<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 333-48085
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN XTAL TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3674 94-3031310
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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4311 SOLAR WAY
FREMONT, CALIFORNIA 94538
(510) 683-5900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MORRIS S. YOUNG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERICAN XTAL TECHNOLOGY, INC.
4311 SOLAR WAY
FREMONT, CALIFORNIA 94538
(510) 683-5900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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PETER M. ASTIZ, ESQ. FRANCIS S. CURRIE, ESQ.
DAVID A. HUBB, ESQ. JOHN T. SHERIDAN, ESQ.
GRAY CARY WARE & FREIDENRICH, LLP WILSON SONSINI GOODRICH & ROSATI
400 HAMILTON AVENUE PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA 94301-1825 650 PAGE MILL ROAD
(650) 328-6561 PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is to be filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, (AS AMENDED) OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED APRIL 24, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
2,500,000 Shares
LOGO
Common Stock
- --------------------------------------------------------------------------------
All of the 2,500,000 shares of common stock, par value $0.001 per share (the
"Common Stock"), offered hereby (the "Offering"), are being sold by American
Xtal Technology, Inc. ("AXT" or the "Company"). Prior to this Offering, there
has been no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $8.00 and
$10.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for inclusion in The
Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the
symbol "AXTI."
SEE "RISK FACTORS" ON PAGES 6 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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======================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ----------------------------------------------------------------------------------------------------------------------
Per Share............................... $ $ $
- ----------------------------------------------------------------------------------------------------------------------
Total(3)................................ $ $ $
======================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $900,000.
(3) The Company has granted to the several Underwriters a 30-day over-allotment
option to purchase up to 375,000 additional shares of the Common Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ and the total Proceeds to Company will be $ . See
"Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares of Common Stock to the Underwriters is expected to be made through
the facilities of the Depository Trust Company, New York, New York on or about
May , 1998.
PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY
May , 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
American Xtal Technology, Inc. and its logo are trademarks of the Company.
This Prospectus contains trademarks of other companies.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information under "Risk Factors," and the Consolidated
Financial Statements and Notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus: (i)
gives effect to the reincorporation of the Company in Delaware prior to the
effective date of this Prospectus; (ii) reflects the conversion of all
outstanding preferred stock, par value $.001 (the "Preferred Stock") to Common
Stock upon the closing of the Offering; and (iii) assumes that the Underwriters'
over-allotment option will not be exercised. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Risk Factors."
THE COMPANY
American Xtal Technology, Inc. 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 primarily manufactures and sells compound
semiconductor substrates composed of gallium arsenide ("GaAs"). Sales of GaAs
substrates accounted for 94.9% and 78.3% of the Company's product revenues for
the year ended December 31, 1997 and the three months ended March 31, 1998,
respectively. The Company also manufactures and sells indium phosphide ("InP")
and germanium ("Ge") substrates and is currently developing other
high-performance compound substrates such as gallium phosphide ("GaP") and
gallium nitride ("GaN"). The Company manufactures substrates from crystals grown
using the Company's proprietary VGF technique and then slices the substrates
into wafers. The Company's substrates are sold to semiconductor device
manufacturers for use in applications such as wireless and fiber optic
telecommunications, lasers, light-emitting diodes ("LEDs"), satellite solar
cells and consumer electronics. The Company's customers include EMCORE
Corporation ("EMCORE"), Hewlett Packard Company ("Hewlett Packard"), Motorola,
Inc. ("Motorola"), NEC Kansai, Ltd. ("NEC"), Nortel, Siemens AG ("Siemens"),
Sony Corporation ("Sony"), Spectrolab, Inc. (a Hughes Electronics Company)
("Spectrolab") and TRW, Inc. ("TRW").
In recent years, semiconductor device manufacturers have increasingly
utilized substrates other than silicon to improve the performance of
semiconductor devices or to enable new applications. These alternative
substrates are composed of a single element such as Ge, or multiple elements
which may include, among others, gallium, aluminum, indium, arsenic, phosphorus
and nitrogen. Substrates that consist of more than one element are referred to
as "compound substrates" and include GaAs, InP, GaP and GaN. GaAs is currently
the most widely used compound substrate. Compound substrates have electrical
properties which allow semiconductor devices to operate at much higher speeds
than silicon-based devices 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 enable them to convert energy into light and lasers, or to detect
light and convert light into electrical energy.
The Company believes that its proprietary VGF technique, which it has
developed over the past 11 years, provides certain significant advantages over
traditional manufacturing methods for growing crystals for the production of
high-performance semiconductor substrates. The Company believes that its
proprietary technique produces high-quality crystals which are characterized by
greater physical and chemical uniformity and fewer defects than crystals grown
by competing methods. This often results in substrates with lower breakage
rates, which increases manufacturing yields and reduces manufacturing costs for
the Company and its customers. The Company believes that it is currently the
only high-volume supplier of GaAs substrates manufactured by using the VGF
technique and is positioned to become a leading manufacturer and supplier of
other high-performance substrates.
3
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Key elements of the Company's business strategy include the following:
- Advance its leadership in VGF technology through continued investment in
research and development and participation in government sponsored
research programs.
- Extend its leadership in the GaAs market by continuing to provide
high-quality, price-competitive substrates and leveraging its
demonstrated success in certain segments of the GaAs market to further
increase sales.
