<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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)
DELAWARE 94-3031310
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4311 SOLAR WAY, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(510) 683-5900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at September 30, 1998
----- ---------------------------------
<S> <C>
Common Stock, $.001 par value 16,068,768
</TABLE>
================================================================================
1
<PAGE> 2
AMERICAN XTAL TECHNOLOGY, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at September 30,
1998 and December 31, 1997
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997
Notes To Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
2
<PAGE> 3
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN XTAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Assets:
Current assets
Cash and cash equivalents $ 15,368 $ 3,054
Accounts receivable, net of allowance for doubtful
accounts of $245 and $100 6,865 6,005
Inventories (Note 3) 15,381 8,361
Prepaid expenses and other current assets 2,432 858
Deferred income taxes 338 226
-------- --------
Total current assets 40,384 18,504
Property, plant and equipment, net of accumulated
depreciation of $5,344 and $3,885 24,957 12,109
-------- --------
Total assets $ 65,341 $ 30,613
======== ========
Liabilities and Stockholders' Equity:
Current liabilities
Short-term bank borrowing $ 796 $ --
Accounts payable 4,319 1,722
Income taxes payable 366 282
Accrued liabilities 1,717 1,545
Current portion of long-term debt 895 745
-------- --------
Total current liabilities 8,093 4,294
Long-term debt, net of current portion 8,179 7,728
-------- --------
Total liabilities 16,272 12,022
-------- --------
Stockholders' equity:
Convertible preferred stock -- 8,553
Common stock 16 867
Additional paid in capital 35,428 --
Deferred compensation (354) (220)
Retained earnings 14,197 9,584
Cumulative translation adjustments (218) (193)
-------- --------
Total stockholders' equity 49,069 18,591
-------- --------
Total liabilities and stockholders' equity $ 65,341 $ 30,613
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
AMERICAN XTAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product revenues $ 10,887 $ 6,060 $ 30,419 $ 15,914
Contract revenues 508 447 1,496 1,889
-------- -------- -------- --------
Total revenues 11,395 6,507 31,915 17,803
Cost of revenues:
Cost of product revenues 6,684 3,604 18,283 9,576
Cost of contract revenues 157 210 640 1,362
-------- -------- -------- --------
Total cost of revenues 6,841 3,814 18,923 10,938
Gross profit 4,554 2,693 12,992 6,865
Operating expenses:
Selling, general and administrative 1,110 703 3,195 2,019
Research and development 736 306 2,045 824
-------- -------- -------- --------
Total operating expenses 1,846 1,009 5,240 2,843
-------- -------- -------- --------
Income from operations 2,708 1,684 7,752 4,022
Other income ( expense ) 206 (9) 203 (23)
Interest expense (169) (157) (508) (423)
-------- -------- -------- --------
Income before provision for income taxes 2,745 1,518 7,447 3,576
Provision for income taxes 1,037 577 2,834 1,359
-------- -------- -------- --------
Net Income $ 1,708 $ 941 $ 4,613 $ 2,217
======== ======== ======== ========
Net income per share:
Basic $ 0.11 $ 0.32 $ 0.32 $ 0.76
======== ======== ======== ========
Diluted $ 0.10 $ 0.07 $ 0.30 $ 0.17
======== ======== ======== ========
Shares used in net income per share calculations:
Basic 16,069 2,939 14,542 2,917
Diluted 16,859 13,158 15,333 12,779
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
AMERICAN XTAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income: $ 4,613 $ 2,217
Adjustments to reconcile net income to cash used in
operations:
Depreciation and amortization 1,460 863
Deferred income taxes (112) (106)
Stock compensation 68 (230)
Changes in assets and liabilities:
Accounts receivable (860) (1,178)
Inventories (7,020) (3,679)
Prepaid expenses and other current assets (1,566) 284
Accounts payable 2,597 1,623
Accrued liabilities 256 174
-------- --------
Net cash used in operating activities (564) (32)
-------- --------
CASH FLOWS FROM PURCHASE OF PROPERTY, PLANT AND EQUIPMENT:
Purchase of property, plant and equipment (14,315) (4,388)
-------- --------
Net cash used in investing activities (14,315) (4,388)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of):
Issuance of common stock upon exercise of common stock options 30 401
Issuance of convertible preferred stock -- 5,935
Issuance of common stock (net) from IPO 25,792 --
Short-term bank borrowings 796 (122)
Related parties loan -- (276)
Long-term debt borrowings 601 1,114
-------- --------
Net cash provided by financing activities 27,219 7,052
-------- --------
Effect of exchange rate changes (26) 7
-------- --------
Net increase in cash and cash equivalents 12,314 2,639
Cash and cash equivalents at the beginning of the period 3,054 756
-------- --------
Cash and cash equivalents at the end of the period $ 15,368 $ 3,395
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 508 $ 423
======== ========
Income taxes paid $ 2,750 $ 1,814
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, considered necessary
for a fair presentation have been included. Operating results for the three
month and nine month periods ended September 30, 1998 are not necessarily
indicative of the result that may be expected for the year ended December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Registration Statement on Form
S-1 (file no. 333-48085).
Note 2. 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.
The functional currencies of the Company's subsidiaries are their
respective local currencies. The assets and liabilities of the Company's
subsidiaries are translated at the rates of exchange on the balance sheet date.
Income and expenses items are translated at an average rate of exchange. The
cumulative translation adjustments in the year ended December 1997 and the nine
months ended September 30, 1998 resulted from fluctuations in foreign currency
exchange rates and its effects on the translation of balance sheet accounts.
Gains and losses from foreign currency translation are included as a separate
component of stockholders' equity.
Note 3. INVENTORIES
Components of inventory are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Inventories:
Raw materials $ 5,982 $ 2,224
Work in process 8,923 5,623
Finished goods 476 514
------- -------
$15,381 $ 8,361
======= =======
</TABLE>
Note 4. INITIAL PUBLIC OFFERING
During 1998, the Company completed its initial public offering ("IPO")
and issued 2,875,000 shares of its Common Stock at $10.00 per share. 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 outstanding convertible Preferred Stock were
automatically converted into shares of Common Stock.
