of Lund, Sweden and
has published more than 30 scientific papers.
11
Jesse Chen has served as a director of AXT since February 1998. Since May
1997, Mr. Chen has served as a Managing Director of Maton Venture, an investment
company. Prior to that, Mr. Chen co-founded BusLogic, Inc., a computer
peripherals company and served as its Chief Executive Officer from 1990 to 1996.
Mr. Chen serves on the Board of Directors of several private companies. Mr. Chen
has a B.S. degree in Aeronautical Engineering from Chenkung University, Taiwan
and an M.S. in Electrical Engineering from Loyola Marymount University.
B.J. Moore has served as a director of AXT since February 1998. Since 1991,
Mr. Moore has been self-employed as a consultant and has served as a director to
several technology-based companies. Mr. Moore currently serves on the Board of
Directors for Adaptec, Inc., a computer peripherals company and Dionex
Corporation, an ion chromatography systems company, as well as several private
companies. From 1986 to 1991, Mr. Moore served as President and Chief Executive
Officer of Outlook Technology, an electronics test equipment company. Mr. Moore
holds a B.S. and an M.S. degree in Electrical Engineering from the University of
Tennessee.
Donald L. Tatzin has served as a director of AXT since February 1998. Since
1993, Mr. Tatzin has served as Executive Vice President of Showboat, Inc., a
gaming company. In addition, Mr. Tatzin served as a director for Sydney Harbour
Casino, an Australian gaming company from 1995 to 1996 and as its Chief
Executive Officer from April to October 1996. Prior to that, Mr. Tatzin was a
director and consultant with Arthur D. Little, Inc., from 1976 to 1993. Mr.
Tatzin holds an S.B. in Economics and an S.B. and masters degrees in City
Planning from the Massachusetts Institute of Technology and an M.S. in Economics
from Australian National University.
ITEM 2. PROPERTIES
In the third quarter of 1998, we completed the expansion of our
approximately 50,000 square foot facility located in Fremont, California by
approximately 30,000 square feet to meet anticipated production needs through
1999. Additionally, 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.
ITEM 3. LEGAL PROCEEDINGS
In October 1998, a vendor submitted a claim against us to the Arbitration
Commission in Shenzhen, China, alleging that we failed to honor our obligation
to take delivery of the full quantity of Ge under a purchase contract with the
vendor. We believe that this action is without merit and will continue to
vigorously defend our position. We expect the cost of defending this matter will
not materially adversely affect our operating results through fiscal 1999.
However, there can be no assurance that our defense of this matter will be
successful.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AXT common stock has been trading publicly on the Nasdaq National Market
under the symbol "AXTI" since May 20, 1998, the date we consummated our initial
public offering. The following table sets forth, for the periods indicated, the
range of quarterly high and low closing sales prices for AXT's common stock on
the Nasdaq National Market.
[Download Table]
HIGH LOW
------- -------
FISCAL 1998
January 1, 1998 through May 19, 1998..................... Not Applicable
May 20, 1998 through June 30, 1998....................... $15.000 $10.125
Third Quarter ended September 30, 1998................... 15.500 7.000
Fourth Quarter ended December 31, 1998................... 10.813 6.000
As of December 31, 1998, there were 181 holders of record of our common
stock. Because many shares of AXT's common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders.
We have never paid or declared any cash dividends on our common stock and
do not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenues................................ $5,666 $11,520 $14,222 $23,014 $41,493
Contract revenues............................... 1,791 2,958 2,005 2,321 1,797
------ ------- ------- ------- -------
Total revenues.......................... 7,457 14,478 16,227 25,335 43,290
Cost of revenues:
Cost of product revenues........................ 3,091 6,030 9,270 13,674 24,550
Cost of contract revenues....................... 1,422 2,234 795 1,553 804
------ ------- ------- ------- -------
Total cost of revenues.................. 4,513 8,264 10,065 15,227 25,354
------ ------- ------- ------- -------
Gross profit...................................... 2,944 6,214 6,162 10,108 17,936
Operating expenses:
Selling, general and administrative............... 921 1,716 2,033 2,959 5,016
Research and development.......................... 149 448 592 1,289 2,504
------ ------- ------- ------- -------
Total operating expenses................ 1,070 2,164 2,625 4,248 7,520
------ ------- ------- ------- -------
Income from operations............................ 1,874 4,050 3,537 5,860 10,416
Interest expense.................................. (3) (12) (170) (570) (781)
Interest and other income (expense)............... 65 282 (72) (34) 568
------ ------- ------- ------- -------
Income before provision for income taxes.......... 1,936 4,320 3,295 5,256 10,203
Provision for income taxes........................ 775 1,581 1,249 1,998 3,877
------ ------- ------- ------- -------
Net income........................................ $1,161 $ 2,739 $ 2,046 $ 3,258 $ 6,326
====== ======= ======= ======= =======
Basic net income per share........................ $ 0.44 $ 0.97 $ 0.71 $ 1.11 $ 0.42
====== ======= ======= ======= =======
Diluted net income per share...................... $ 0.10 $ 0.23 $ 0.17 $ 0.25 $ 0.42
====== ======= ======= ======= =======
Shares used in basic net income per share
calculations.................................... 2,634 2,821 2,882 2,938 14,928
Shares used in diluted net income per
share calculations.......... 11,676 11,813 11,811 12,839 15,177
13
[Enlarge/Download Table]
DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments..................................... $1,446 $ 835 $ 756 $ 3,054 $16,122
Working capital................................... 2,859 3,760 5,542 14,209 41,068
Total assets...................................... 5,757 11,316 17,384 30,613 75,023
Long-term debt, net of current portion............ -- 2,350 5,582 7,728 16,347
Stockholders' equity.............................. 4,213 7,005 8,999 18,591 51,168
14
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
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.
RESULTS OF OPERATIONS
Overview
We use a proprietary VGF technique to produce high-performance compound
semiconductor substrates for use 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, LEDs, and consumer electronics. We also sell Ge
substrates for use in satellite solar cells.
We have been profitable on an annual basis since 1990 and our total
revenues were $16.2 million, $25.3 million and $43.3 million for the years ended
December 31, 1996, 1997 and 1998, respectively. Total revenues consist of
product revenues and contract revenues. Our product revenues were $14.2 million,
$23.0 million and $41.5 million for the years ended December 31, 1996, 1997 and
1998, respectively. Product revenues are generally recognized upon shipment of
products to customers. Historically, virtually all of our product revenues have
been derived from sales of GaAs substrates, which, in the years ended December
31, 1997 and 1998, accounted for 95.0% and 81.8%, respectively, of the our
product revenues. We began selling InP and Ge substrates to our customers in
late 1997 and GaN substrates in late 1998.
Our contract revenues were $2.0 million, $2.3 million and $1.8 million for
the years ended December 31, 1996, 1997 and 1998, respectively. Contract
revenues are recognized under the percentage of completion method and related
research costs are included in cost of contract revenues. Contract revenues
consist of research and development contracts with U.S. government agencies and
customer-funded research projects. The largest of the government contracts was a
four-year U.S. Department of Defense Title III Program for development of GaAs
substrates (the "Title III GaAs contract"), which was awarded to us in March
1994 and under which we were paid an aggregate of $6.1 million. The Title III
GaAs contract was completed in 1998. We retain rights to the VGF and wafer
fabrication technology developed under these government and customer-funded
research contracts and are therefore able to leverage these programs to continue
to broaden our product and technology offerings.
In 1995, we established a wholly-owned subsidiary in Japan to distribute
our products. This subsidiary serves primarily as a direct sales and support
office for our customers in Japan. We also utilize independent sales
representatives in France, Japan, South Korea, Taiwan and the United Kingdom.
Domestic sales are generated by our direct sales force. International sales,
excluding Canada, accounted for 35.0%, 34.1% and 28.8% of total revenues for the
years ended December 31, 1996, 1997 and 1998, respectively. Except for sales in
Japan, which are denominated in yen, we denominate and collect our international
sales in U.S. dollars. Doing business in Japan subjects us to fluctuations in
exchange rates between the U.S. dollar and the Japanese yen. We incurred foreign
exchange losses of $114,000, $186,000 and $24,000 for the years ended December
31, 1996, 1997 and 1998, respectively. During the year ended December 31, 1998,
we bought foreign exchange contracts to hedge against certain trade accounts
receivable in Japanese yen. The outstanding commitments with respect to such
foreign exchange contracts had a total value of approximately $1.6 million as of
December 31, 1998.
Since July 1996, we have conducted all of our operations in a 50,000 square
foot office and production facility located in Fremont, California. Prior to
transitioning our manufacturing operations to this facility, we
15
leased a 20,000 square foot manufacturing facility in Dublin, California. In
late 1998, we expanded the size of our current manufacturing facility by
approximately 30,000 square feet to meet our anticipated future production needs
through 1999. In June 1998, we purchased an additional 58,000 square foot
facility in Fremont, California directly across the street from our existing
manufacturing facility and moved marketing, sales, engineering and
administrative personnel into a portion of the building. We believe that this
new facility will not be used for production of substrates prior to the end of
1999. In January 1999, we announced we had received a business license for
operations in Beijing, China and had purchased a 30,000 square foot facility in
a major tax-free industrial park in Beijing. This facility is expected to be
operational during the second quarter of 1999. We expect that our proprietary
VGF crystal growth operations will continue to be housed in Fremont, California,
and our other manufacturing operations will be conducted in both Fremont and
Beijing.
In connection with the granting of stock options, we recorded aggregate
deferred compensation of $322,000 and $203,000, representing the difference
between the deemed fair value of the Common Stock for accounting purposes and
the option exercise price at the date of grant for the years ended December 31,
1997 and 1998, respectively. This deferred compensation will be amortized over
the vesting period of the applicable options of which $102,000 and $96,000 was
amortized during the years ended December 31, 1997 and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
Revenues:
Product revenues.......................................... 87.6% 90.8% 95.8%
Contract revenues......................................... 12.4 9.2 4.2
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues.................................. 57.1 54.0 56.7
Cost of contract revenues................................. 4.9 6.1 1.9
----- ----- -----
Total cost of revenues............................ 62.0 60.1 58.6
----- ----- -----
Gross margin................................................ 38.0 39.9 41.4
Operating expenses:
Selling, general and administrative....................... 12.5 11.7 11.5
Research and development.................................. 3.6 5.1 5.8
----- ----- -----
Total operating expenses.......................... 16.1 16.8 17.3
----- ----- -----
Income from operations...................................... 21.9 23.1 24.1
Interest expense............................................ (1.0) (2.2) (1.8)
Interest and other income (expense)......................... (0.5) (0.1) 1.3
----- ----- -----
Income before provision for income taxes.................... 20.4 20.8 23.6
Provision for income taxes.................................. 7.7 7.9 9.0
----- ----- -----
Net income.................................................. 12.7% 12.9% 14.6%
===== ===== =====
16
The following table sets forth product and contract gross profits and gross
margins for the periods indicated.