- Leverage its VGF technology as a platform to rapidly develop and
cost-effectively manufacture high-quality substrates for emerging
applications in various markets.
- Target high-volume markets by increasing its manufacturing capacity in
order to lower unit production costs and provide high-performance
substrates at competitive prices.
- Leverage existing customer relationships by supplying customers with
high-performance substrates in addition to GaAs and establishing
arrangements to jointly develop GaAs and other substrates.
For the years ended December 31, 1995, 1996 and 1997 and the three months
ended March 31, 1998, the Company generated total revenues of $14.5 million,
$16.2 million, $25.3 million and $9.7 million, respectively, and during the same
periods, generated net income of $2.7 million, $2.0 million, $3.3 million and
$1.4 million, respectively.
The Company was incorporated in the State of California in December 1986.
The Company will reincorporate in the State of Delaware in connection with the
Offering. The Company's executive offices and manufacturing facilities are
located at 4311 Solar Way, Fremont, California 94538, and its telephone number
is (510) 683-5900.
4
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THE OFFERING
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Common Stock Offered Hereby................................. 2,500,000 shares
Common Stock to be Outstanding after the Offering(1)........ 15,690,268 shares
Use of Proceeds............................................. For capital expenditures, product
development, sales and marketing
and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol...................... AXTI
</TABLE>
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(1) Excludes 1,466,950 shares of Common Stock issuable upon exercise of
outstanding options at March 31, 1998 with a weighted average exercise price
of $5.02 per share. See "Management -- Benefit Plans" and Note 8 of Notes to
Consolidated Financial Statements.
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events which could adversely affect the Company's business. Such material risks
include, but are not limited to, fluctuations in operating results, market
acceptance of VGF technology, manufacturing risks, limited and sole suppliers,
limitations of existing manufacturing capacity and dependence on limited product
offerings. See "Risk Factors."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
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STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 4,403 $ 7,457 $14,478 $16,227 $25,335 $ 5,094 $ 9,730
Gross profit........................ 1,485 2,944 6,214 6,162 10,108 1,791 4,005
Income from operations.............. 416 1,874 4,050 3,537 5,860 927 2,399
Net income.......................... 125 1,161 2,739 2,046 3,258 447 1,385
Basic net income per share(1)....... $ 0.05 $ 0.44 $ 0.97 $ 0.71 $ 1.11 $ 0.15 $ 0.45
Diluted net income per share........ $ 0.01 $ 0.10 $ 0.23 $ 0.17 $ 0.25 $ 0.04 $ 0.10
Shares used in basic net income per
share calculations................ 2,555 2,634 2,821 2,882 2,938 2,896 3,052
Shares used in diluted net income
per share calculations............ 11,549 11,676 11,813 11,811 12,839 12,225 13,516
</TABLE>
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<CAPTION>
MARCH 31, 1998
------------------------
ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,981 $23,006
Working capital............................................. 14,898 34,923
Total assets................................................ 34,209 54,234
Long-term debt, net of current portion...................... 7,981 7,981
Stockholders' equity........................................ 20,088 40,113
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(1) Because of the anticipated conversion of the Preferred Stock into Common
Stock if the Offering is consummated, basic net income per share is not
indicative of the Company's future capital structure.
(2) Reflects (i) the conversion of all outstanding shares of the Company's
Preferred Stock into 10,128,738 shares of Common Stock upon completion of
the Offering and (ii) the sale of 2,500,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $9.00 per share after
deducting the underwriting discounts and commissions and estimated Offering
expenses payable by the Company and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
5
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, as well as the other information set forth in this Prospectus, in
evaluating an investment in the Common Stock offered hereby.
This Prospectus contains statements that constitute forward-looking
statements. Those statements appear in a number of places in this Prospectus and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (i)
the Company's revenues; (ii) the Company's research and development efforts;
(iii) potential acquisitions by the Company; (iv) the use of the proceeds of the
Offering; (v) the Company's financing plans; (vi) trends affecting the Company's
financial condition or results of operations; (vii) the Company's growth,
operating and financing strategies; and (viii) the declaration and payment of
dividends. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including, without
limitation, the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences.
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 three months ended March 31, 1998, 23.5% and 14.6%, respectively, of the
Company's total revenues were from customers located in Japan and other Asian
countries.
The Company's expense levels are based in large part on its current
expectations for future revenues and its expected research and development and
marketing requirements. In the event revenues do not meet expectations, the
Company may be unable to adjust its spending levels on a timely basis to
compensate for unexpected revenue shortfalls. In addition, the Company has
significantly increased its expense levels to support its recent growth and
intends to continue to make significant investments in research and development,
facility expansion, capital equipment and customer service and support
capabilities worldwide. These investments will make it difficult for the Company
to reduce its operating expenses in a particular period if the Company's revenue
expectations for that period are not met. There can be no assurance that the
Company will achieve a rate of revenue growth in any future period commensurate
with its increased level of operating expenses and the failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's revenues and operating results are substantially dependent
upon the volume and timing of orders received by the Company from its customers.