6
<PAGE> 7
Note 5. COMPREHENSIVE INCOME
In January 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 primary difference between net income and comprehensive income for
the Company relates to foreign currency items. Comprehensive income for the
three months ended September 30, 1998 and 1997 was $1,645,000 and $925,000,
respectively, and for the nine months ended September 30, 1998, and 1997,
$4,587,000 and $2,224,000, respectively. The difference between net income in
the condensed consolidated statements of operations and comprehensive income for
the three months ended September 30, 1998 and 1997 represented cumulative
transaction adjustment losses of $63,000 and $16,000, respectively, and for the
nine months ended September 30, 1998 and 1997 represented cumulative translation
adjustment losses of $26,000 and cumulative translation adjustment gains of
$7,000, respectively.
Note 6. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standard No.
128 "Earnings per Share" ("SFAS 128"). Basic earnings per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted average number
of common and potentially dilutive common shares during the period, except those
that are antidilutive.
SFAS 128 requires a reconciliation of the numerators and denominators
of the basic and diluted net income per share calculations as follows, (in
thousands except per share data):
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
(unaudited)
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS calculation $1,708 16,069 $ 0.11 $ 941 2,939 $ 0.32
Effect of dilutive securities
Common stock options -- 790 -- -- 90 --
Convertible preferred stock -- -- -- -- 10,129 --
------ ------ ------ ------
Diluted EPS calculation $1,708 16,859 $ 0.10 $ 941 13,158 $ 0.07
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
(unaudited)
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS calculation $4,613 14,542 $ 0.32 $2,217 2,917 $ 0.76
Effect of dilutive securities
Common stock options -- 791 -- -- 200 --
Convertible preferred stock -- -- -- -- 9,662 --
------ ------ ------ ------
Diluted EPS calculation $4,613 15,333 $ 0.30 $2,217 12,779 $ 0.17
====== ====== ====== ======
</TABLE>
7
<PAGE> 8
ITEM 2. 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 the Company's 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 That May Affect Future
Results of Operations" and elsewhere in this Form 10-Q 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.
The following management's discussion and analysis of financial
condition and results of operations should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations included in the Company's Registration Statement on Form S-1 (file
no. 333-48085).
RESULTS OF OPERATIONS
OVERVIEW. American Xtal Technology, Inc. uses a proprietary VGF
technique to produce high-performance compound semiconductor substrates for use
in a variety of electronic and opto-electronic applications. The Company was
founded in 1986 and commenced product sales in 1990. The Company currently sells
gallium arsenide ("GaAs"), indium phosphide ("InP") and germanium ("Ge")
substrates to manufacturers of semiconductor devices for use in applications
such as wireless and fiber optic telecommunications, lasers, LEDs, satellite
solar cells and consumer electronics.
RESULTS OF OPERATIONS. The following table sets forth certain operating
data as a percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
\ ----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Product revenues 95.5% 93.1% 95.3% 89.4%
Contract revenues 4.5 6.9 4.7 10.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues 58.6 55.4 57.3 53.8
Cost of contract revenues 1.4 3.2 2.0 7.6
----- ----- ----- -----
Total cost of revenues 60.0 58.6 59.3 61.4
Gross profit 40.0 41.4 40.7 38.6
Operating expenses:
Selling, general and administrative 9.7 10.8 10.0 11.4
Research and development 6.5 4.7 6.4 4.6
----- ----- ----- -----
Total operating expenses 16.2 15.5 16.4 16.0
----- ----- ----- -----
Income from operations 23.8 25.9 24.3 22.6
Other income (expense) 1.8 (0.1) 0.6 (0.1)
Interest expense (1.5) (2.4) (1.6) (2.4)
----- ----- ----- -----
Income before provision for income taxes 24.1 23.4 23.3 20.1
Provision for income taxes 9.1 8.9 8.9 7.6
----- ----- ----- -----
Net Income 15.0% 14.5% 14.4% 12.5%
===== ===== ===== =====
</TABLE>
8
<PAGE> 9
REVENUES. Total revenues consist of product revenues and contract
revenues. Total revenues increased 75.1% from $6.5 million for the three months
ended September 30, 1997 to $11.4 million for the three months ended September
30, 1998. For the nine months ended September 30, 1998, total revenues increased
79.3% from $17.8 million in the same period in 1997 to $31.9 million in 1998.
Product revenues increased 79.7% from $6.1 million for the three months ended
September 30, 1997 to $10.9 million for the three months ended September 30,
1998. For the nine months ended September 30, 1998, product revenues increased
91.1% from $15.9 million in the same period in 1997 to $30.4 million in 1998.
The increase in product revenues for the three month and nine month periods
ended September 30, 1998, reflected an increase in the volume of sales of GaAs
and InP substrates to existing domestic and international customers and the
addition of new customers and sales of Ge substrates, which were introduced in
the three months ended December 31, 1997. Sales of Ge substrates represented
15.6% and 17.8% of product revenues for the three and nine months ended
September 30, 1998, respectively. However, a major customer of the Company's Ge
substrates has recently delayed its order, which delay is likely to adversely
affect the Company's financial condition and results of operations in the fourth
quarter of 1998. In addition, if this customer elects not to order Ge substrates
from the Company in the future, the Company's business, financial condition and
results of operations could be materially adversely affected.
International revenues, excluding Canada, decreased from 35.8% of total
revenues for the three months ended September 30, 1997 to 24.8% of total
revenues for the three months ended September 30, 1998, and decreased from 33.3%
of total revenues for the nine months ended September 30, 1997 to 26.2% of total
revenues for the nine months ended September 30, 1998. The decrease in
percentage of international revenues primarily reflects the introduction of Ge
substrates late in 1997, which are currently sold only to domestic customers.