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------ ------ -------
(DOLLARS IN THOUSANDS)
Product gross profit.................................... $4,952 $9,340 $16,943
Product gross margin.................................... 34.8% 40.6% 40.8%
Contract gross profit................................... $1,210 $ 768 $ 993
Contract gross margin................................... 60.3% 33.1% 55.3%
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Total revenues increased 70.9% from $25.3 million for the year
ended December 31, 1997 to $43.3 million for year ended December 31, 1998.
Product revenues increased 80.3% from $23.0 million for the year ended December
31, 1997 to $41.5 million for the year ended December 31, 1998. The increase in
product revenues reflected an increase in the volume of sales of GaAs and InP
substrates to existing domestic and international customers, the addition of new
customers and the introduction of Ge substrates in the fourth quarter of 1997.
Ge substrates totaled 15.6% of product revenues for the year ended December 31,
1998 compared to only 3.6% in 1997.
International revenues, excluding Canada, decreased from 34.1% of total
revenues for the year ended December 31, 1997 to 28.8% of total revenues for the
year ended December 31, 1998, primarily reflecting the introduction of Ge
substrates in late 1997, which are currently sold only to domestic customers. We
believe that Ge substrates will be sold only to U.S. customers for the
foreseeable future, which is expected to cause our international revenues to
decline as a percentage of total revenues.
Contract revenues decreased 22.6% from $2.3 million for the year ended
December 31, 1997 to $1.8 million for the year ended December 31, 1998. Contract
revenues in 1997 were higher than in 1998 primarily because we recognized
significant revenue from a $1.2 million customer-funded Ge substrates research
contract that was completed in June 1997. Contract revenues declined from 9.2%
of total revenues for the year ended December 31, 1997 to 4.2% for the year
ended December 31, 1998 as a result of product revenue growth combined with a
decline in contract revenues. In future periods, we expect contract revenues to
continue to decline as a percentage of total revenues.
Gross margin. Gross margin increased from 39.9% for the year ended December
31, 1997 to 41.4% for the year ended December 31, 1998. Product gross margin
increased slightly from 40.6% for the year ended December 31, 1997 to 40.8% for
the year ended December 31,1998, reflecting the higher yields achieved in GaAs
and InP production, partially offset by lower margins from Ge substrates.
Contract gross margins increased from 33.1% for the year ended December
31,1997 to 55.3% for the year ended December 31, 1998. This increase was due to
a shift in contract revenue mix from a lower margin customer-funded contract for
Ge substrates research completed in June 1997 to higher margin government
contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 69.5% from $3.0 million for the year ended
December 31, 1997 to $5.0 million for the year ended December 31, 1998. This
increase resulted primarily from increased personnel and administrative expenses
required to support additional sales volume. Selling, general and administrative
expenses as a percentage of total revenues decreased slightly from 11.7% for the
year ended December 31,1997 to 11.5% for the year ended December 31, 1998.
Research and development expenses. Research and development expenses
increased 94.3% from $1.3 million for the year ended December 31, 1997 to $2.5
million for the year ended December 31, 1998. This increase resulted primarily
from the hiring of additional engineers and the purchase of materials to develop
new products and to enhance existing products. In addition to our funded
research and development, we incurred research and development expenses relating
to government and customer-funded research contracts, which are included in the
cost of contract revenues. For the year ended December 31, 1998, total research
and
17
development costs, including both contract funded and internally funded research
and development expenses, totaled $3.3 million, or 7.6% of total revenues.
Interest expense. Interest expense increased from $570,000 for the year
ended December 31, 1997 to $781,000 for the year ended December 31, 1998. This
increase was primarily the result of additional borrowings in 1998 we incurred
to finance the purchase of the our new building and to finance expansion of
production facilities and related equipment purchases.
Interest and other income (expense). Interest and other income (expense)
increased from $34,000 of expense for the year ended December 31, 1997 to
$568,000 of income for the year ended December 31, 1998. This increase was
primarily the result of interest income earned on the $25.8 million in net
proceeds raised from our initial public offering in May 1998.
Provision for Income Taxes. Income tax expense remained at 38.0% of income
before provision for income taxes for the years ended December 31, 1997 and
1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues increased 56.1% from $16.2 million for the year
ended December 31, 1996 to $25.3 million for the year ended December 31, 1997.
Product revenues increased 61.8% from $14.2 million for the year ended December
31, 1996 to $23.0 million for the year ended December 31, 1997. The increase in
product revenues reflected an increase in the volume of sales of GaAs substrates
to existing domestic and international customers, sales to new customers and the
introduction of Ge substrates in the fourth quarter of 1997.
International revenues, excluding Canada, decreased from 35.0% of total
revenues for the year ended December 31, 1996 to 34.1% of total revenues for the
year ended December 31, 1997, primarily reflecting the introduction of Ge
substrates in late 1997, which were sold only to U.S. customers.
Contract revenues increased 15.8% from $2.0 million for the year ended
December 31, 1996 to $2.3 million for the year ended December 31, 1997. This
increase was primarily due to revenues recognized from a $1.2 million
customer-funded Ge substrates research contract that was completed in 1997. This
increase was partially offset by a reduction in government contract revenues.
Contract revenues declined from 12.4% of total revenues for the year ended
December 31, 1996 to 9.2% for the year ended December 31, 1997 as a result of
product revenue growth exceeding contract revenue growth.
Gross margin. Gross margin increased from 38.0% for the year ended December
31, 1996 to 39.9% for the year ended December 31, 1997. Product gross margin
increased from 34.8% for the year ended December 31, 1996 to 40.6% for the year
ended December 31, 1997. The lower product gross margin in 1996 resulted
primarily from duplicate expenses of approximately $500,000 due to simultaneous
operations of two facilities and manufacturing inefficiencies relating to the
transition to our new production facility.
Contract gross margin declined from 60.3% for the year ended December 31,
1996 to 33.1% for the year ended December 31, 1997. This decrease was due to a
shift in contract revenue mix from higher margin government research contracts
in 1996 to a lower margin customer-funded contract for Ge substrates research.
In addition, in 1996 gross margin was favorably impacted by large incentive
awards which we were paid upon completion of certain milestones of the Title III
GaAs contract.
Selling, general and administrative expenses Selling, general and
administrative expenses increased 45.5% from $2.0 million for the year ended
December 31, 1996 to $3.0 million for the year ended December 31, 1997. This
increase resulted primarily from increased domestic and international sales
personnel and administrative expenses required to support increased sales
volume.
Research and development expenses. Research and development expenses
increased 117.7% from $592,000 for the year ended December 31, 1996 to $1.3
million for the year ended December 31, 1997. This increase resulted primarily
from the hiring of additional engineers to develop new products and to enhance
existing products. For the year ended December 31, 1997, total research and
development costs, including
18
both contract funded and internally funded research and development expenses,
totaled $2.8 million, or 11.2% of total revenues.
Interest expense. Interest expense increased from $170,000 for the year
ended December 31, 1996 to $570,000 for the year ended December 31, 1997. This
increase resulted primarily from additional borrowings incurred in 1996 to
finance our new manufacturing facility, the expansion of production facilities
in 1997 and related equipment purchases.
Interest and other income (expense). Interest and other income (expense)
decreased from $72,000 of expense for the year ended December 31, 1996 to
$34,000 of expense for the year ended December 31, 1997. This decrease was due
to higher interest income generated on investments from the proceeds of a $5.9
million private equity financing completed in March 1997, partially offset by
foreign currency transaction losses incurred due to the increase in the value of
the U.S. dollar compared to the Japanese yen.
Provision for income taxes. Income tax expense was virtually unchanged from
37.9% of income before provision for income taxes for the year ended December
31, 1996 to 38.0% of income before provision for income taxes for the year ended
December 31, 1997.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results in dollars for
the eight quarters ended December 31, 1998. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly such quarterly information. The
operating results for any quarter are not necessarily indicative of results for
any subsequent period.
[Enlarge/Download Table]
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
Revenues:
Product revenues.............. $4,494 $5,360 $6,060 $7,100 $9,238 $10,293 $10,887 $11,074
Contract revenues............. 600 842 447 432 492 497 508 301
------ ------ ------ ------ ------ ------- ------- -------
Total revenues......... 5,094 6,202 6,507 7,532 9,730 10,790 11,395 11,375
Cost of revenues:
Cost of product revenues...... 2,805 3,167 3,604 4,098 5,460 6,139 6,684 6,267
Cost of contract revenues..... 498 654 210 191 265 218 157 164
------ ------ ------ ------ ------ ------- ------- -------
Total cost of 3,303 3,821 3,814 4,289 5,725 6,357 6,841 6,431
revenues.............
------ ------ ------ ------ ------ ------- ------- -------
Gross profit.................... 1,791 2,381 2,693 3,243 4,005 4,433 4,554 4,944
Operating expenses:
Selling, general and 642 674 703 940 966 1,119 1,110 1,821
administrative..............
Research and development...... 222 296 306 465 640 669 736 459
------ ------ ------ ------ ------ ------- ------- -------
Total operating 864 970 1,009 1,405 1,606 1,788 1,846 2,280
expenses.............
------ ------ ------ ------ ------ ------- ------- -------
Income from operations.......... 927 1,411 1,684 1,838 2,399 2,645 2,708 2,664
Interest expense................ (115) (151) (158) (146) (181) (157) (169) (273)
Interest and other income (91) 77 (8) (12) 21 (25) 206 365
(expense).....................
------ ------ ------ ------ ------ ------- ------- -------
Income before provision for 721 1,337 1,518 1,680 2,239 2,463 2,745 2,756
income taxes..................
Provision for income taxes...... 274 508 577 639 854 943 1,037 1,043
------ ------ ------ ------ ------ ------- ------- -------
Net income...................... $ 447 $ 829 $ 941 $1,041 $1,385 $ 1,520 $ 1,708 $ 1,713
====== ====== ====== ====== ====== ======= ======= =======
19
The following table sets forth selected consolidated financial information
as a percentage of total revenues for each of our last eight quarters.