The Company's lengthy sales cycle limits its visibility regarding future
financial performance. The Company's revenue is subject to demand for GaAs
substrates and is also subject to the risks to which the markets for its
customers' products are subject, including technological or other changes in
those markets. In addition, the ordering patterns of some of the Company's
existing large customers have been unpredictable in the past, and the Company
expects ordering patterns of such customers will continue to be unpredictable in
the future. Because the Company's customers may cancel or reschedule
6
<PAGE> 8
orders without significant penalty and because such orders are often large and
intended to satisfy customers' long-term needs, backlog is not necessarily
indicative of future product sales. The Company has in the past experienced
customer order cancellations, reschedulings of orders, and product returns, for
reasons beyond the Company's control. Such cancellations, reschedulings and
returns have not had a material adverse impact on the Company's revenues and
operating results to date. However, future cancellations or reschedulings of
orders or product returns could impact the timing and amounts of revenues
recognized quarterly which could materially adversely affect the Company's
business, financial condition and results of operations.
Other factors which may affect the Company's revenues and operating results
include 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. See
"Business -- Technology."
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 and adversely affect operating
results. There can be no assurance that the Company will not suffer periodic
yield problems, which could materially and 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
7
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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 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.
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 the 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.
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. See
"Business -- Manufacturing."
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 in the
third quarter of 1998. The Company believes that the expansion will cost
approximately $2.0 million, which the Company is financing by a bank loan. Any
disruptions in manufacturing as a result of the facility expansion could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company experienced manufacturing disruptions in the
summer of 1996 as a result of the move to its current facility. 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.
The Company has recently entered into a purchase agreement (the "Purchase
Agreement") regarding the purchase of an additional 58,000 square foot facility
in Fremont, California. This new facility will provide additional manufacturing
capacity for the Company and will not replace its current facility. Pursuant to
the terms of the Purchase Agreement, the cost of the new facility is $9.0
million, and the purchase is expected to close in June 1998. While the Company
anticipates that it will finance the acquisition of this new facility with
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funds obtained from outside sources, it may elect to use a portion of the net
proceeds from the Offering to fund this acquisition. No assurance can be given
that funds from outside sources will be available on terms favorable to the
Company or at all. In addition, 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 purchase and building improvements and
commence operations in the new facility prior to the end of 1999, whether as a
result of an inability to obtain required financing or any other 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 facility and as a result, the Company's business, financial condition and
results of operations may be materially adversely affected. See "Use of
Proceeds" and "Business -- Manufacturing."
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. See "Business -- Products" and "-- Research and
Development."
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
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<PAGE> 11
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.
See "Business -- Products," "-- Research and Development" and "-- Competition."
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 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 51.7% of the Company's revenues in 1996 and
1997 and in the three months ended March 31, 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.
See "Business -- Customers."
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
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<PAGE> 12
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
target markets. Failure of the Company to compete successfully would materially
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Competition."
DEPENDENCE ON SALES OUTSIDE THE UNITED STATES. International sales
represented 38.2% and 25.6% of the Company's total revenues in 1997 and in the
three months ended March 31, 1998, respectively. Sales to customers located in
Japan and other Asian countries represented 23.5% and 14.6% of the Company's
total revenues in 1997 and in the three months ended March 31, 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 three
months ended March 31, 1998, 14.0%, 16.3%, 17.1% and 10.5%, 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 the three months ended March 31, 1998, the Company
incurred foreign exchange losses of $114,000, $186,000 and $56,000,
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, its President and Chief
Executive Officer, as well as its other key
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<PAGE> 13
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 Mr. 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. See "Business -- Employees" and
"Management."
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, 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 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. See "Business -- Intellectual Property and Other
Proprietary Rights."
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
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<PAGE> 14
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 difficulty and costs 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 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.
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. See "Use of Proceeds."
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 12 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
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<PAGE> 15
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 "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
CONCENTRATION OF SHARE OWNERSHIP AND VOTING POWER; ANTI-TAKEOVER
PROVISIONS. Upon the closing of the Offering (assuming no exercise of the
Underwriters' over-allotment option), officers, directors and affiliates of the
Company will beneficially own approximately 22.0% of the Company's outstanding
Common Stock. As a result, these stockholders as a group will be able to
substantially influence the management and affairs of the Company and, if acting
together, would be able to influence most 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.
Upon the closing of the Offering, the Company's Board of Directors will
have 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. The
issuance of shares of Preferred Stock, while potentially providing desirable
flexibility in connection with possible acquisitions and for other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present intention to issue shares of Preferred Stock. In addition,
certain provisions of the Company's Certificate of Incorporation, which will
become effective upon consummation of the Offering, 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. These provisions provide,
among other things, that the Board of Directors is divided into three classes to
serve staggered three-year terms, that stockholders may not take action by
written consent, that the ability of stockholders to call special meetings of
stockholders and to raise matters at meetings of stockholders is restricted and
that certain amendments of the Company's Certificate of Incorporation, and all
amendments of the Company's Bylaws, require the approval of holders of at least
66 2/3% of the voting power of all outstanding shares. 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. See "Principal Stockholders" and
"Description of Capital Stock."
BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS. A significant portion of
the anticipated net proceeds to the Company from the Offering has not been
designated for specific uses. Accordingly, management of the Company will have
broad discretion with respect to the use of these funds. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE. Upon the closing of the Offering, the
Company will have a total of 15,690,268 shares of Common Stock outstanding
(16,065,268 shares if the Underwriters' over-allotment option is exercised in
full). Of these shares, the 2,500,000 shares of Common Stock offered hereby
(2,875,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradable without restriction or registration under the
Securities Act by persons other than "affiliates" of the Company, as defined
under the Securities Act. The remaining shares of Common Stock outstanding will
be "restricted securities" as that term is defined by Rule 144 as promulgated
under the Securities Act.
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<PAGE> 16
Under Rule 144 (and subject to the conditions thereof, including volume
limitations), all of the restricted shares will become eligible for sale after
the Offering. However, 12,979,536 of such restricted shares are also subject to
lock-up restrictions as described below. The Company, its officers and directors
and certain beneficial owners of the Company's Common Stock and holders of
options to purchase Common Stock have agreed that they will not, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any other securities convertible into, or exercisable or exchangeable for,
shares of Common Stock or other similar securities of the Company, currently
beneficially owned or hereafter acquired by such holders, for a period of 180
days following the date of this Prospectus. After such 180-day period, this
restriction will expire and all the restricted shares will become eligible for
sale, subject to the limitations under Rule 144. Prudential Securities
Incorporated may, in its sole discretion, at any time and without prior notice,
release all or any portion of the shares subject to such lock-up agreements.
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities. See "Management -- Benefit Plans" and "Shares Eligible for
Future Sale."
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE. Prior to the Offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active trading market will develop or, if developed, will
continue following the Offering, or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price for the Common Stock will be determined by negotiations among the
Company and the representatives of the Underwriters based on several factors,
and may not be indicative of the market price for the Common Stock after the
Offering. 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 Common Stock to
fluctuate substantially. 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. See "Underwriting."
DILUTION. Purchasers of the Common Stock offered hereby will experience an
immediate and substantial dilution of $6.44 in the net tangible book value per
share of their Common Stock assuming an initial public offering price of $9.00
per share, while the net tangible book value of the shares of Common Stock owned
by the existing stockholders will increase by $1.04 per share. See "Dilution."
NO INTENT TO PAY DIVIDENDS. The Company has never declared or paid
dividends on its Common Stock since its formation. The Company currently does
not intend to declare or pay dividends in the foreseeable future. The Company
intends to retain any earnings for future growth. The payment of dividends, if
any, will be at the discretion of the Board of Directors and will require the
prior approval of certain financial institutions with whom the Company has
entered into loan agreements. See "Dividend Policy."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,500,000 shares of Common
Stock offered hereby are estimated to be approximately $20,025,000
(approximately $23,164,000 if the Underwriters' over-allotment option is
exercised in full) assuming an initial public offering price of $9.00 per share
and after deducting underwriting discounts and commissions and estimated
Offering expenses. The Company intends to use approximately $6.0 million of the
net proceeds for capital expenditures, approximately $4.0 million for product
development, and approximately $1.0 million for sales and marketing, with the
remainder of the net proceeds to be used for general working capital purposes.
Pending such uses, the Company intends to invest the net proceeds from the
Offering in short-term, investment-grade, interest-bearing securities or
guaranteed obligations of the United States government. The Company currently
expects to finance the $9.0 million purchase of a new facility in Fremont,
California, with funds obtained from outside sources. However, the Company may
elect to use a portion of the $6.0 million of the net proceeds allocated for
capital expenditures as described above to fund part of this acquisition. The
Company may also use a portion of the net proceeds to acquire businesses,
technologies or products complementary to the Company's business. Although the
Company has from time to time engaged in discussions with respect to possible
acquisitions, it has no present understandings, commitments or agreements, nor
is it currently engaged in any discussions or negotiations with respect to any
such transaction.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock since
its formation. The Company currently does not intend to declare or pay dividends
in the foreseeable future. The Company intends to retain any earnings for future
growth. In addition, the Company's loan agreements contain covenants that
expressly prohibit the payment of any cash dividends without prior bank
approval.
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CAPITALIZATION
The following table sets forth as of March 31, 1998: (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
reflecting the conversion of all outstanding Preferred Stock into 10,128,737
shares of Common Stock, and (iii) the pro forma capitalization of the Company as
adjusted to give effect to the sale of 2,500,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $9.00 per share, after
deducting underwriting discounts and commissions and estimated Offering expenses
and the application of the estimated net proceeds therefrom. The information set
forth below should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion(1).................. $ 7,981 $ 7,981 $ 7,981
Stockholders' equity:
Convertible Preferred Stock, no par value: 25,000,000
shares authorized, 10,128,737 shares issued and
outstanding, actual; $0.001 par value, 2,000,000
authorized, no shares issued and outstanding pro forma
and as adjusted....................................... 8,553 -- --
Common Stock, no par value: 100,000,000 shares
authorized, 3,061,531 shares issued and outstanding,
actual; $0.001 par value, 40,000,000 shares
authorized, 13,190,268 and 15,690,268 shares issued
and outstanding, pro forma and as adjusted,
respectively(2)....................................... 1,119 13 16
Additional paid in capital............................... -- 9,659 29,681
Deferred compensation.................................... (427) (427) (427)
Retained earnings........................................ 10,969 10,969 10,969
Cumulative translation adjustments....................... (126) (126) (126)
------- ------- -------
Total stockholders' equity............................... 20,088 20,088 40,113
------- ------- -------
Total capitalization.................................. $28,069 $28,069 $48,094
======= ======= =======
</TABLE>
- ---------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) Excludes 1,466,950 shares of Common Stock issuable upon exercise of
outstanding options at March 31, 1998 with a weighted average exercise price
of $5.02 per share. See "Management -- Benefit Plans" and Note 8 of Notes to
Consolidated Financial Statements.