Contract revenues increased 13.6% from $447,000 for the three months
ended September 30, 1997 to $508,000 for the three months ended September 30,
1998, and decreased 20.8% from $1.9 million for the nine months ended September
30, 1997 to $1.5 million for the nine months ended September 30, 1998. Contract
revenues increased in the three month period ended September 30, 1998 due to the
recognition of the final portion of the Company's U.S. Department of Defense
Title III Program for development of GaAs substrates which was awarded to the
Company in March 1994. Contract revenues for the nine months ended September 30,
1998 decreased primarily due to the recognition of significant revenues from a
$1.2 million customer-funded Ge research contract that was completed in June
1997. Contract revenues declined from 6.9% of total revenues for the three
months ended September 30, 1997 to 4.5% for the three months ended September 30,
1998, and declined from 10.6% of total revenues for the nine month period ended
September 30, 1997 to 4.7% for the nine month period ended September 30, 1998.
Contract revenues as a percentage of total revenues declined primarily as a
result of product revenue growth combined with a decrease in contract revenues.
The Company anticipates contract revenues will be about 5% or less of total
revenues in the future.
GROSS MARGIN. Gross margin decreased from 41.4% of total revenues for
the three months ended September 30, 1997 to 40.0% of total revenues for the
three months ended September 30, 1998, and increased from 38.6% of total
revenues for the nine months ended September 30, 1997 to 40.7% for the nine
months ended September 30, 1998. Product gross margin decreased from 40.5% for
the three months ended September 30, 1997 to 38.6% for the three months ended
September 30, 1998, reflecting the introduction of Ge substrates in late 1997,
which have a lower gross margin than other substrates. Product gross margin
increased slightly from 39.8% for the nine months ended September 30, 1997 to
39.9% for the nine months ended September 30, 1998, primarily reflecting the
higher yields achieved in GaAs substrate production, which more than offset the
lower Ge substrate gross margins.
Contract gross margin increased from 53.0% for the three months ended
September 30, 1997 to 69.1% for the three months ended September 30, 1998, and
increased from 27.9% for the nine months ended September 30, 1997 to 57.2% for
the nine months ended September 30, 1998. These increases in gross margin were
due to a shift in contract revenue mix from a lower margin customer-funded
contract for Ge research completed in June 1997 to higher margin government
contracts and the recognition of the final portion of the Company's GaAs Title
III contract in the three months ended September 30, 1998.
9
<PAGE> 10
SELLING, GENERAL and ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 57.9% from $703,000 for the three months ended
September 30, 1997 to $1.1 million for the three months ended September 30,
1998, and increased 58.2% from $2.0 million for the nine months ended September
30, 1997 to $3.2 million for the nine months ended September 30, 1998. These
increases resulted primarily from the increased personnel and administrative
expenses required to support additional sales volume. Selling, general and
administrative expenses as a percentage of total revenues decreased from 10.8%
for the three months ended September 30, 1997 to 9.7% for the three months ended
September 30, 1998, and decreased from 11.3% for the nine months ended September
30, 1997 to 10.0% for the nine months ended September 30, 1998. The Company
expects that selling, general and administrative expenses will continue to
increase in absolute dollars but will fluctuate as a percentage of total
revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 140.5% from $306,000 for the three months ended September 30, 1997 to
$736,000 for the three months ended September 30, 1998, and increased 148.2%
from $824,000 for the nine months ended September 30, 1997 to $2.0 million for
the nine months ended September 30, 1998. These increases resulted primarily
from the hiring of additional engineers and the purchase of materials to develop
new products and enhance existing products. As a percentage of total revenues,
research and development expenses increased from 4.7% for the three months ended
September 30, 1997 to 6.5% for the three months ended September 30, 1998, and
increased from 4.6% for the nine months ended September 30, 1997 to 6.4% for the
nine months ended September 30, 1998. The Company plans to continue to make
substantial investments in research and development and expects that such
expenses will continue to increase in absolute dollar amounts in future periods.
OTHER INCOME (EXPENSE). Other income (expense) increased from $9,000 of
expense for the three months ended September 30, 1997 to $206,000 of income for
the three months ended September 30, 1998. Other income (expense) increased from
$23,000 of expense for the nine months ended September 30, 1997 to $203,000 of
income for the nine months ended September 30, 1998. These increases primarily
reflected the additional earnings from investments on cash generated from the
Company's initial public offering in May 1998, which more than offset the
increase in foreign currency transaction losses that the Company incurred as a
result of changes in the value of the U. S. dollar compared to the Japanese yen.
INTEREST EXPENSE. Interest expense increased slightly from $157,000 for
the three months ended September 30, 1997 to $169,000 for the three months ended
September 30, 1998. Interest expense increased from $423,000 for the nine months
ended September 30, 1997 to $508,000 for the nine months ended September 30,
1998. These increases resulted primarily from additional borrowings incurred to
finance the expansion of the Company's production facilities and related
equipment purchases in 1998.
PROVISION FOR INCOME TAXES. The effective tax rate decreased slightly
from 38.0% for the three months ended September 30, 1997 to 37.8% for the three
months ended September 30, 1998, and increased slightly from 38.0% for the nine
months ended September 30, 1997 to 38.1% for the nine months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
During the past five years, the Company has funded its operations
primarily from cash provided by operations, short-term and long-term borrowings
and a private financing in the net amount of $5.9 million for Preferred Stock
completed in March 1997. The Company completed its initial public offering in
May 1998, and raised approximately $25.8 million, net of offering expenses. As
of September 30, 1998, the Company had working capital of $32.3 million,
including cash and cash equivalents of $15.4 million, compared to working
capital at December 31, 1997 of $14.2 million, including cash and cash
equivalents of $3.1 million.