[Enlarge/Download Table]
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
Revenues:
Product revenues.............. 88.2% 86.4% 93.1% 94.3% 94.9% 95.2% 95.5% 97.4%
Contract revenues............. 11.8 13.6 6.9 5.7 5.1 4.8 4.5 2.6
------ ------ ------ ------ ------ ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues...... 55.0 51.1 55.4 54.4 56.1 56.9 58.6 55.1
Cost of contract revenues..... 9.8 10.5 3.2 2.5 2.7 2.0 1.4 1.4
------ ------ ------ ------ ------ ------- ------- -------
Total cost of 64.8 61.6 58.6 56.9 58.8 58.9 60.0 56.5
revenues.............
------ ------ ------ ------ ------ ------- ------- -------
Gross margin.................... 35.2 38.4 41.4 43.1 41.2 41.1 40.0 43.5
Operating expenses:
Selling, general and 12.6 10.8 10.8 12.5 9.9 10.4 9.7 16.0
administrative..............
Research and development...... 4.4 4.8 4.7 6.2 6.6 6.2 6.5 4.0
------ ------ ------ ------ ------ ------- ------- -------
Total operating 17.0 15.6 15.5 18.7 16.5 16.6 16.2 20.0
expenses.............
------ ------ ------ ------ ------ ------- ------- -------
Income from operations.......... 18.2 22.8 25.9 24.4 24.7 24.5 23.8 23.5
Interest expense................ (2.3) (2.4) (2.4) (1.9) (1.9) (1.5) (1.5) (2.4)
Interest and other income (1.7) 1.2 (0.2) (0.2) 0.2 (0.2) 1.8 3.2
(expense).....................
------ ------ ------ ------ ------ ------- ------- -------
Income before provision for 14.2 21.6 23.3 22.3 23.0 22.8 24.1 24.3
income taxes..................
Provision for income taxes...... 5.4 8.2 8.9 8.5 8.8 8.7 9.1 9.2
------ ------ ------ ------ ------ ------- ------- -------
Net income...................... 8.8% 13.4% 14.4% 13.8% 14.2% 14.1% 15.0% 15.1%
====== ====== ====== ====== ====== ======= ======= =======
The following table sets forth product and contract gross profits and gross
margins for the eight quarters ended December 31, 1998.
[Enlarge/Download Table]
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Product gross profit............ $1,689 $2,193 $2,456 $3,002 $3,778 $ 4,154 $ 4,203 $ 4,807
Product gross margin............ 37.6% 40.9% 40.5% 42.3% 40.9% 40.4% 38.6% 43.4%
Contract gross profit........... $ 102 $ 188 $ 237 $ 241 $ 227 $ 279 $ 351 $ 137
Contract gross margin........... 17.0% 22.3% 53.0% 55.8% 46.1% 56.1% 69.1% 45.5%
Our total revenues have increased in each of the eight quarters ended
December 31, 1998, except for the quarter ended December 31, 1998, which was
comparable to the prior quarter. These quarterly increases reflect increased
product shipments to both the semi-insulating and semi-conducting GaAs and InP
markets and the introduction of Ge substrates in the quarter ended December 31,
1997. In the quarter ended December 31, 1998, revenues from the sales of Ge
substrates declined by $1.2 million from the prior quarter as a result of a
major customer having excess inventory and deferring shipments. This decline in
revenues was offset by a $1.2 million increase in GaAs shipments due primarily
to increased orders from Southeast Asia for semi-conducting substrates. Contract
revenues increased in the quarters ended March 31 and June 30, 1997 primarily as
a result of revenues recognized from a $1.2 million customer-funded Ge
substrates research contract. Contract revenues decreased in the quarter ended
December 31, 1998 due primarily to the temporary reduction in the level of work
performed on contracts in progress.
We experienced higher product gross margins in the four quarters of 1997
primarily as a result of better product yields achieved from the new production
facility completed in 1996 and improved manufacturing efficiencies from larger
production volumes. In addition, due to a recycling program implemented in the
quarter ended December 31, 1997, we were able to recycle scrapped inventory that
had accumulated over prior quarters. This recycling program had a significant
positive impact on the product gross margin for the quarter ended December 31,
1997. While we will continue the recycling program, we expect the program to
have a less significant impact on product gross margins in the future as
evidenced by the decline in product gross
20
margins for March 31, 1998. The increase in the overall product gross margin in
the quarter ended December 31, 1997 was partially offset by lower product gross
margins from sales of Ge substrates, which have lower gross margins than GaAs
and InP substrates. The decrease in the overall product gross margins for the
first three quarters of 1998 was primarily due to an increase in sales of Ge
substrates. We experienced significantly lower contract gross margins for the
quarters ended March 31, 1997 and June 30, 1997 due to a shift in contract
revenue mix from higher margin government research contracts in prior quarters
to a lower margin customer-funded contract for Ge substrates research. The
decrease in contract gross margin from the quarter ended December 31, 1997 to
the quarter ended March 31, 1998 was due to a shift in contract revenue mix from
higher margin government research contracts in prior quarters to a lower margin
cost sharing contract for InP substrates research. Contract gross margin in the
quarter ended September 30, 1998 was favorably impacted by the recognition of
certain performance incentives under the Title III GaAs contract. The lower
contract gross margin in the quarter ended December 31, 1998 was primarily due
to the lower margin on the cost sharing contract for InP substrates research.
Selling, general and administrative expenses for the quarter ended December
31, 1997 were higher than the quarters ended June 30 and September 30, 1997, as
we built our management infrastructure to support its increased sales volume.
Selling, General and administrative expenses for the quarter ended December 31,
1998 were significantly higher than the previous three quarters due primarily to
increases in our bad debt allowance to cover exposure from increased
international sales and for legal expenses in connection with an arbitration
case.
Research and development expenses for the four quarters ended September 30,
1998 significantly increased over the prior three quarters ended September 30,
1997, primarily due to increased new product research and materials purchased
for research on InP substrates. Research and development expenses for the
quarter ended December 31, 1998 decreased primarily due to lower material
purchases for three research projects.
We believe that our quarterly and annual revenues, expenses and operating
results could vary significantly in the future and that period-to-period
comparisons should not be relied upon as indications of future performance.
There can be no assurance that our revenues will grow in future periods or that
it will sustain its level of total revenues or its rate of revenue growth on a
quarterly or annual basis. We may, in some future quarter, have operating
results that will be below the expectations of stock market analysts and
investors. In such event, the price of the our common stock could be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
During the past five years, we have funded our operations primarily from
cash provided by operations, short-term and long-term borrowings and a private
financing of $5.9 million for preferred stock completed in March 1997. We
completed our initial public offering in May 1998, and raised net proceeds of
approximately $25.8 million. As of December 31, 1998, we had working capital of
$40.8 million, including cash and cash equivalents of $16.1 million, compared to
working capital at December 31, 1997 of $14.2 million, including cash of $3.1
million, and compared to working capital at December 31, 1996 of $5.5 million,
including cash of $756,000.
During the year ended December 31, 1996, net cash provided by operations of
$474,000 was due primarily to net income of $2.0 million, depreciation of
$867,000 and an increase in accounts payable and accrued liabilities of
$629,000, offset in part by increases in inventory of $2.3 million, and accounts
receivable and other assets of $727,000. The increase in inventory was primarily
due to increases in raw material and work-in-process inventory to provide an
adequate supply of material in anticipation of large orders for the upcoming
year. These inventory increases resulted in a decrease in the inventory turnover
ratio from 4.5 turns per year at December 31, 1995 to 3.3 turns per year at
December 31, 1996. The increase in accounts receivable was primarily a result of
increased sales in Japan, which generally have longer payment cycles. The
increase in sales to Japan also adversely impacted days sales outstanding, which
increased from 49 days at December 31, 1995 to 60 days at December 31, 1996.
21
During the year ended December 31, 1997, net cash used in operations of
$1.2 million was primarily due to increases in inventory of $4.4 million and
accounts receivable of $3.0 million, offset in part by net income of $3.3
million, depreciation of $1.2 million and increases in accounts payable and
accrued liabilities of $1.6 million. The increase in inventory during this
period included additional Ge inventory, which primarily resulted in a decrease
in the inventory turnover ratio from 3.3 turns per year at December 31, 1996 to
2.2 turns per year at December 31, 1997. The increases in accounts payable and
accrued liabilities, accounts receivable and inventory were primarily the result
of a 56.1% increase in revenues from the prior year. In addition, accounts
receivable increased due to the increase in international revenues, which
historically have longer payment cycles. This increase in payment cycles
resulted in an increase in days sales outstanding from 60 days at December 31,
1996 to 64 days at December 31, 1997.
During the year ended December 31, 1998, net cash used in operations of
$6.3 million was primarily due to increases in inventory of $12.2 million,
accounts receivable of $2.9 million and prepaid and other assets of $1.6
million, offset in part by net income of $6.3 million, depreciation of $2.0
million, and increases in accounts payable of $1.7 million and accrued
liabilities of $496,000. The increases in accounts receivable, inventory and
accounts payable were primarily the result of the 70.9% increase in total
revenues from the prior year. In addition, inventory increased due to our
decision to maintain the Ge substrates production line during the fourth quarter
of 1998 in anticipation of future large orders, although shipments to a large
customer had been deferred. Accordingly, the inventory turnover ratio declined
from 2.2 turns per year at December 31, 1997 to 1.7 turns per year at December
31, 1998. The increase in prepaid and other assets was due primarily to deposits
on manufacturing equipment and materials for our new Beijing, China facility and
U.S. operations and for increases in prepaid insurance, taxable bond fees and
bank fees. The increase in accrued liabilities was the result of an increase in
legal expenses in connection with an arbitration case, and higher vacation and
payroll expenses due to the increased number of personnel. Days sales
outstanding decreased from 64 days at December 31, 1997 to 62 days at December
31, 1998, reflecting improved collection efforts.
Net cash used in investing activities was $3.9 million, $4.9 million, and
$16.4 million for the years ended December 31, 1996, 1997 and 1998,
respectively, which amounts were attributed in each period to the purchase of
property, plant and equipment. For the year ended December 31, 1998, the
property acquired included our new 58,000 square foot building at a cost of $9.0
million and the 30,000 square foot addition for $2.0 million.
Net cash provided by financing activities was $3.5 million, $8.4 million
and $35.5 million for the years ended December 31, 1996, 1997 and 1998,
respectively. For the year ended December 31, 1996, net cash provided by
financing activities resulted primarily from long-term borrowings of $3.5
million to complete our manufacturing facility. For the year ended December 31,
1997, net cash provided by financing activities resulted primarily from the
issuance of $5.9 million of preferred stock and $2.7 million for long-term bank
borrowings, partially offset by the repayment of $300,000 of short-term
borrowings. For the year ended December 31, 1998, net cash provided by financing
activities consisted primarily of net proceeds of $25.8 million from our initial
public offering and long-term net borrowings of $9.6 million. Long-term net
borrowings reflected the issuance of $11.6 million in taxable variable rate
revenue bonds in November 1998 and equipment loans in the amount of $2.3 million
less repayment of existing long-term debts in the amount of $4.3 million.