17
<PAGE> 19
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of $6.44 per share (assuming an initial public offering
price of $9.00 per share) in the pro forma net tangible book value of the Common
Stock from the assumed initial public offering price. The pro forma net tangible
book value of the Company as of March 31, 1998 was $20.1 million or $1.52 per
share. Pro forma net tangible book value per share is determined by dividing the
net tangible book value of the Company (tangible assets less liabilities) by the
number of shares of the Company's Common Stock outstanding (assuming the
conversion of all then outstanding Preferred Stock into Common Stock) as of
March 31, 1998. After giving effect to the receipt of the net proceeds from the
sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $9.00 per share and deducting the underwriting
discounts and commissions and estimated Offering expenses, the pro forma net
tangible book value of the Common Stock as of March 31, 1998 would have been
$40.1 million, or $2.56 per share. This represents an immediate dilution in pro
forma net tangible book value of $6.44 per share to new investors purchasing
shares in the Offering. The following table illustrates the per share dilution
as of March 31, 1998:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $9.00
Pro forma net tangible book value at December 31,
1997................................................. $1.52
Increase attributable to new investors................. 1.04
-----
Pro forma net tangible book value after the Offering........ 2.56
-----
Dilution to new investors................................... $6.44
=====
</TABLE>
The following table sets forth, on an as adjusted basis as of March 31,
1998, after giving effect to the conversion of all outstanding Preferred Stock
into Common Stock, the differences between the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and purchasers of Common Stock in the
Offering at an assumed initial public offering price of $9.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)................. 13,190,268 84.1% $ 9,672,000 30.1% $0.73
New investors............................ 2,500,000 15.9 22,500,000 69.9 9.00
---------- ------ ----------- ------
Total.................................. 15,690,268 100.0% $32,172,000 100.0%
========== ====== =========== ======
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 2,875,000 shares, or
approximately 17.9% of the total number of shares to be outstanding after
the Offering.
The foregoing table assumes no exercise of stock options outstanding at
March 31, 1998 or of the Underwriters' over-allotment option. At March 31, 1998,
there were 1,466,950 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $5.02 per
share. To the extent that outstanding options were exercised upon the
consummation of the Offering, the dilution to new investors would be $6.23. See
"Management -- Benefit Plans" and Note 8 of Notes to Consolidated Financial
Statements.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The consolidated balance sheet
data as of December 31, 1996 and 1997 and the consolidated statement of
operations data for the years ended December 31, 1995, 1996 and 1997 are derived
from the audited consolidated financial statements included herein. The
consolidated balance sheet data as of December 31, 1994 and 1995 and the
consolidated statement of operations data for the year ended December 31, 1994
are derived from audited consolidated financial statements of the Company not
included herein. The consolidated balance sheet data as of December 31, 1993 and
the consolidated statement of operations data for the year ended December 31,
1993 are derived from unaudited financial statements not included herein. The
selected consolidated financial data as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998, are derived from, and are qualified by
reference to, the unaudited consolidated financial statements included elsewhere
herein. In the opinion of management, such unaudited financial statements have
been prepared on the same basis as the audited financial statements referred to
above and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's results of
operations for the indicated periods. Operating results for the three months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998 or any other future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenues..................................... $ 4,129 $ 5,666 $11,520 $14,222 $23,014 $ 4,494 $ 9,238
Contract revenues.................................... 274 1,791 2,958 2,005 2,321 600 492
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 4,403 7,457 14,478 16,227 25,335 5,094 9,730
Cost of revenues:
Cost of product revenues............................. 2,672 3,091 6,030 9,270 13,674 2,805 5,460
Cost of contract revenues............................ 246 1,422 2,234 795 1,553 498 265
------- ------- ------- ------- ------- ------- -------
Total cost of revenues......................... 2,918 4,513 8,264 10,065 15,227 3,303 5,725
------- ------- ------- ------- ------- ------- -------
Gross profit........................................... 1,485 2,944 6,214 6,162 10,108 1,791 4,005
Operating expenses:
Selling, general and administrative.................. 826 921 1,716 2,033 2,959 642 966
Research and development............................. 243 149 448 592 1,289 222 640
------- ------- ------- ------- ------- ------- -------
Total operating expenses....................... 1,069 1,070 2,164 2,625 4,248 864 1,606
------- ------- ------- ------- ------- ------- -------
Income from operations................................. 416 1,874 4,050 3,537 5,860 927 2,399
Interest expense....................................... -- (3) (12) (170) (570) (115) (181)
Other income (expense)................................. (60) 65 282 (72) (34) (91) 21
------- ------- ------- ------- ------- ------- -------
Income before provision for income taxes............... 356 1,936 4,320 3,295 5,256 721 2,239
Provision for income taxes............................. 231 775 1,581 1,249 1,998 274 854
------- ------- ------- ------- ------- ------- -------
Net income............................................. $ 125 $ 1,161 $ 2,739 $ 2,046 $ 3,258 $ 447 $ 1,385
======= ======= ======= ======= ======= ======= =======
Basic net income per share(1).......................... $ 0.05 $ 0.44 $ 0.97 $ 0.71 $ 1.11 $ 0.15 $ 0.45
======= ======= ======= ======= ======= ======= =======
Diluted net income per share........................... $ 0.01 $ 0.10 $ 0.23 $ 0.17 $ 0.25 $ 0.04 $ 0.10
======= ======= ======= ======= ======= ======= =======
Shares used in basic net income per share
calculations......................................... 2,555 2,634 2,821 2,882 2,938 2,896 3,052
Shares used in diluted net income per share
calculations......................................... 11,549 11,676 11,813 11,811 12,839 12,225 13,516
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------- ---------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $ 1,052 $ 1,446 $ 835 $ 756 $ 3,054 $ 2,981
Working capital........................................ 1,821 2,859 3,760 5,542 14,209 14,898
Total assets........................................... 3,497 5,757 11,316 17,384 30,613 34,209
Long-term debt, net of current portion................. -- -- 2,350 5,582 7,728 7,981
Stockholders' equity................................... 3,014 4,213 7,005 8,999 18,591 20,088
</TABLE>
(1) Because of the anticipated conversion of the Preferred Stock into Common
Stock if the Offering is consummated, basic net income per share is not
indicative of the Company's future capital structure.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND 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 GaAs, InP and 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.