During the nine months ended September 30, 1998, net cash used in
operations of $766,000 was due primarily to net income of $4.6 million,
depreciation and amortization of $1.5 million, and an increase in accounts
payable of $2.6 million, partially offset by increases in inventories of $7.0
million, and increases in accounts
10
<PAGE> 11
receivable and prepaid expenses and other assets of $860,000 and $1.6 million,
respectively. The increases in inventories, accounts receivable and accounts
payable were primarily related to the 79.3% increase in total revenues from the
prior year. The increase in prepaid expenses and other assets is primarily due
to increases in prepaid insurance and deposits on material and equipment.
Net cash used in investing activities was $14.3 million for the nine
months ended September 30, 1998 and was due to the purchase of property, plant
and equipment, including $9.0 million for a new building.
Net cash provided by financing activities was $27.2 million for the
nine months ended September 30, 1998 and was generated primarily from the
Company's issuance of Common Stock in the net amount of approximately $25.8
million, long-term borrowings of $601,000 for equipment purchases and
construction of the Company's additional 30,000 square feet of manufacturing
space and short-term bank borrowings of $796,000.
The Company acquired an additional 58,000 square foot facility in June
1998 for $9.0 million, which was temporarily financed from proceeds of the
Company's initial public offering in May 1998. The Company expects to
permanently finance this new facility and potentially other capital expenditures
by the issuance of taxable bonds, supported by a bank letter of credit, in
November 1998.
The Company has a $15.0 million line of credit with a commercial bank,
which expires in May 1999, at an interest rate equal to the prime rate or 2.31%
plus the prevailing LIBOR rate. As of September 30, 1998, $796,000 was
outstanding under this line of credit. In addition, the Company has an unused
$4.0 million equipment leasing line of credit, which expires in May 1999, for
the purchase of new and used equipment.
The nature of the substrate manufacturing industry, combined with the
current economic environment, make it very difficult for the Company to predict
future liquidity requirements with certainty. However, the Company believes that
its existing cash, cash equivalents and short-term investments, cash generated
from operations and other existing sources of working capital will be adequate
to finance its operations through the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company's future results of operations are dependent upon a number
of factors, including those described below. For a complete description of such
factors, see the Company's Registration Statement on Form S-1 (file no.
333-48085).
FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly and annual
revenues and operating results have varied in the past, are difficult to
forecast, are subject to numerous factors both within and outside the Company's
control and may fluctuate significantly in the future. Although the Company has
been profitable on an annualized basis since 1990, there can be no assurance
that the Company will continue to be profitable in future periods. The Company
believes that period-to-period comparisons are not necessarily meaningful and
should not be relied upon as indicative of future operating results.
The financial markets in Japan, Singapore, South Korea, Taiwan and
other Asian nations have recently experienced significant turmoil. Such turmoil
in the financial markets may negatively impact and/or delay the decision by the
Company's customers to purchase the Company's substrates. Any reduction in the
value of Asian currencies, in particular the Japanese yen, would make it more
difficult for the Company to sell substrates into the Asian market and would
provide the Company's Asian competitors with the ability to compete more
effectively in the U.S. market. As a result, the turmoil in the Asian financial
markets may materially and adversely affect the Company's business, financial
condition and results of operations. For the year ended December 31, 1997 and
the nine months ended September 30, 1998, 23.5% and 16.2%, respectively, of the
Company's total revenues were from customers located in Japan and other Asian
countries.
11
<PAGE> 12
Other factors which may affect the Company's revenues and operating
results include the Company's expense levels and expected research and
development and marketing requirements, the volume and timing of orders received
by the Company from its customers, the availability of raw materials;
fluctuations in manufacturing yields; changes in product mix; the Company's
ability to develop and bring to market new products on a timely basis;
introduction of products and technologies by the Company's competitors; funds
received from the federal government for research and development; market
acceptance of the Company's and its customers' products; timing of investments
in research and development and sales and marketing; fluctuations in exchange
rates; changes in the international business climate and economic conditions
generally.
The Company's operating results in a future quarter or quarters may
fall below the expectations of public market analysts or investors. In such
event, the price of the Company's Common Stock will likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MARKET ACCEPTANCE OF VGF TECHNOLOGY. The traditional crystal growing
processes for producing semi-insulating and semi-conducting GaAs substrates are
the liquid-encapsulated Czochralski ("LEC") and horizontal Bridgman ("HB")
techniques, respectively. The Company currently believes it is the only
high-volume supplier of semi-insulating and semi-conducting GaAs substrates
which are produced utilizing VGF technology. In order to establish the VGF
technique as a preferred process for producing substrates, the Company must
offer products with superior price/performance characteristics on a timely basis
and in sufficient volumes to satisfy customers' requirements. A significant
portion of the Company's prospective customers are manufacturers of wireless
communications, fiber optic communications and other high-speed semiconductor
devices that generally use GaAs substrates produced using either the LEC or HB
techniques. The Company must overcome any reluctance of these customers to
purchase the Company's GaAs substrates because of perceived risks relating to
the newer VGF technology generally and concerns about the relative quality and
cost-effectiveness of the Company's GaAs substrates as compared to substrates
produced using 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. There can be
no assurance that additional companies will purchase the Company's products
using the VGF technique or that the companies that currently use AXT's VGF
produced substrates will continue to do so in the future. The failure to achieve
increased market acceptance of the Company's VGF technique by either current or
prospective customers would have a material adverse effect on the Company's
business, financial condition and results of operations.
MANUFACTURING RISKS. The growing of crystals and the other steps
required to manufacture substrates are highly complex processes. Manufacturing
yields can be adversely affected by a number of factors, including chemical or
physical defects in the crystals, contamination of the manufacturing
environment, substrate breakage, equipment failure and the performance of
manufacturing personnel. A combination of these factors has, in the past,
adversely affected the Company's yields and resulted in product shipment delays.