Long-term borrowings were used for the purchase of the new 58,000 square foot
facility, for construction of the additional 30,000 square foot manufacturing
space and related equipment.
We have generally financed our equipment purchases through secured
equipment loans over five-year terms at interest rates ranging from 6.0% to 9.0%
per annum. Our manufacturing facilities have been financed by long-term
borrowings, which were repaid by the taxable variable rate revenue bonds in
1998, except for a $1.0 million SBA loan. The SBA loan has an interest rate of
7.3% per annum, matures in 2016 and is subordinated to the taxable variable rate
revenue bonds. The taxable variable rate revenue bonds have a term of 25 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 December 31, 1998, $11.6 million was outstanding under the
taxable variable rate revenue bonds.
22
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 May
1999. This line of credit is subject to certain financial covenants regarding
current financial ratios and cash flow requirements, which were met as of
December 31, 1998. We must obtain the lender's approval to obtain additional
borrowings or to further pledge our assets, except for borrowings secured by the
pledge of equipment or obtained in the normal course of business. At December
31, 1998, no amount was outstanding under the $15.0 million line of credit.
We anticipate that the combination of existing working capital and the
borrowings available under current credit agreements will be sufficient to fund
working capital and capital expenditure requirements for the next 12 months. Our
future capital requirements will depend 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 selling and marketing and
administrative activities, and market acceptance of our products. We expect that
we may need to raise additional equity or debt financing in the future, although
we are not currently negotiating for additional financing nor do we have any
plans to obtain additional financing at this time. There can be no assurance
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 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.
YEAR 2000 READINESS
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the "year 2000 problem."
Assessment. The year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Accordingly, we
have organized a program team responsible for monitoring the assessment and
remediation status of our year 2000 projects and reporting such status to our
board of directors. This project team is currently assessing the potential
effect and costs of remediating the year 2000 problem for our internal systems.
To date, we have obtained verification or validation from our significant
equipment and system vendors that the software programs and applications and
related hardware that we use, operate or maintain for our operations are
compliant with the year 2000.
Internal infrastructure. We believe that we have identified and evaluated
all of the major computers, software applications and related equipment used in
connection with our internal operations to determine if they must be modified,
upgraded or replaced to minimize the possibility of a material disruption to our
business. We are in the process of modifying, upgrading, and replacing major
systems that have been assessed as adversely affected, and expect to complete
this process before the end of fiscal 1999. As of December 31, 1998, we have
incurred approximately $300,000 in this process.
Systems other than information technology systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems, and other common devices may
be affected by the year 2000 problem. We are currently assessing the potential
effect and costs of remediating the year 2000 problem on our office equipment at
our facilities in Fremont, California. We estimate the total cost to us of
completing any required modifications, upgrades or replacements of our internal
systems will not exceed $100,000, almost all of which we believe will be
incurred during 1999. This estimate is being monitored and we will revise it as
additional information becomes available.
Based on the activities described above, we do not believe that the year
2000 problem will have a material adverse effect on our business or operating
results.
23
Suppliers. We are in the process of contacting third-party suppliers of
components used in the manufacture of our products to identify and, to the
extent possible, resolve issues involving the year 2000 problem. However, we
have limited or no control over the actions of these third-party suppliers.
Thus, while we expect that we will be able to resolve any significant year 2000
problems with these third parties, there can be no assurance that these
suppliers will resolve any or all year 2000 problems before the occurrence of a
material disruption to the operation of our business. Any failure of these third
parties to timely resolve year 2000 problems with their systems could have a
material adverse effect on our business, operating results and financial
condition.
Most likely consequences of year 2000 problems. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business operations. However, we believe that it is not possible to determine
with complete certainty that all year 2000 problems affecting us have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, no one
can accurately predict how many year 2000 problem-related failures will occur or
the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, we believe that the following consequences are possible:
- a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- business disputes and claims for pricing adjustments or penalties due to
year 2000 problems by our customers, which we believe will be resolved in
the ordinary course of business; and
- business disputes alleging that we failed to comply with the terms of
contracts or industry standards of performance, some of which could
result in litigation or contract termination.
Contingency plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems affecting
our internal systems are not effective. We expect to complete our contingency
plans by the end of August 1999. Depending on the systems affected, these plans
could include:
- accelerated replacement of affected equipment or software; short- to
medium-term use of backup equipment and software; increased work hours
for our personnel; and use of contract personnel to correct on an
accelerated schedule any year 2000 problems that arise or to provide
manual workarounds for information systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial condition.
Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year 2000
compliance and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivatives and hedging activities and supersede and amend a
number of existing accounting standards. SFAS 133 requires that all derivative
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders' equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2000, is not
expected to have a material effect on the Company's consolidated financial
statements.
24
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.
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, due to the foregoing factors, 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:
- fluctuations in demand for our substrates due to reduction in the value
of Asian currencies and the turmoil in the Asian financial markets;
- 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;
- changes in the unit of products sold;
- introduction of products and technologies by our competitors; and
- 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."
VGF is a new technique for producing substrates which must achieve
widespread acceptance if we are to succeed. We believe that our competitors
principally utilize the traditional LEC or HB crystal growing processes for
producing semi-insulating and semi-conducting GaAs substrates. We further
believe that we are the only high-volume supplier of semi-insulating and
semi-conducting GaAs substrates which utilize the VGF technique, a newer
technology than either the LEC or HB techniques. We cannot assure you that our
current customers will continue to use our VGF-produced substrates or that
additional companies will purchase our products manufactured from the VGF
technique. Failure to gain increased market acceptance of our VGF technique by
either current or prospective customers could materially adversely affect our
operating results.
A significant portion of our prospective customers are wireless
communications manufacturers, fiber optic communications manufacturers and
manufacturers of other high-speed semiconductor devices that use GaAs substrates
produced using either the LEC or HB techniques. To establish the VGF technique
as a preferred process for producing substrates for 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 would be delayed
and our business adversely affected. The highly complex
25
processes of growing crystals as well as other steps involved in manufacturing
substrates which we engage in can be adversely affected by a number of factors,
including the following:
- 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.
We 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. Such decreases in production volume and yields could materially
adversely affect our business, financial condition and results of operations.
In the past, we have sometimes manufactured substrates which have not met
certain customers' manufacturing process requirements. We have fixed such
occurrences through minor changes to the substrates or the manufacturing
process. Recurrence of such problems and our inability to solve them may
materially hurt our performance.
We have begun producing and shipping Ge and InP substrates in commercial
volume. We also understand that we must achieve the same manufacturing
capability for six inch GaAs wafers. We cannot assure you that we will be able
to manufacture the Ge and InP substrate or the larger GaAs substrates in
commercial volumes with acceptable yields. Our business, financial condition and
results of operations would be materially adversely affected if we experience
low yields of these substrates.
Because substantially all of our revenue is derived from sales of our GaAs
substrates, we are dependent on widespread market acceptance of these
products. We currently derive substantially all of our revenues from sales of
our GaAs substrates. We expect that revenue from GaAs substrates will account
for a significant majority of our revenues for the next several years. GaAs
substrates are primarily used in electronic applications such as wireless
communications, fiber optic communications and other high-speed semiconductor
devices, as well as in opto-electronic applications such as lasers and LEDs. If
there is a decrease in demand for GaAs substrates by semiconductor device
manufacturers or if new substrates for these electronic and opto-electronic
applications are developed and successfully introduced by competitors, our
revenues may decline and our business will be materially adversely affected.
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 are adopted
by semiconductor device manufacturers, demand for GaAs substrates could
decrease. This development could cause our revenues to fall, which could
adversely affect our business, financial condition and results of operations.
In order 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. Recently, we have begun commercial shipments of Ge and InP
substrates and are currently developing other substrates, including gallium
phosphide and gallium nitride. Factors that may affect the success of product
improvements and product introductions include the development of markets for
such improvements and substrates, achievement of acceptable yields, price and
market acceptance. Many of these factors are beyond our control. 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, financial condition and results of operations would be materially
adversely affected.
26
Our limited ability to protect our intellectual property may adversely
affect our ability to compete. We rely on a combination of patents, copyrights,
trademarks and trade secret laws and contractual restrictions on employees,
consultants and third parties from disclosure to protect our intellectual
property rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. We
believe that, due to the rapid pace of technological innovation in the GaAs and
other substrate markets, our ability to establish and maintain a position of
technology leadership in the industry depends more on the skills of our
development personnel than upon the legal protections afforded our existing
technologies.
To date, we have been issued one U.S. patent, which relates to the VGF
technique, and have two U.S. patent applications pending, one which relates to
the VGF technique. Additionally, we have one pending application for a Japanese
patent but no issued foreign patents. We cannot assure you that:
- 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. See
"Business-Intellectual property" for more information regarding risks relating
to protecting our intellectual property rights.
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
management's 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 such 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. For more information
regarding environmental regulations that affect our operations, see
"Business -- Environmental regulations."
We purchase critical raw materials required to grow crystals from single or
limited sources, and could lose sales if these sources fail to fill our
needs. We do not have any long-term supply contracts with any of our suppliers,
and we currently purchase raw materials required to grow crystals from single or
a limited number of suppliers. For example, we purchase a majority of the
gallium we use from Rhone-Poulenc.
Due to our reliance on a limited group of suppliers, we are exposed to
several risks such as 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. Although we
27
attempt to preempt supply interruptions by maintaining adequate levels of
inventory of critical materials and attempts to obtain additional suppliers,
shortages or price increases caused by suppliers may nevertheless recur.
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 materially adversely affect our business, financial condition and
results of operations.
We are subject to additional risks as a result of the recent completion of
a new manufacturing facility. 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. The improvements to the new facility subject us to significant risks,
including:
- unavailability or late delivery of process equipment;
- unforeseen engineering problems;
- work stoppages;
- 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, it could materially adversely affect operations
under the new facility which in turn would materially adversely affect our
business, financial condition and results of operations.
Finally, the operation of the new facility, together with the recent
expansion of our current facility by approximately 30,000 square feet, will also
expose us to additional risks. For example, the additional fixed operating
expenses associated with the new facility 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 would
not be able to offset the costs of operating the new facility, which may
materially adversely affect our results of operations.