The Company has been profitable on an annual basis since 1990 and its total
revenues were $14.5 million, $16.2 million, $25.3 million, $5.1 million and $9.7
million for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 and 1998, respectively. Total revenues consist of
product revenues and contract revenues. The Company's product revenues were
$11.5 million, $14.2 million, $23.0 million, $4.5 million and $9.2 million for
the years ended December 31, 1995, 1996 and 1997 and for the three months ended
March 31, 1997 and 1998, respectively. Product revenues are generally recognized
upon shipment of products to customers. Historically, virtually all of the
Company's product revenues have been derived from sales of GaAs substrates,
which, in the year ended December 31, 1997 and in the three months ended March
31, 1998, accounted for 94.9% and 78.3%, respectively, of the Company's product
revenues. The Company began selling InP and Ge substrates to its customers in
late 1997.
The Company's contract revenues were $3.0 million, $2.0 million, $2.3
million, $600,000 and $492,000 for the years ended December 31, 1995, 1996 and
1997 and for the three months ended March 31, 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 the Company in March 1994 and under which the Company was paid an
aggregate of $6.1 million. The Title III GaAs contract will be completed in May
1998. The Company retains rights to the VGF and wafer fabrication technology
developed under these government and customer-funded research contracts and is
therefore able to leverage these programs to continue to broaden its product and
technology offerings.
In 1995, the Company established a wholly-owned subsidiary in Japan to
distribute the Company's products. This subsidiary serves primarily as a direct
sales and support office for the Company's customers in Japan. The Company also
utilizes independent sales representatives in France, Japan, South Korea, Taiwan
and the United Kingdom. Domestic sales are generated by the Company's direct
sales force. International sales accounted for 38.2%, 38.2% and 25.6% of total
revenues for the years ended December 31, 1996 and 1997 and for the three months
ended March 31, 1998, respectively. Except for sales in Japan, which are
denominated in yen, the Company denominates and collects its international sales
in U.S. dollars. Doing business in Japan subjects the Company to fluctuations in
exchange rates between the U.S. dollar and the Japanese yen. The Company
incurred foreign exchange losses of $114,000, $186,000 and $56,000 for the years
ended December 31, 1996 and 1997 and for the three months ended March 31, 1998,
respectively.
Since July 1996, the Company has conducted all of its operations in a
50,000 square foot office and production facility located in Fremont,
California. Prior to transitioning its manufacturing operations to this
facility, the Company leased a manufacturing facility in Dublin, California. The
Company is in the process of expanding the size of its current 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 in the third quarter of 1998.
In addition, in April 1998, the Company executed the Purchase Agreement for the
purchase of an additional 58,000 square foot facility in Fremont, California.
The Company believes that this planned new facility will not begin production of
substrates prior to the end of 1999.
In connection with the granting of stock options, the Company recorded
aggregate deferred compensation of $550,000, representing the difference between
the deemed fair value of the Common Stock for accounting
20
<PAGE> 22
purposes and the option exercise price at the date of grant for the year ended
December 31, 1997 and the three months ended March 31, 1998. Such deferred
compensation will be amortized over the vesting period of the applicable options
of which $102,000 and $21,000 was amortized during the year ended December 31,
1997 and the three months ended March 31, 1998, respectively.