Because a significant portion of the Company's manufacturing costs are fixed,
increases in the production volume of substrates and improvements of yields are
critical to reducing unit costs, increasing margins and maintaining and
improving the Company's results of operations. Yield decreases can result in
substantially higher unit costs, which could materially adversely affect
operating results. There can be no assurance that the Company will not suffer
periodic yield problems, which could materially adversely affect the Company's
business, financial condition and results of operations. From time to time the
Company has manufactured substrates which, although meeting customer
specifications, were not suitable in a particular manufacturing process due to
the uniqueness of the customer's manufacturing process. These difficulties have
been resolved in the past through minor changes to the substrates and/or the
manufacturing process. The Company may continue to experience such difficulties
in manufacturing substrates that satisfy its customers' requirements in the
future and its failure to resolve such difficulties with its customers could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is in the process of significantly expanding its substrate
manufacturing capacity. The Company has also recently commenced production and
shipment of Ge and InP substrates. The Company also expects that it will need to
successfully manufacture GaAs substrates in commercial quantities with six inch
diameters in the near future. To date, the Company has only manufactured
substrates with such size diameters on a
12
<PAGE> 13
test basis. There can be no assurance that the Company will successfully
manufacture new or larger substrates in commercial volumes with acceptable
yields. In the event the Company experiences low yields as a result of any of
the foregoing, the Company's business, financial condition and results of
operations would be materially adversely affected.
The Company grows all of its crystals and manufactures all of its
substrates at its facility in Fremont, California. Due to the centralization of
its operations, the Company is susceptible to business interruptions resulting
from fire, natural disasters, equipment failures or other localized conditions.
Prolonged business interruptions could have a material adverse effect on the
Company's business, financial condition and results of operations.
LIMITED AND SOLE SUPPLIERS. The Company does not maintain any long-term
supply agreements with any of its suppliers, and a number of raw materials
required to grow crystals are obtained from a single or limited number of
suppliers. For example, the Company purchases majority of its gallium from
Rhone-Poulenc. The Company's reliance on a limited group of suppliers involves
several risks, including the potential inability to obtain an adequate supply of
materials and reduced control over pricing and delivery time. To date, the
Company has from time to time experienced delays in obtaining certain materials
and may in the future experience delays or increased costs as a result of
shortages of materials, such as gallium. Although the Company attempts to
maintain adequate levels of inventory of those materials which are supplied by
limited sources to offset supply interruptions and attempts to obtain additional
suppliers, the Company believes it will continue to be dependent upon a limited
number of suppliers for its critical raw materials. There can be no assurance
that delays, shortages or price increases caused by suppliers will not occur in
the future. The failure to obtain adequate and timely deliveries of materials
and components could prevent the Company from meeting scheduled shipment dates,
which could damage relationships with current and prospective customers and
could materially adversely affect the Company's business, financial condition
and results of operations.
LIMITATIONS OF EXISTING MANUFACTURING CAPACITY. The Company currently
produces all of its substrates at its approximately 50,000 square foot facility
located in Fremont, California. The Company is in the process of expanding the
size of this manufacturing facility by approximately 30,000 square feet to meet
its anticipated future production needs through 1999. The expansion is scheduled
for completion and operations are expected to commence in such space by the end
of 1998. The Company believes that the expansion will cost approximately $2.0
million, which the Company partially financed by a bank loan. In connection with
the expansion of its current facility, the Company will be required to purchase
equipment and hire, train and manage additional production personnel in order to
successfully increase its production capacity in accordance with its time
schedule. In the event the Company's expansion plans are not implemented on a
timely basis for any reason, the Company could become subject to production
capacity constraints. Such constraints could have a material adverse effect on
the Company's business, financial condition and results of operations.
In June 1998, the Company purchased an additional 58,000 square foot
facility in Fremont, California to provide additional manufacturing capacity for
the Company. The improvements to this new facility entail significant risks,
including unavailability or late delivery of process equipment, unforeseen
engineering problems, work stoppages and unanticipated cost increases, any of
which could have a material adverse effect on the completion of the building
improvements and production start-up of the new facility. In addition,
unexpected charges or concessions required by local, state or federal regulatory
agencies with respect to necessary licenses, land use permits and building
permits could involve significant additional costs and delay the scheduled
opening of the new facility. In the event the Company is unable to successfully
complete the building improvements and commence operations in the new facility
prior to the end of 1999 for any reason, the Company's business, financial
condition and results of operations could be materially adversely affected.
The operation of the expanded facility and the new facility will also
subject the Company to additional risks. For example, the Company will have
additional fixed operating expenses associated with the new facility which can
only be offset by sufficient increases in product revenues. There can be no
assurance that market demand for the Company's products will grow as currently
expected. If demand for the Company's products does not grow as the Company
anticipates, the Company would not be able to offset the costs of operating the
new
13
<PAGE> 14
facility and as a result, the Company's business, financial condition and
results of operations may be materially adversely affected.
DEPENDENCE ON LIMITED PRODUCT OFFERINGS. To date, substantially all of
the Company's revenues have resulted from sales of its GaAs substrates and the
Company anticipates that a significant majority of its revenues for the next
several years will continue to be derived from sales of its GaAs substrates.
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
demand for GaAs substrates by semiconductor device manufacturers diminishes or
if new substrates for these electronic and opto-electronic applications are
developed and successfully introduced by competitors, the Company's business,
financial condition and results of operations could be materially adversely
affected. The Company is aware that other companies, including International
Business Machines Corp. ("IBM"), are actively involved in developing silicon
germanium ("SiGe") based devices for use in certain wireless and other
applications. SiGe-based devices could potentially provide the same
high-performance, power-efficient capabilities as GaAs-based devices at
competitive prices. If these SiGe-based devices are successfully developed and
are adopted by semiconductor device manufacturers, demand for GaAs substrates
could diminish, which could materially adversely affect the Company's business,
financial condition and results of operations. The Company's future success
depends on its ability to develop and introduce in a timely manner new
substrates and to continue to improve its current substrates to address customer
requirements and to compete effectively on the basis of price and performance.
Recently, the Company has begun commercial shipments of Ge and InP substrates
and is currently developing other substrates, including GaP and GaN. The success
of product improvements and new product introductions is dependent upon several
factors, including the development of markets for such improvements and
substrates, achievement of acceptable yields, and price and market acceptance.