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. 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
which could materially adversely affect our business. For example, our
introduction of InP substrates was delayed approximately six months as a result
of delays in the finalization of the manufacturing process for these substrates.
In addition, if we are unable to introduce reliable quality products, we could
suffer from reduced orders, higher manufacturing costs, product returns and
additional service expenses, all of which could result in lower revenues.
The sales cycle for our GaAs substrates is long and we may incur
substantial, non-recoverable expenses or devote significant resources to sales
that do not occur as anticipated. We have experienced and continue to experience
delays in obtaining purchase orders for GaAs substrates while customers evaluate
our substrates. A customer's decision to purchase our GaAs substrates is based
upon whether the customer prefers substrates developed using our proprietary VGF
technique or substrates developed using the more traditional LEC and HB
techniques. The amount of time it takes for a customer to evaluate our GaAs
substrates typically ranges from three months to a year or more, depending on
the amount of time required to test and qualify substrates from new vendors.
Since our substrates are generally incorporated into a customer's products at
the design
28
stage, the customer's decision to use our substrates often precedes volume
sales, if any, by a significant period. 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. Thus, our GaAs substrates typically have a lengthy sales cycle,
during which we may expend substantial funds and sales, marketing and management
efforts to attract the potential customer. However, there is a risk that these
expenditures may not result in sales. Consequently, 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.
We anticipate that sales of any future products under development will have
similar lengthy sales cycles and will, therefore, be subject to risks
substantially similar to those inherent in the lengthy sales cycle of our GaAs
substrates.
The loss of one or more of our key customers would significantly hurt our
operating results. A small number of customers have historically accounted for a
substantial portion of our revenues. We expect that a significant portion of our
future sales will be due to a limited number of customers. Our top five
customers accounted for approximately 35.5%, 34.9% and 39.5% of our revenues in
1996, 1997 and 1998, respectively. Our customers are not obligated to purchase
any specified quantity of products or to provide us with binding forecasts of
product purchases. In addition, our customers may reduce, delay or cancel orders
at any time without any significant penalty.
Our substrates are typically one of many components used in semiconductor
devices produced by our customers. 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.
In the past, we have experienced reductions, cancellations and delays in
customer orders. If any one of our major customers reduces, cancels or delays
orders in the future, our business, financial condition and results of operation
could be materially adversely affected.
Intense competition in the market for GaAs substrates could prevent us from
increasing revenue and sustaining profitability. The market for GaAs substrates
is intensely competitive. In the semi-insulating GaAs substrates market, our
principal competitors currently 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;
29
- 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, resulting in lower prices and
margins. For more information regarding the risks we face from our competitors,
see "Business -- Competition."
We derive a significant portion of our revenues from international sales
and our ability to sustain and increase our international sales involve
significant risks. Our ability to grow will depend in part on the expansion of
international sales and operations which have and are expected to constitute a
significant portion of our revenues. International sales, excluding Canada,
represented 34.1% and 28.8% of our total revenues in 1997 and 1998,
respectively. Sales to customers located in Japan and other Asian countries
represented 23.5% and 18.7% of our total revenues in 1997 and 1998. Sales to
customers in Japan, in particular, accounted for 17.1% and 11.5% of our total
revenues in 1997 and 1998, respectively. We expect that sales to customers
outside the United States, including device manufacturers located in Japan and
other Asian countries who sell their products worldwide, will continue to
represent a significant portion of our revenues.
Our dependence on international sales involves a number of risks,
including:
- 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 by our Japanese subsidiary, 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 1996, 1997 and 1998, we incurred foreign exchange losses of
$114,000, $186,000 and $24,000, respectively. If we do not effectively manage
the risks associated with international sales, our business, financial condition
and results of operations could be materially adversely affected. In order to
minimize our foreign exchange risk, we have bought foreign exchange contracts to
hedge against certain trade accounts receivable in Japanese yen. Because we
currently denominate sales in U.S. dollars except in Japan, we do not anticipate
that the adoption of the Euro as a functional legal currency of certain European
countries will materially affect our business.
If we lose certain 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. 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 there can be no
assurance 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, such as product introduction, on time.
30
Continued rapid growth may strain our operations. We have recently
experienced a period of rapid growth and expansion which has placed, and
continues to place, a significant strain on our operations. To accommodate this
anticipated growth, we will be required to:
- 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.
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned personnel systems, procedures and
controls may not be adequate to support our future operations. 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 may 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 such new or enhanced systems, products and
controls, or any disruption in the transition to such 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.
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 a 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 used 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, such 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.
31
Year 2000 compliance is an issue for virtually all businesses whose
computer systems and applications may require significant hardware and software
upgrades or modifications. Companies owning and operating such systems may plan
to devote a substantial portion of their information systems' spending to fund
such upgrades and modifications and divert spending away from networking
solutions. Such changes in customers' spending patterns could have a material
adverse impact on our business, operating results or financial condition.
We may engage in future acquisitions that we must successfully integrate
into our business and that may dilute our stockholders and cause us to assume
contingent liabilities. As part of our business strategy, we may in the future
review acquisition prospects that would complement our current product
offerings, augment our market coverage or enhance our technical capabilities, or
that may otherwise offer growth opportunities. In the event of any future
acquisitions, we could:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- assume contingent liabilities.
Such actions by us 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 have a material
adverse effect on our business, operating results and 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. We do not currently anticipate the
need for additional capital but 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.
On December 1, 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;
- to refinance an existing loan and to finance tenant improvements on our
principal offices; and
- the permanent financing for an existing bank construction loan.
32
These debt securities have rights, preferences and privileges that are
senior to holders of common stock, as other debt securities which we may issue
in the future would be, and the term of any debt could impose restrictions on
our operations. We cannot assure you that if we required additional capital, it
will be available on acceptable terms, or at all. If we are unable to obtain
additional capital, we may be required to reduce the scope of our planned
product development and marketing efforts, which would materially adversely
affect our business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our executive officers and directors control 21% of our common stock and
are able to significantly influence matters requiring stockholder
approval. Executive officers, directors and entities affiliated with them, in
the aggregate, currently beneficially own approximately 21% 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,
among others:
- 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 certain large stockholders, in particular those owning 15%
or more of the outstanding voting stock, from consummating a merger or
combination with a corporation unless:
- 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 fluctuate significantly since we
began trading on the Nasdaq national market. In 1998, our stock price closed as
low as $6.00 and as high as $15.50. 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.
33
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since many of our Japanese invoices are denominated in yen, we have bought
foreign exchange contracts to hedge against certain trade accounts receivable in
Japanese yen. As of December 31, 1998, our outstanding commitments with respect
to the foreign exchange contracts had a total value of approximately $1.6
million equivalent. Many of the contracts were entered six months prior to the
due date and the dates coincide with the receivable terms we have on the
invoices. By matching the receivable collection date and contract due date, we
attempt to minimize the impact of foreign exchange fluctuation.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
34
PART III
The SEC allows us include information required in this report by referring
to other documents or reports we have already or will soon be filing. This is
called "Incorporation by Reference." We intend to file your definitive proxy
statement pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Proposal No. 1 -- Election of Directors" and in Part I of this report under the
heading "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the definitive Proxy Statement under the
heading "Executive Compensation and Other matters."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Executive Compensation and Other matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading "Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Certain Relationships and Related Transactions."
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
[Download Table]
(1) Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Report of Independent Accountants........................... 37
Consolidated Balance Sheets as of December 31, 1997 and
1998........................................................ 38
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997, and 1998........................... 39
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998................ 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997, and 1998........................... 41
Notes to Consolidated Financial Statements.................. 42
(2) Financial Statement Schedules
All schedules have been omitted because the required
information is not present or not present in amounts
sufficient to require submission of the schedules or because
the information required is included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits
See Index to Exhibits on page 54 hereof. The exhibits listed
in the accompanying Index to Exhibits are filed as part of
this report.