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
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- ------------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues......................... 79.6% 87.6% 90.8% 88.2% 94.9%
Contract revenues........................ 20.4 12.4 9.2 11.8 5.1
----- ----- ----- ----- -----
Total revenues................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues................. 41.6 57.1 54.0 55.0 56.1
Cost of contract revenues................ 15.4 4.9 6.1 9.8 2.7
----- ----- ----- ----- -----
Total cost of revenues........... 57.0 62.0 60.1 64.8 58.8
----- ----- ----- ----- -----
Gross margin............................... 43.0 38.0 39.9 35.2 41.2
Operating expenses:
Selling, general and administrative...... 11.9 12.5 11.7 12.6 9.9
Research and development................. 3.1 3.6 5.1 4.4 6.6
----- ----- ----- ----- -----
Total operating expenses......... 15.0 16.1 16.8 17.0 16.5
----- ----- ----- ----- -----
Income from operations..................... 28.0 21.9 23.1 18.2 24.7
Interest expense........................... (0.1) (1.0) (2.2) (2.3) (1.9)
Other income (expense)..................... 1.9 (0.5) (0.1) (1.7) 0.2
----- ----- ----- ----- -----
Income before provision for income taxes... 29.8 20.4 20.8 14.2 23.0
Provision for income taxes................. 10.9 7.7 7.9 5.4 8.8
----- ----- ----- ----- -----
Net income................................. 18.9% 12.7% 12.9% 8.8% 14.2%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth product and contract gross profits and gross
margins for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Product gross profit.......................... $5,490 $4,952 $9,340 $1,689 $3,778
Product gross margin.......................... 47.7% 34.8% 40.6% 37.6% 40.9%
Contract gross profit......................... $ 724 $1,210 $ 768 $ 102 $ 227
Contract gross margin......................... 24.5% 60.3% 33.1% 17.0% 46.1%
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Revenues. Total revenues increased 91.0% from $5.1 million for the three
months ended March 31, 1997 to $9.7 million for the three months ended March 31,
1998. Product revenues increased 105.6% from $4.5 million for the three months
ended March 31, 1997 to $9.2 million for the three months ended March 31, 1998.
The increase in product revenues reflected an increase in the volume of sales of
GaAs substrates to existing domestic and international customers, the addition
of new customers and sales of Ge substrates,
21
<PAGE> 23
which were introduced in the three months ended December 31, 1997. Ge substrates
totaled 20.7% of product revenues for the three months ended March 31, 1998.
International revenues decreased from 34.2% of total revenues for the three
months ended March 31, 1997 to 25.6% of total revenues for the three months
ended March 31, 1998, primarily reflecting the introduction of Ge substrates in
late 1997, which are currently sold only to domestic customers. The Company
believes that Ge substrates will be sold only to U.S. customers for the
foreseeable future which is expected to result in international revenues
continuing to decline as a percentage of total revenues.
Contract revenues decreased 18.0% from $600,000 for the three months ended
March 31, 1997 to $492,000 for the three months ended March 31, 1998. Contract
revenues in 1997 were higher than in 1998 primarily because the Company
recognized significant revenue from a $1.2 million customer-funded Ge research
contract that was completed in June 1997. Contract revenues declined from 11.8%
of total revenues for the three months ended March 31, 1997 to 5.1% for the
three months ended March 31, 1998 as a result of product revenue growth combined
with a decline in contract revenues. In future periods, the Company expects
contract revenues to continue to decline as a percentage of total revenues.
Gross Margin. Gross margin increased from 35.2% of total revenues for the
three months ended March 31, 1997 to 41.2% of total revenues for the three
months ended March 31, 1998. Product gross margin increased from 37.6% for the
three months ended March 31, 1997 to 40.9% for the three months ended March 31,
1998, reflecting higher yields achieved in GaAs production. The 30,000 square
foot expansion and the 58,000 square foot facility that the Company expects to
purchase will provide additional manufacturing capacity and will not replace the
Company's current facility. As a result, the Company does not anticipate that it
will experience the duplicate expenses that resulted from operating two
facilities in 1996 and impacted gross margins.
Contract gross margin increased from 17.0% for the three months ended March
31, 1997 to 46.1% for the three months ended March 31, 1998. This increase was
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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 50.5% from $642,000 for the three months ended
March 31, 1997 to $966,000 for the three months ended March 31, 1998. The
increase resulted primarily from increased personnel and administrative expenses
required to support additional sales volume.
Research and Development Expenses. Research and development expenses
increased 188.3% from $222,000 for the three months ended March 31, 1997 to
$640,000 for the three months ended March 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 Company
funded research and development, the Company has incurred research and
development expenses relating to government and customer-funded research
contracts, which are included in the cost of contract revenues. For the three
months ended March 31, 1998, total research and development costs, including
both contract funded and internally funded research and development expenses,
totaled $905,000, or 9.3% of total revenues.
Interest Expense. Interest expense increased from $115,000 for the three
months ended March 31, 1997 to $181,000 for the three months ended March 31,
1998. This increase was primarily the result of additional borrowings incurred
to finance the expansion of the Company's production facility in 1997 and 1998
and related equipment purchases.
Other Income (Expense). Other income (expense) increased from $91,000 of
expense for the three months ended March 31, 1997 to $21,000 of income for the
three months ended March 31, 1998. This increase was primarily due to a decline
in foreign currency transaction losses incurred as a result of changes in the
value of the U.S. dollar compared to the Japanese yen and interest earned on
investments.
Provision for Income Taxes. Income tax expense remained at 38.0% of income
before provision for income taxes for the three months ended March 31, 1997 and
March 31, 1998.
22
<PAGE> 24
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 were 38.2% of total revenues for each of the years ended December 31,
1996 and 1997.