No assurance can be given that the Company's product development efforts will be
successful or that its new products will achieve market acceptance. To the
extent that new product introductions do not achieve market acceptance, the
Company's business, financial condition and results of operations would be
materially adversely affected.
RAPID TECHNOLOGICAL CHANGE; RELIANCE UPON CONTINUED PRODUCT
DEVELOPMENT. The markets in which the Company and its customers compete are
characterized by rapid technological change and continuous improvements in
substrates. Accordingly, the Company's future success will depend upon whether
it can apply its proprietary VGF technique to develop new substrates for
existing and new markets that adequately address customer requirements and
compete effectively on the basis of quality, price and performance. There can be
no assurance that the Company's research and development efforts will result in
the timely development of new products or in products with sufficient
performance characteristics to meet market demands. If a competing process
technology emerges that permits production of substrates that are superior to
those produced using the Company's VGF technology, and if the Company is unable
to develop competitive or alternative products that are economically viable and
that can be delivered in sufficient quantity, the Company's business, financial
condition and results of operation could be materially adversely affected.
Because it is generally not possible to predict with accuracy the time required
and costs involved in reaching certain research, development and engineering
objectives, actual development costs could exceed budgeted amounts and estimated
product development schedules could require extension. The Company has
experienced product development delays in the past and may experience similar
delays in the future which could materially adversely affect the Company's
business, financial condition and results of operations. For example, the
Company's introduction of InP substrates was delayed approximately six months as
a result of delays in the finalization of the manufacturing process for such
substrates. In addition, if new products experience reliability or quality
problems, the Company could encounter a number of difficulties, including
reduced orders, higher manufacturing costs, product returns and additional
service expense, all of which could materially adversely affect the Company's
business, financial condition and results of operations.
LENGTHY SALES CYCLES. Sales of the Company's GaAs substrates depend, in
significant part, upon the decision of a prospective customer to choose products
developed using the Company's proprietary VGF technique instead of substrates
developed using the more traditional LEC and HB techniques. As a result, the
amount of time from the initial contact with the customer to the customer's
placement of an order, which typically ranges from three months to a year or
more, depends on such factors as the amount of time required to test and
14
<PAGE> 15
qualify substrates from new vendors. Because the Company's substrates are
generally incorporated into a customer's products at the design stage, the
customer's decision to use the Company's substrates often precedes volume sales,
if any, by a significant period. If a customer decides at the design stage not
to incorporate the Company's substrates into its products, the Company may not
have another opportunity to sell its substrates for those products for many
months or years. The Company has experienced delays in obtaining orders while
customers evaluate the Company's GaAs substrates. For these and other reasons,
the Company's GaAs substrates typically have a lengthy sales cycle during which
the Company may expend substantial funds and sales, marketing and management
effort. The Company anticipates that sales of any future products currently
under development will have similarly lengthy sales cycles and will therefore be
subject to risks substantially similar to those inherent in the lengthy sales
cycle for its GaAs substrates. There can be no assurance that the Company's
expenditures or efforts during the lengthy sales process with any potential
customer will result in sales.
CUSTOMER CONCENTRATION. A small number of customers have historically
accounted for a substantial portion of the Company's revenues, and the Company
expects a significant portion of its future sales will remain concentrated
within a limited number of customers. The Company's top five customers accounted
for approximately 35.5%, 34.9% and 42.6% of the Company's revenues in 1996, 1997
and in the nine months ended September 30, 1998, respectively. The Company's
customers are not presently obligated to purchase any specified quantity of
products or to provide the Company with binding forecasts of product purchases
for any period and may reduce, delay or cancel orders at any time without
significant penalty to the customer. The Company's substrates are typically one
of many components used in semiconductor devices produced by the Company's
customers. Demand for the Company's products is therefore subject to many risks
beyond the Company's control, including, among others, demand for the Company's
customers' products, competition faced by the Company's customers in their
particular industries, the technical, sales and marketing and management
capabilities of the Company's customers, and the financial and other resources
of the Company's customers. The Company has experienced reductions,
cancellations and delays in customer orders in the past and there can be no
assurance that any of the Company's customers will not reduce, cancel or delay
orders in the future. The reduction, delay or cancellation of significant orders
from one or more of the Company's major customers could materially adversely
affect the Company's business, financial condition and results of operations.
COMPETITION. The markets for GaAs substrates are intensely competitive.
The Company's principal competitors in the market for semi-insulating GaAs
substrates currently include Freiberger Compound Materials GmbH ("Freiberger"),
Hitachi Cable, Ltd. ("Hitachi Cable"), Litton Airtron ("Litton") and Sumitomo
Electric Industries Ltd. ("Sumitomo Electric"). In the semi-conducting GaAs
substrate market, the Company's principal competitors currently are Sumitomo
Electric and Hitachi Cable. The Company also faces competition from
manufacturers that produce GaAs substrates for their own use. In addition, the
Company faces competition from companies such as IBM that are actively
developing alternative materials to GaAs. As the Company enters new markets,
such as the Ge and InP substrate markets, the Company expects to face
competitive risks similar to those for its GaAs substrates. Many of the
Company's competitors and potential competitors have been in the business longer
than the Company and have greater manufacturing experience, more established
technologies than the Company's VGF technique, broader name recognition and
significantly greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company will compete successfully
against these competitors in the future or that the Company's 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
those of the Company. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices and margins,
which would materially adversely affect the Company's business, financial
condition and results of operations.
The Company's ability to compete in its target markets also depends on
such factors as the timing and success of the development and introduction of
new products by the Company and its competitors, the availability of adequate
sources of raw materials, protection of Company products by effective
utilization of intellectual property laws and general economic conditions. In
order to remain competitive, the Company believes it must invest significant
resources in developing new substrates and in maintaining customer satisfaction
worldwide. There can be no assurance that the Company's products will continue
to compete favorably or that the Company will be successful in the face of
competition from existing competitors or new companies entering the Company's
15
<PAGE> 16
target markets. Failure of the Company to compete successfully would materially
adversely affect the Company's business, financial condition and results of
operations.