(b) Reports on form 8-K
None
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of American Xtal Technology, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
American Xtal Technology, Inc. and its subsidiaries at December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 28, 1999
37
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
[Download Table]
DECEMBER 31,
------------------
1997 1998
------- -------
Current assets:
Cash and cash equivalents................................. $ 3,054 $16,122
Accounts receivable, less allowance for doubtful accounts
of $100 and $550....................................... 6,005 8,902
Inventories............................................... 8,361 20,579
Prepaid expenses and other current assets................. 858 2,507
Deferred income taxes..................................... 225 466
------- -------
Total current assets.............................. 18,503 48,576
Property, plant and equipment............................... 12,110 26,447
------- -------
Total assets...................................... $30,613 $75,023
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,722 $ 3,455
Accrued liabilities....................................... 1,827 2,323
Current portion of long-term debt......................... 745 1,730
------- -------
Total current liabilities......................... 4,294 7,508
Long-term debt, net of current portion...................... 7,728 16,347
------- -------
Total liabilities................................. 12,022 23,855
------- -------
Contingencies (Note 12)
Stockholders' equity:
Convertible preferred stock, no par value, 25,000,000
shares authorized, 10,128,737 and 0 shares issued and
outstanding............................................ 8,553 --
Common stock, no par value, 100,000,000 shares authorized,
3,041,531 shares with no par value and 16,116,675
shares with $0.001 par value issued and outstanding.... 867 16
Additional paid in capital................................ -- 35,537
Deferred compensation..................................... (220) (327)
Retained earnings......................................... 9,584 15,910
Accumulated other comprehensive income -- cumulative
translation adjustments................................ (193) 32
------- -------
Total stockholders' equity........................ 18,591 51,168
------- -------
Total liabilities and stockholders' equity........ $30,613 $75,023
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
38
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
Revenues:
Product revenues.......................................... $14,222 $23,014 $41,493
Contract revenues......................................... 2,005 2,321 1,797
------- ------- -------
Total revenues.................................... 16,227 25,335 43,290
Cost of revenues:
Cost of product revenues.................................. 9,270 13,674 24,550
Cost of contract revenues................................. 795 1,553 804
------- ------- -------
Total cost of revenues............................ 10,065 15,227 25,354
------- ------- -------
Gross profit................................................ 6,162 10,108 17,936
Operating expenses:
Selling, general and administrative....................... 2,033 2,959 5,016
Research and development.................................. 592 1,289 2,504
------- ------- -------
Total operating expenses.......................... 2,625 4,248 7,520
------- ------- -------
Income from operations...................................... 3,537 5,860 10,416
Interest expense............................................ (170) (570) (781)
Interest and other income (expense)......................... (72) (34) 568
------- ------- -------
Income before provision for income taxes.................... 3,295 5,256 10,203
Provision for income taxes.................................. 1,249 1,998 3,877
------- ------- -------
Net income.................................................. $ 2,046 $ 3,258 $ 6,326
======= ======= =======
Net income per share:
Basic..................................................... $ 0.71 $ 1.11 $ 0.42
======= ======= =======
Diluted................................................... $ 0.17 $ 0.25 $ 0.42
======= ======= =======
Shares used in net income per share calculations:
Basic..................................................... 2,882 2,938 14,928
======= ======= =======
Diluted................................................... 11,811 12,839 15,177
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
39
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
ACCUMULATED
OTHER
COMPREHENSIVE
CONVERTIBLE INCOME --
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
--------------------- ------------------- PAID IN DEFERRED RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ADJUSTMENTS
----------- ------- ---------- ------ ---------- ------------ -------- -------------
Balance at January 1,
1996..................... 8,928,737 $ 2,618 2,848,956 $ 107 $ -- $ -- $ 4,280 $ --
Common stock options
exercised................ -- -- 40,750 52 -- -- -- --
Comprehensive income
Net income............... -- -- -- -- -- -- 2,046 --
Other comprehensive
income
Currency translation
adjustment........... -- -- -- -- -- -- -- (104)
Comprehensive income....... -- -- -- -- -- -- -- --
----------- ------- ---------- ------ ------- ----- ------- -----
Balance at December 31,
1996..................... 8,928,737 2,618 2,889,706 159 -- -- 6,326 (104)
Issuance of series C
convertible preferred
stock in March 1997 at
$5.00 per share, net of
issuance costs........... 1,200,000 5,935 -- -- -- --
----
Common stock options
exercised................ -- -- 151,825 386 -- -- -- --
Deferred compensation...... -- -- -- 322 -- (322) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 102 -- --
Comprehensive income
Net income............... -- -- -- -- -- -- 3,258 --
Other comprehensive
income
Currency translation
adjustment........... -- -- -- -- -- -- -- (89)
Comprehensive income....... -- -- -- -- -- -- -- --
----------- ------- ---------- ------ ------- ----- ------- -----
Balance at December 31,
1997..................... 10,128,737 8,553 3,041,531 867 -- (220) 9,584 (193)
Common stock with no par
value converted to common
stock of $0.001 par
value.................... -- -- -- (864) 864 -- -- --
Conversion of preferred
stock to common stock.... (10,128,737) (8,553) 10,128,737 10 8,543 -- -- --
Common stock options
exercised................ -- -- 71,407 -- 138 -- -- --
Issuance of common stock
upon initial public
offering, net of issuance
costs.................... -- -- 2,875,000 3 25,789 -- -- --
Deferred compensation...... -- -- -- -- 203 (203) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 96 -- --
Comprehensive income
Net income............... -- -- -- -- -- -- 6,326 --
Other comprehensive
income
Currency translation
adjustment........... -- -- -- -- -- -- -- 225
Comprehensive income....... -- -- -- -- -- -- -- --
----------- ------- ---------- ------ ------- ----- ------- -----
Balance at December 31,
1998..................... -- $ -- 16,116,675 $ 16 $35,537 $(327) $15,910 $ 32
=========== ======= ========== ====== ======= ===== ======= =====
COMPREHENSIVE
TOTAL INCOME
------- -------------
Balance at January 1,
1996..................... $ 7,005 $ --
Common stock options
exercised................ 52 --
Comprehensive income
Net income............... 2,046 2,046
Other comprehensive
income
Currency translation
adjustment........... (104) (104)
-------
Comprehensive income....... -- $ 1,942
------- =======
Balance at December 31,
1996..................... 8,999
Issuance of series C
convertible preferred
stock in March 1997 at
$5.00 per share, net of
issuance costs........... 5,935 --
Common stock options
exercised................ 386 --
Deferred compensation...... -- --
Amortization of deferred
compensation............. 102 --
Comprehensive income
Net income............... 3,258 3,258
Other comprehensive
income
Currency translation
adjustment........... (89) (89)
-------
Comprehensive income....... -- $ 3,169
------- =======
Balance at December 31,
1997..................... 18,591
Common stock with no par
value converted to common
stock of $0.001 par
value.................... -- --
Conversion of preferred
stock to common stock.... --
Common stock options
exercised................ 138 --
Issuance of common stock
upon initial public
offering, net of issuance
costs.................... 25,792 --
Deferred compensation...... -- --
Amortization of deferred
compensation............. 96 --
Comprehensive income
Net income............... 6,326 6,326
Other comprehensive
income
Currency translation
adjustment........... 225 225
-------
Comprehensive income....... -- $ 6,551
------- =======
Balance at December 31,
1998..................... $51,168
=======
The accompanying notes are an integral part of these consolidated financial
statements.
40
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
Cash flows from operating activities:
Net income................................................ $ 2,046 $ 3,258 $ 6,326
Adjustments to reconcile net income to cash provided by
(used in) operations:
Depreciation and amortization............................. 867 1,164 2,048
Deferred income taxes..................................... (43) 264 (241)
Stock compensation........................................ -- 102 96
Changes in assets and liabilities:
Accounts receivable.................................... (578) (3,013) (2,897)
Inventories............................................ (2,298) (4,406) (12,218)
Prepaid expenses and other current assets.............. (149) (84) (1,649)
Accounts payable....................................... 247 894 1,733
Accrued liabilities.................................... 382 665 496
------- ------- --------
Net cash provided by (used in) operating
activities...................................... 474 (1,156) (6,306)
------- ------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (3,946) (4,856) (16,385)
------- ------- --------
Net cash used in investing activities............. (3,946) (4,856) (16,385)
------- ------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net........... 52 386 25,930
Proceeds from the issuance of convertible preferred
stock.................................................. -- 5,935 --
Payments of short-term bank borrowings.................... (300) (300) --
Proceeds from long-term debt borrowings................... 3,469 2,654 13,942
Payments of long-term debt borrowings..................... -- -- (4,338)
Proceeds from (payments of) notes payable to related
parties................................................ 276 (276) --
------- ------- --------
Net cash provided by financing activities......... 3,497 8,399 35,534
------- ------- --------
Effect of exchange rate changes............................. (104) (89) 225
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (79) 2,298 13,068
Cash and cash equivalents at beginning of year.............. 835 756 3,054
------- ------- --------
Cash and cash equivalents at end of year.................... $ 756 $ 3,054 $ 16,122
======= ======= ========
Supplemental disclosures:
Interest paid............................................. $ 203 $ 579 $ 781
======= ======= ========
Income taxes paid......................................... $ 794 $ 1,814 $ 4,378
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
41
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
American Xtal Technology, Inc. (the "Company") was incorporated in
California in December 1986 and reincorporated in Delaware in 1998. The Company
uses a proprietary vertical gradient freeze ("VGF") technique to produce
high-performance compound semiconductor base materials, or substrates, for use
in a variety of electronic and opto-electronic applications. The Company
manufactures and sells gallium arsenide ("GaAs"), indium phosphide ("InP") and
germanium ("Ge") substrates. The Company also has research and development
contracts with the U.S. Department of Defense ("DOD") and other third parties
for developing GaAs and other substrates.
In May 1998, the Company completed its initial public offering ("IPO") and
issued 2,875,000 shares of its common stock at $10.00 per share, including the
shares from an over-allotment option. The Company received cash of approximately
$25,792,000 net of underwriting discounts, commissions and IPO expenses. Upon
the closing of the IPO, all outstanding shares of the Company's then convertible
preferred stock were automatically converted into shares of common stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The functional currencies of the Company's Japanese and Chinese
subsidiaries are the local currencies. Transaction gains and losses resulting
from transactions denominated in currencies other than the US dollar for the
Company or in the local currencies for the subsidiaries are included in the
results of operations for the year.
The assets and liabilities of the subsidiaries are translated at the rates
of exchange on the balance sheet date. Income and expense items are translated
at the average rate of exchange for the period. Gains and losses from foreign
currency translation are included as a separate component of stockholders'
equity.
Revenue Recognition
Product revenues are generally recognized upon shipment. The Company
provides an allowance for estimated returns at the time revenue is recognized.
Contract revenues are recognized under the percentage of completion method based
on costs incurred relative to total contract costs. Costs associated with
contract revenues are included in cost of contract revenues. All costs of
contract revenues are research and development expenses which are funded by the
contract.
Concentration of Credit Risk
The Company manufactures and distributes GaAs, InP and Ge substrates and
performs services under research and development contracts. Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of trade accounts receivable. The Company invests
primarily in
42
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
money market accounts and commercial paper instruments. Cash equivalents are
maintained with high quality institutions and their composition and maturities
are regularly monitored by management.
The Company performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary, but
generally does not require collateral. No customer represented greater than
10.0% of product revenues in fiscal years 1996 and 1997, and one customer in
1998, represented 14.2% of product revenues. For fiscal 1996, one government
entity represented 91.3% of contract revenues. For fiscal 1997, one government
entity and a third party represented 47.4% and 52.6%, respectively, of contract
revenues. For fiscal 1998, one government entity represented 100% of contract
revenues. No customer accounted for 10% or more of the trade accounts receivable
balance as of December 31, 1997, and 1998.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
using the weighted average method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed using the straight-line method over the estimated economic
lives of the assets, generally five years. Leasehold improvements are amortized
over the shorter of the estimated useful life or the term of the lease.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"), the Company reviews long-lived assets based upon a gross cash
flow basis and will reserve for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. Based on its most recent analysis, the Company believes that there
was no impairment of its property, plant and equipment as of December 31, 1998.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations thereof. Accordingly, compensation costs for stock options is
measured as the excess, if any, of the market price of the Company's stock at
the date of grant over the stock option exercise price. In addition, the Company
complies with the disclosure provisions of Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Income Taxes
The Company accounts for deferred income taxes using the liability method,
under which the expected future tax consequences of timing differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities.
43
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standard No.
130 "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income 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 difference between net
income and comprehensive income for the Company relates to foreign currency
translation adjustments. Comprehensive income for the years ended December 31,
1996, 1997 and 1998 is disclosed in the Statement of Stockholders' Equity.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires that companies report separately, in the
financial statements, certain financial and descriptive information about
operating segment profit or loss, certain specific revenue and expense items,
and segment assets. Additionally, companies are required to report information
about the revenues derived from their products and service groups, about
geographic areas in which the Company earns revenues and holds assets, and about
major customers. (See Note 11 for these disclosures).
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders' equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2000, is not
expected to have a material effect on the Company's consolidated financial
statements.