DEPENDENCE ON SALES OUTSIDE THE UNITED STATES. International sales,
excluding Canada, represented 34.1% and 26.2% of the Company's total revenues in
1997 and in the nine months ended September 30, 1998, respectively. Sales to
customers located in Japan and other Asian countries represented 23.5% and 16.2%
of the Company's total revenues in 1997 and in the nine months ended September
30, 1998, respectively. The Company expects that a significant portion of its
revenues will continue to be from sales to customers outside of the United
States, including device manufacturers located in Japan and other Asian
countries who sell their products worldwide. These sales are subject to a
variety of risks including tariffs, import restrictions and other trade
barriers, unexpected changes in regulatory requirements, longer accounts
receivable payment cycles and export license requirements. In addition, the
Company is subject to the risks inherent in conducting business internationally,
including political and economic instability and unexpected changes in
diplomatic and trade relationships. In particular, the economies of Japan and
certain other Asian countries are currently experiencing considerable economic
instability and downturns. Because the Company's sales to date, except for sales
by the Company's Japanese subsidiary, have been denominated in U.S. dollars,
increases in the value of the dollar could increase the price in local
currencies of the Company's products in non-U.S. markets and make the Company's
products more expensive than competitors' products that are denominated in local
currencies. Furthermore, for the years ended December 31, 1995, 1996 and 1997
and the nine months ended September 30, 1998, 14.0%, 16.3%, 17.1% and 11.1%,
respectively, of the Company's total revenues were derived from sales to
customers in Japan. Doing business in Japan subjects the Company to fluctuations
in exchange rates between the U.S. dollar and the Japanese yen. For example, for
the years ended December 31, 1996 and 1997, and for the nine months ended
September 30, 1998, the Company incurred foreign exchange losses of $114,000,
$186,000 and $192,000, respectively. In the year ended December 31, 1995, the
Company did not incur any foreign exchange gains or losses. There can be no
assurance that one or more of the factors described above will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON KEY EMPLOYEES. The Company's success depends to a
significant extent upon the continued service of Morris S. Young, Ph.D., its
President and Chief Executive Officer, as well as its other key management and
technical personnel, and on its ability to continue to attract, retain and
motivate qualified personnel, such as experienced engineers. The competition for
such employees is intense. The loss of the services of Dr. Young or other key
management or technical personnel or the Company's inability to recruit
replacements for such personnel or to otherwise attract, retain and motivate
qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
have long-term employment contracts and does not maintain life insurance
policies on any of its key employees.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company relies on a
combination of patents, trade secret, copyright and trademark laws,
nondisclosure agreements, and other contractual provisions and technical
measures to protect its proprietary rights. There can be no assurance that such
measures will be adequate to safeguard the proprietary technology underlying the
Company's VGF technique and the Company's products, or that its agreements with
employees, consultants and others who participate in the development of its
products will not be breached, that the Company will have adequate remedies for
any breach or that the Company's proprietary information or trade secrets will
not otherwise become known. Moreover, notwithstanding the Company's efforts to
protect its intellectual property, there is no assurance that competitors will
not be able to develop substrates which are equal or superior to the Company's
products without infringing any of the Company's intellectual property rights.
In addition, effective protection of intellectual property rights may be
unavailable or limited in certain countries. Accordingly, there can be no
assurance that the Company's means of protecting its intellectual property will
be adequate or that the Company's competitors will not independently develop
similar technologies or products.
The Company relies primarily on the technical and creative ability of
its personnel, rather than on patents, to maintain its competitive position. To
date, the Company has been issued one U.S. patent, which relates to its VGF
technique, and has two patent applications, one of which relates to its VGF
technique, pending. The Company has one pending application for a Japanese
patent but no issued foreign patents. There can be no
16
<PAGE> 17
assurance that the Company's pending U.S. applications or any future U.S. or
foreign patent applications will be approved, that any issued patents will
protect the Company's intellectual property or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Moreover, the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as the laws of the United States. The Company believes that, due to the
rapid pace of technological innovation in the GaAs and other substrate markets,
the Company's ability to establish and maintain a position of technology
leadership in the industry depends more on the skills of its development
personnel than upon the legal protections afforded its existing technologies.
Although there are currently no pending lawsuits against the Company or
unresolved notices that the Company is infringing intellectual property rights
of others, the Company may be notified in the future that it is infringing
certain patent and/or other intellectual property rights of others. Litigation
may be necessary in the future to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity, and there can be no
assurance that the Company would prevail in any future litigation. Any such
litigation, whether or not determined in the Company's favor or settled by the
Company, would be costly and would divert the efforts and attention of the
Company's management and technical personnel from normal business operations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in litigation could
result in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from licensing its technology, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATED TO ENVIRONMENTAL REGULATIONS. The Company is 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 its 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. There can be no assurance that the Company's control
systems will be successful in preventing a release of these materials or other
adverse environmental conditions. Any such release or other failure to comply
with present or future environmental laws and regulations could result in the
imposition of significant fines on the Company, 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 the Company, or in restrictions on the Company's
operations.
MANAGEMENT OF GROWTH. The Company's business is currently experiencing
a period of growth that has placed and is expected to continue to place a
significant strain on the Company's personnel and resources. The Company's
ability to manage future growth, if any, will depend on its ability to continue
to implement and improve operational, financial and management information and
control systems on a timely basis, together with maintaining effective cost
controls. To support any future growth, the Company will need to hire more
engineering, manufacturing, sales, marketing, support and administrative
personnel and expand customer service capabilities. Competition worldwide for
the necessary personnel in the Company's industry is intense. There can be no
assurance that the Company will be able to attract and retain the necessary
personnel in response to any future growth. Although the Company believes its
current management information systems are adequate to address its current
needs, the Company is in the process of implementing a new system to accommodate
any future growth in operations. The difficulties associated with implementing
new management information systems may place a burden on the Company's
management and internal resources. In addition, international growth may require
the Company to expand its worldwide operations and enhance its communications
infrastructure. The inability of the Company's management to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in financial business systems and various administration
functions. To the extent that these software applications contain source code
that is unable
17
<PAGE> 18
to appropriately interpret the upcoming calendar year "2000," some level of
modification or even possibly replacement of such source code or applications
will be necessary. The Company is in the process of identifying the software
applications that are not "Year 2000" compliant. The new management information
system the Company is currently implementing will be "Year 2000" compliant.
Given the information known at this time about the Company's systems, coupled
with the Company's ongoing efforts to upgrade or replace business critical
systems as necessary, it is currently not anticipated that these "Year 2000"
costs will have a material adverse impact on the Company's business, financial
condition and results of operations. However, the Company is still analyzing its
software applications and, to the extent they are not fully "Year 2000"
compliant, there can be no assurance that the costs necessary to update software
or potential systems interruptions would not have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is also in the process of contacting its critical suppliers
to determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant. Where practicable, the Company will attempt to
mitigate its risks with respect to the failure of suppliers to be Year 2000
ready. In the event that suppliers are not Year 2000 compliant, the Company will
seek alternative sources of supplies. However, such failures remain a
possibility and could have an adverse impact on the Company's results of
operations or financial condition. Additionally, litigation may arise from
situations in which the Company has minimum purchase commitment contracts with
suppliers that were not Year 2000 compliant.
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 the purchase of
compound semiconductor substrates. Such changes in customers' spending pattern
as could have a material adverse impact on the Company's sales, operating
results or financial condition.
POTENTIAL FUTURE ACQUISITIONS. As part of its business strategy, the
Company may make acquisitions of, or significant investments in, complementary
companies, products or technologies, although no such acquisitions or
investments are currently pending. Any such future acquisitions would be
accompanied by the risks commonly encountered in acquisitions of companies. Such
risks include, among other things, the difficulty of assimilating the operations
and personnel of the acquired companies, the potential disruption of the
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of the acquired technology into the Company's products and
services, additional expense associated with amortization of acquired intangible
assets, the maintenance of uniform standards, controls, procedures and policies
and the impairment of relationships with employees and customers as a result of
any integration of new management personnel. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered with such acquisitions.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company
currently anticipates that its available cash resources will be sufficient to
meet its presently anticipated cash requirements through the next twelve months.
Thereafter, if available cash resources are insufficient to satisfy the
Company's working capital and capital expenditure requirements, the Company will
be required to raise additional funds. No assurance can be given that additional
financing will be available on terms favorable to the Company or its
stockholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of holders of the Company's Common Stock. If adequate
funds are not available to satisfy either short- or long-term capital
requirements, the Company may be required to limit its operations significantly.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONCENTRATION OF SHARE OWNERSHIP AND VOTING POWER; ANTI-TAKEOVER
PROVISIONS. Officers, directors and affiliates of the Company currently
beneficially own approximately 22.0% of the Company's outstanding Common Stock.
As a result, these stockholders as a group are able to substantially influence
the management and affairs of the Company and, if acting together, would be able
to influence most
18
<PAGE> 19
matters requiring the approval by the stockholders of the Company, including
election of directors, any merger, consolidation or sale of all or substantially
all of the Company's assets and any other significant corporate transactions.
The concentration of ownership could have the effect of delaying or preventing a
change in control of the Company and reducing the likelihood of any acquisition
of the Company at a premium price.
The Company's Board of Directors has the authority to issue up to
2,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. Also, certain provisions of the
Company's Certificate of Incorporation may have the effect of delaying or
preventing a change of control of the Company, which could adversely affect the
market price of the Company's Common Stock. In addition, the Company is subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company.
VOLATILITY OF STOCK PRICE. The Company believes that various factors
unrelated to the Company's performance, such as general economic conditions,
changes or volatility in the financial markets and changing market conditions,
as well as various factors related to the Company's performance, such as
quarterly or annual variations in the Company's financial results, announcements
of technological innovations, large customer orders, order cancellations or new
product introductions by the Company or its competitors could cause the market
price of the Company's Common Stock to fluctuate substantially. For example,
since its initial public offering in May 1998, the market price of the Company's
common stock has ranged from a high of $16.75 to a low of $5.25 per share. In
addition, in recent years the stock market in general and the market for shares
of small capitalization companies, particularly semiconductor-related companies,
have experienced extreme price fluctuations which have been unrelated to the
operating performance of the affected companies.
19
<PAGE> 20
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
11.1 Statement Regarding Computation of Earnings Per
Share
See Note. 6 in Notes to Condensed Financial
Statements for Table of Computation of Earnings Per
Share
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None.
20
<PAGE> 21
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.
Dated: November 12, 1998 By: /s/ Guy D. Atwood
---------------------------------
Guy D. Atwood
Chief Financial Officer
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 15,368
<SECURITIES> 0
<RECEIVABLES> 7,110
<ALLOWANCES> 245
<INVENTORY> 15,381
<CURRENT-ASSETS> 40,384
<PP&E> 30,301
<DEPRECIATION> 5,344
<TOTAL-ASSETS> 65,341
<CURRENT-LIABILITIES> 8,093
<BONDS> 8,179
0
0
<COMMON> 16
<OTHER-SE> 49,053
<TOTAL-LIABILITY-AND-EQUITY> 65,341
<SALES> 30,419
<TOTAL-REVENUES> 31,915
<CGS> 18,283
<TOTAL-COSTS> 18,923
<OTHER-EXPENSES> 5,240
<LOSS-PROVISION> 145
<INTEREST-EXPENSE> 508
<INCOME-PRETAX> 7,447
<INCOME-TAX> 2,834
<INCOME-CONTINUING> 4,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,613
<EPS-PRIMARY> .32
<EPS-DILUTED> .30
</TABLE>