44
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BALANCE SHEET DETAIL
[Download Table]
DECEMBER 31,
------------------
1997 1998
------- -------
(IN THOUSANDS)
Inventories:
Raw materials.......................................... $ 2,224 $ 7,687
Work in process........................................ 5,623 12,059
Finished goods......................................... 514 833
------- -------
$ 8,361 $20,579
======= =======
Property, plant and equipment:
Land................................................... $ 1,120 $ 1,120
Building............................................... 4,731 14,191
Machinery and equipment................................ 8,130 13,668
Leasehold improvements................................. 240 256
Construction in progress............................... 1,773 3,144
------- -------
15,994 32,379
Less: Accumulated depreciation and amortization........ 3,884 5,932
------- -------
$12,110 $26,447
======= =======
Accrued liabilities:
Accrued compensation................................... $ 690 $ 934
Accrued income tax..................................... 282 --
Customer advances...................................... 260 --
Allowance for sales returns............................ 247 336
Other.................................................. 348 1,053
------- -------
$ 1,827 $ 2,323
======= =======
NOTE 3. DEBT
On September 11, 1995, the Company obtained a bank loan of up to $4.5
million to finance the construction of a new commercial building in Fremont,
California. The loan, which was due on September 11, 1996, was refinanced with
two new loans:
(1) On October 1, 1996, the Company obtained a loan for $3.5 million from a
commercial bank. The loan has an interest rate of 8.3% per annum,
matures in 2006 and is secured by the land and building. The loan was
fully repaid as of December 31, 1998.
(2) On August 15, 1996, the Company obtained a $1.0 million debenture loan
from the Bay Area Employment Development Company guaranteed by the U.S.
Small Business Administration. The loan has an interest rate of 7.3%
per annum, matures in 2016 and is subordinate to the $3.5 million bank
loan. As of December 31, 1997 and 1998, $1.0 million and $0.9 million
was outstanding under this debenture loan, respectively.
The Company obtained equipment loans from several different banks through
financing companies to finance the purchase of new manufacturing equipment for
the Company's Fremont, California facility. These loans have a maturity of five
years with interest rates ranging from 6.0% to 9.0% per annum. These loans are
secured by the machinery and equipment purchased with the loans. As of December
31, 1997 and 1998, $3.2 million and $5.5 million was outstanding under these
loans, respectively.
45
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1996, the Company obtained a $3.0 million line of credit
("LOC") with a bank which expired in April 1998. In March 1998, the Company
obtained a $15.0 million LOC which expires in May 1999 to replace the $3.0
million LOC. The $15.0 million LOC is secured by the Company's business assets,
excluding equipment. Borrowings under the $15.0 million LOC bear interest at the
bank's prime interest rate plus one-half percent. The $15.0 million LOC is
subject to certain financial covenants regarding current financial ratios and
cash flow requirements which have all been met as of December 31, 1998. At
December 31, 1997 and 1998, no amount was outstanding under the LOC.
In May 1997, the Company obtained a bank loan for $1.4 million under the
$3.0 million LOC. The loan was to finance construction of manufacturing
facility. The loan consisted of two parts: (i) a loan for $750,000 which bears
interest at the bank's prime rate plus one percent and is secured by property
and (ii) a loan for $690,000 which bears interest at the bank's prime rate plus
one-half percent and is secured by the Company's business assets, excluding
equipment, which was assumed under the LOC. At the time of building completion,
the $750,000 loan is convertible into a new term loan with a maturity of ten
years and an interest rate fixed at the nine-year U.S. Treasury Bond yield plus
2.3% and will be secured by the land and building. At December 31, 1997,
$106,000 was outstanding at an interest rate of 8.3% per annum. During the year
ended December 31, 1998, this construction loan was fully prepaid.
In December 1998, the Company completed the sale of $11.6 million bonds.
The bonds, which are secured by a letter of credit from a bank, have a term of
25 years, bear interest at 200 basis points below prime (5.6% at December 31,
1998). Repayment of principal and interest under the bonds is by installment
payments on a quarterly basis. The Company has an option to redeem in whole or
in part of the bonds during the term of the bonds.
The aggregate future repayments of long-term debt outstanding at December
31, 1998 are $2.8 million in 1999, $2.9 million in 2000, $2.9 million in 2001,
$2.6 million in 2002, $1.7 million in 2003 and $10.6 million thereafter. A total
interest amount of $5.4 million is included in these aggregate future
repayments.
NOTE 4. RESEARCH AND DEVELOPMENT CONTRACTS
In March 1994, the Company was awarded a four-year, $6.1 million contract
under the DOD Title III program for the development of GaAs substrates. The
Title III contract is comprised of three different contract components: A
cost-plus-fixed-fee component totaling $1.2 million, a firm-fixed-price ("FFP")
component totaling $4.4 million and a $500,000 component consisting of a bonus
award. The bonus award may be earned upon reaching specific contract milestones.
Under the FFP component, 10.0% of the cost reimbursement is withheld by the DOD
until the completion of the project in May 1998. The amounts relating to this
10.0% withholding were $625,000, $319,000, and $325,000 at December 31, 1996,
1997 and 1998, respectively.
For the years ended December 31, 1996, 1997 and 1998, the Company
recognized contract revenues of $1.5 million, $364,000 and $416,000,
respectively, under the Title III contract. For the years ended December 31,
1996, 1997 and 1998, the Company incurred costs of $468,000, $211,000 and
$87,000, respectively, under the Title III contract. As of December 31, 1998,
the Title III contract was completed and the total contract revenue of $6.1
million had been completely recognized.
Certain products were manufactured under the Title III contract and the
costs were charged to such contracts. As permitted under the contract, the
products were sold to third parties, generating product revenues of $95,000, $0
and $0 for the years ended December 31, 1996, 1997 and 1998, respectively.
In January 1997, the Company was awarded a $1.2 million contract from a
third party. The contract was an FFP contract under which the Company produced
Ge substrates. The contract was completed in July 1997. For the year ended
December 31, 1997, the Company recognized contract revenues of $1.2 million and
incurred contract costs of $1.1 million under the contract.
46
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1997, the Company was awarded a $2.5 million, 30-month contract
under the DOD Title III program. In August 1998, the contract was amended such
that the work scope was extended and the total contract amount was increased to
$3.1 million. The contract is a cost-sharing agreement for the development of
InP substrates. Contract revenues are recognized under the percentage of
completion method based on total estimated revenue and the proportion of costs
incurred relative to total contract costs. For the years ended December 31, 1997
and 1998, the Company recognized contract revenues of $661,000 and $1,238,000,
respectively and incurred contract costs of $252,000 and $628,000, respectively
under this contract.
The Company has no additional obligations with regards to any of the above
research and development contracts.
NOTE 5. FOREIGN EXCHANGE CONTRACTS AND TRANSACTION LOSSES
The Company uses short-term forward exchange contracts for hedging purposes
to reduce the effects of adverse foreign exchange rate movements. During the
year ended December 31, 1998, the Company bought foreign exchange contracts to
hedge against certain trade accounts receivable in Japanese yen. These contracts
are accounted for using hedge accounting, under which the change in the fair
value of the forward contracts is recognized as part of the related foreign
currency transactions as they occur. As of December 31, 1998, the Company's
outstanding commitments with respect to the foreign exchange contracts, which
were commitments to sell Japanese yen, had a total value of approximately $1.6
million.
During the years ended December 31, 1996, 1997 and 1998, the Company
incurred foreign transaction exchange losses of $114,000, $186,000 and $24,000,
respectively.
NOTE 6. INCOME TAXES
The components of the provision for income taxes were as follows:
[Download Table]
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
Current:
Federal........................................ $1,116 $1,571 $3,627
State.......................................... 178 79 441
Foreign........................................ -- 84 50
------ ------ ------
Total current.......................... 1,294 1,734 4,118
------ ------ ------
Deferred:
Federal........................................ (36) 235 (228)
State.......................................... (9) 29 (13)
------ ------ ------
Total deferred......................... (45) 264 (241)
------ ------ ------
Total provision........................ $1,249 $1,998 $3,877
====== ====== ======
47
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the effective income tax rates and the
U.S. statutory federal income tax rate:
[Download Table]
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ----- -----
Statutory federal income tax rate.................... 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefits...... 4.7 4.1 2.7
Foreign sales corporation benefit.................... (2.4) (1.7) (1.7)
Foreign income taxed at higher rate.................. -- 1.6 0.2
Other................................................ 1.6 0.0 2.8
---- ---- ----
Effective tax rate................................... 37.9% 38.0% 38.0%
==== ==== ====
Deferred tax assets (liabilities) are summarized as follows:
[Download Table]
DECEMBER 31,
--------------
1997 1998
---- ------
(IN THOUSANDS)
Deferred tax assets:
Bad debt and inventory reserves........................... $497 $ 816
Vacation accrual.......................................... 67 75
State taxes............................................... 13 137
Other..................................................... -- 181
---- ------
Deferred tax assets....................................... 577 1,209
Deferred tax liabilities:
Depreciation.............................................. (352) (743)
---- ------
Net deferred tax asset............................ $225 $ 466
==== ======
NOTE 7. RETIREMENT SAVINGS PLAN
The Company has a 401(k) Savings Plan (the "Savings Plan") which qualifies
as a thrift plan under Section 401(k) of the Internal Revenue Code. All
full-time U.S. employees are eligible to participate in the Savings Plan after
one year from the date of hire. Participants may contribute up to 6.0% of their
earnings to the Savings Plan with a discretionary matching amount provided by
the Company. The Company's contributions to the Savings Plan for the years ended
December 31, 1996, 1997 and 1998 were $69,000, $87,000 and $101,000,
respectively.
NOTE 8. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
Stock Option Plans
In 1993, the Company adopted the 1993 Stock Option Plan ("1993 Plan") which
provides for granting of incentive and non-qualified stock options to employees,
consultants, and directors of the Company. Under the 1993 Plan, 880,000 shares
of common stock have been reserved for issuance as of December 31, 1998. Options
granted under the 1993 Plan are generally for periods not to exceed ten years
and are granted at the fair market value of the stock at the date of grant as
determined by the board of directors. Options granted under the 1993 Plan
generally vest 25.0% upon grant and 25.0% each year thereafter, with full
vesting occurring on the third anniversary of the grant date.
In May 1997, the Company adopted the 1997 Stock Option Plan ("1997 Plan")
which provides for granting of incentive and non-qualified stock options to
employees, consultants and directors of the Company. Under the 1997 Plan,
2,800,000 shares of common stock have been reserved for issuance as of December
31,
48
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998. Options granted under the 1997 Plan are generally for periods not to
exceed ten years (five years if the option is granted to a 10.0% stockholder)
and are granted at the fair market value of the stock at the date of grant as
determined by the board of directors. Options granted under the 1997 Plan
generally vest 25.0% at the end of one year and 2.1% each month thereafter, with
full vesting after four years.
The following summarizes the Company's stock option activity under the 1993
Plan and the 1997 Plan and related weighted average exercise price within each
category for each of the years ended December 31, 1996, 1997 and 1998:
[Download Table]
SHARES OPTIONS WEIGHTED AVERAGE
AVAILABLE OUTSTANDING OPTION PRICE
---------- ----------- ----------------
Balance at December 31, 1995............ 322,594 244,900 $1.53
Granted............................... -- -- --
Exercised............................. -- (40,750) 1.26
Canceled.............................. -- -- --
---------- ---------
Balance at December 31, 1996............ 322,594 204,150 1.58
Additional shares authorized.......... 1,367,000 -- --
Granted............................... (1,315,100) 1,315,100 4.95
Exercised............................. -- (151,825) 2.54
Canceled.............................. 24,475 (24,475) 3.38
---------- ---------
Balance at December 31, 1997............ 398,969 1,342,950 4.77
Additional shares authorized.......... 1,500,000 -- --
Granted............................... (246,000) 246,000 7.10
Exercised............................. -- (71,407) 1.94
Canceled.............................. 100,968 (100,968) 5.39
---------- ---------
Balance at December 31, 1998............ 1,753,937 1,416,575 5.25
========== =========
At December 31, 1996, 1997 and 1998, options for 107,450, 76,725 and
956,827 shares, respectively, were vested.
During the years ended December 31, 1997 and 1998, the Company granted
options for the purchase of 1,315,100 shares and 246,000 shares, respectively,
of common stock to employees at a weighted average exercise price of $4.95 per
share and $7.10 per share, respectively. Management calculated deferred
compensation of $322,000 and $203,000 related to options granted during the
years ended December 31, 1997 and 1998, respectively. Such deferred compensation
is amortized over the vesting period relating to these options of which
approximately $102,000 and $96,000 was amortized during the years ended December
31, 1997 and 1998, respectively.
Information relating to stock options outstanding under the 1993 Plan and
the 1997 Plan at December 31, 1998 is as follows:
[Enlarge/Download Table]
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------- ---------------- --------------
Range of exercise prices:
$1.20 - $1.90......................... 43,675 6.6 years $1.56
$5.00 - $5.50......................... 1,152,900 8.2 years 5.00
$7.00 - $8.25......................... 220,000 9.6 years 7.29
---------
$1.20 - $8.25......................... 1,416,575 8.4 years 5.25
=========
49
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[Download Table]
OPTIONS VESTED
------------------------
WEIGHTED
NUMBER AVERAGE
VESTED EXERCISE PRICE
------- --------------
Range of exercise prices:
$1.20 - $7.00........................................ 956,827 $2.61
Certain Pro Forma Disclosures
In October 1995, SFAS 123 established a fair value based method of
accounting for employee stock options. The weighted average grant-date fair
value of options granted during the years ended December 31, 1997 and 1998 (no
options were granted during the year ended December 31, 1996) was $0.06 and
$0.98, respectively. Had compensation cost for the Company's options been
determined based on the fair value at the grant dates, as prescribed in SFAS
123, the Company's pro forma net income and net income per share would have been
as follows:
[Download Table]
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income:
As reported.................................... $2,046 $3,258 $6,326
Pro forma net income........................... 2,032 3,111 6,131
Net income per share:
As reported:
Basic....................................... $ 0.71 $ 1.11 $ 0.42
Diluted..................................... 0.17 0.25 0.42
Pro forma net income:
Basic....................................... $ 0.71 $ 1.06 $ 0.41
Diluted..................................... 0.17 0.24 0.40
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997 and 1998
(no options were granted during the year ended December 31, 1996); dividend
yield of 0.0% for both periods; risk-free interest rates of 6.1% and 5.2% for
options granted during the years ended December 31, 1997 and 1998, respectively;
and expected lives of 4.5 and 5.0 years for options granted during the years
ended December 31, 1997 and 1998, respectively; and volatility of 0.0% and 75%
for the years ended December 31, 1997 and 1998.
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects on
reported net income for future years.
50
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Purchase Plan
In May 1997, the Company's board of directors approved an Employee Stock
Purchase Plan (the "1997 Purchase Plan"). Under this plan, employees of the
Company were allowed to purchase a certain number of shares of Common Stock by
December 31, 1997. A total of 67,000 shares were purchased as of December 31,
1997.
In February 1998, the Company's board of directors approved a 1998 Employee
Stock Purchase Plan (the "1998 Purchase Plan") and reserved a total of 250,000
shares of the Company's common stock for issuance thereunder. The Company's
shareholders approved the 1998 Purchase Plan in March 1998. The 1998 Purchase
Plan permits eligible employees to acquire shares of the Company's common stock
through payroll deductions. The common stock purchase price is determined as 85%
of the lower of the market price of the common stock at the purchase date or the
date of offer to the employee.
NOTE 9. NET INCOME PER SHARE
Statement of Financial Accounting Standard No. 128 "Earnings per Share"
requires a reconciliation of the numerators and denominators of the basic and
diluted net income per share calculations as follows:
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1997 1998
------------------------ ------------------------ ------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic EPS calculation............ $2,046 2,882 $0.71 $3,258 2,938 $1.11 $6,326 14,928 $0.42
Effect of dilutive securities
Common stock options........... -- -- -- -- 72 -- -- 249 --
Convertible preferred stock.... -- 8,929 -- -- 9,829 -- -- -- --
Diluted EPS calculation.......... $2,046 11,811 $0.17 $3,258 12,839 $0.25 $6,326 15,177 $0.42
NOTE 10. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996, 1997 and 1998, the Company
purchased $760,000, $1,540,000 and $ 3,681,000, respectively, of raw materials
and manufactured quartz from a supplier which is owned by a family member of an
officer.
51
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SEGMENT AND FOREIGN OPERATIONS INFORMATION
The Company has two reportable segments: semiconductor substrates
manufacturing and research and development contracting. In the semiconductor
substrates manufacturing segment, the Company manufactures and sells
high-performance compound semiconductor substrates for use in electronic and
opto-electronic applications. In the research and development contracting
segment, the Company contracts with the U.S. Department of Defense and other
parties for developing semiconductor substrates. The research and development
contracting segment did not meet the requirements for separate disclosure of a
reportable segment as defined in SFAS 131.
The Company sells its substrates in the United States and in other parts of
the world. The Company has operations in Japan and China. Revenues by geographic
location based on the country of the customer, and income from operations and
identifiable assets based on country in which the Company operates, were as
follows:
[Download Table]
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
Net revenues:
United States............................... $10,028 $15,653 $29,449
Europe...................................... 2,216 2,497 3,960
Canada...................................... 522 1,034 1,356
Japan....................................... 2,653 4,323 4,997
Asia Pacific and other...................... 808 1,828 3,528
------- ------- -------
Consolidated................................ $16,227 $25,335 $43,290
======= ======= =======
Income from operations:
United States............................... $ 3,529 $ 5,662 $10,334
Japan....................................... 8 198 82
------- ------- -------
Consolidated................................ $ 3,537 $ 5,860 $10,416
======= ======= =======
Identifiable assets at end of year:
United States............................... $16,467 $28,967 $71,019
Japan....................................... 917 1,056 2,728
China....................................... -- -- 1,276
------- ------- -------
Consolidated................................ $17,384 $30,613 $75,023
======= ======= =======
NOTE 12. CONTINGENT LIABILITIES
From time to time the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date will
not have a material adverse effect on the Company's financial position or
results of operations.
52
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.
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ MORRIS S. YOUNG
------------------------------------
Morris S. Young
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 30, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Morris S Young and Guy D. Atwood,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution, each with power to act alone, to sign and execute on
behalf of the undersigned any and all amendments to this Report on Form 10-K,
and to perform any acts necessary in order to file the same, with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requested and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or their or his or her substitutes, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MORRIS S. YOUNG President, Chief Executive March 30, 1999
-------------------------------------------------------- Officer, and Chairman of the
Morris S. Young Board (Principal Executive
Officer)
/s/ GUY D. ATWOOD Vice President, Chief March 30, 1999
-------------------------------------------------------- Financial Officer (Principal
Guy D. Atwood Financial and Accounting
Officer)
/s/ THEODORE S. YOUNG Senior Vice President, March 30, 1999
-------------------------------------------------------- Marketing, Director
Theodore S. Young
/s/ DONALD L. TATZIN Director March 30, 1999
--------------------------------------------------------
Donald L. Tatzin
/s/ JESSE CHEN Director March 30, 1999
--------------------------------------------------------
Jesse Chen
/s/ B.J. MOORE Director March 30, 1999
--------------------------------------------------------
B.J. Moore
53
AMERICAN XTAL TECHNOLOGY, INC.
EXHIBITS
TO
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1998
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* Agreement and Plan of Merger between American Xtal
Technology, a California corporation, and American Xtal
Technology Delaware Corporation, a Delaware corporation.
3.1 Restated Certificate of Incorporation.
10.1* Form of Indemnification Agreement for directors and
officers.
10.2* 1993 Stock Option Plan and forms of agreements thereunder.
10.3* 1997 Stock Option Plan and forms of agreements thereunder.
10.4* 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5* 1998 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.6* Loan Agreement between U.S. Bank National Association and us
dated March 4, 1998.
10.7** Purchase and Sale Agreement by and between Limar Realty
Corp. #23 and us dated April 1998.
10.8 Loan Agreement between U.S. Bank National Association and us
dated September 18, 1998.
10.9 Letter of Credit and Reimbursement Agreement between U.S.
Bank National Association and us dated December 1, 1998.
10.10 Bond Purchase Contract between Dain Rauscher Incorporated
and us dated December 1, 1998.
10.11 Remarketing Agreement between Dain Rauscher Incorporated and
us dated December 1, 1998.
21.1* List of Subsidiaries.
23.1 Consent of Independent Accountants.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see signature page).
27.1 Financial Data Schedule.
---------------
* As filed with the SEC in our Registration Statement on Form S-1 on March 17,
1998.
** As filed with the SEC in our Registration Statement on Amendment No. 2 to
Form S-1 on May 11, 1998.
54
Dates Referenced Herein and Documents Incorporated by Reference
11 Subsequent Filings that Reference this Filing
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