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. The
increase was primarily due to revenues recognized from a $1.2 million
customer-funded Ge 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% of total revenues for the
year ended December 31, 1996 to 39.9% of total revenues 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 the 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 research. In addition,
in 1996 gross margin was favorably impacted by large incentive awards which were
paid to the Company 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. The
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 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 the Company's new manufacturing facility, the expansion of production
facilities in 1997 and related equipment purchases.
Other Income (Expense). Other expense decreased from $72,000 for the year
ended December 31, 1996 to $34,000 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.
23
<PAGE> 25
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues increased 12.1% from $14.5 million for the year
ended December 31, 1995 to $16.2 million for the year ended December 31, 1996.
Product revenues increased 23.5% from $11.5 million for the year ended December
31, 1995 to $14.2 million for the year ended December 31, 1996. This increase in
product revenues was primarily attributable to increased acceptance by both
domestic and international customers of the Company's VGF technology. Product
revenues in the third quarter of 1996 were adversely impacted by the Company's
move from its former production facility that was operating at full capacity to
a new manufacturing facility, which required significant start-up time.
International revenues increased from 36.0% of total revenues for the year
ended December 31, 1995 to 38.2% of total revenues for the year ended December
31, 1996. This increase was primarily attributable to the growth in the European
and Japanese markets.
Contract revenues decreased 32.2% from $3.0 million for the year ended
December 31, 1995 to $2.0 million for the year ended December 31, 1996 primarily
as a result of the Company's completion, in March 1996, of the first phase of
the Title III GaAs contract, under which it recognized $567,000 of contract
revenues under the Title III contract. Following March 1996, the Company began
recognizing lower contract revenues under this contract than it had recognized
in 1995 and the first three months of 1996. As a result, contract revenues
declined from 20.4% of total revenues for the year ended December 31, 1995 to
12.4% for the year ended December 31, 1996.
Gross Margin. Gross margin decreased from 43.0% of total revenues for the
year ended December 31, 1995 to 38.0% of total revenues for the year ended
December 31, 1996. In the year ended December 31, 1995, the Company sold
$790,000 of products manufactured under the Title III GaAs contract which had no
associated product costs. Without these product revenues, product gross margins
would have been 43.8% for the year ended December 31, 1995. Product gross margin
decreased from 47.7% for the year ended December 31, 1995 to 34.8% for the year
ended December 31, 1996. This decrease was primarily due to duplicate expenses
of approximately $500,000 due to simultaneous operations of two facilities and
manufacturing inefficiencies relating to the transition to the new production
facility.
Contract gross margin increased from 24.5% for the year ended December 31,
1995 to 60.3% for the year ended December 31, 1996 because of the Company's
shift from the first to the second phase of the Title III GaAs contract. The
second phase of the Title III GaAs contract had higher margins because, during
that phase, the Company received significant incentive awards upon the
achievement of certain milestones.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 18.5% from $1.7 million for the year ended
December 31, 1995 to $2.0 million for the year ended December 31, 1996. The
increase was primarily attributable to the establishment of the Japanese
subsidiary and the hiring of additional sales and administrative staff to
support the overall increased sales volume.
Research and Development Expenses. Research and development expenses
increased 32.1% from $448,000 for the year ended December 31, 1995 to $592,000
for the year ended December 31, 1996. This increase resulted primarily from
increased staff levels for further development of GaAs substrates and the
initial research on InP substrates. For the year ended December 31, 1996,
research and development costs, including both contract funded and internally
funded research and development costs, totaled $1.4 million, or 8.5% of total
revenues.
Interest Expense. Interest expense increased from $12,000 for the year
ended December 31, 1995 to $170,000 for the year ended December 31, 1996. This
increase was primarily the result of additional borrowings incurred to finance
the Company's new manufacturing facility and related equipment. Prior to 1995,
the Company had not incurred any long-term debt.
Other Income (Expense). Other income (expense) decreased from income of
$282,000 for the year ended December 31, 1995 to $72,000 of expense for the year
ended December 31, 1996. The decrease resulted primarily from the realization in
1995 of gains on sales of equipment and investments of $232,000, and foreign
currency transaction losses recognized in 1996 which resulted from the increase
in value of the U.S. dollar compared to the Japanese yen.
Provision for Income Taxes. Income tax expense increased from 36.6% of
income before provision for taxes for the year ended December 31, 1995 to 37.9%
of income before provision for income taxes for the year ended December 31,
1996.
24
<PAGE> 26
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results in dollars for
the nine quarters ended March 31, 1998. The Company believes 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.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues........... $3,274 $3,543 $3,376 $4,029 $4,494 $5,360 $6,060 $7,100 $9,238
Contract revenues.......... 739 508 332 426 600 842 447 432 492
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues...... 4,013 4,051 3,708 4,455 5,094 6,202 6,507 7,532 9,730
Cost of revenues:
Cost of product revenues... 2,153 2,400 2,201 2,516 2,805 3,167 3,604 4,098 5,460
Cost of contract
revenues................. 321 179 126 169 498 654 210 191 265
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues.......... 2,474 2,579 2,327 2,685 3,303 3,821 3,814 4,289 5,725
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................. 1,539 1,472 1,381 1,770 1,791 2,381 2,693 3,243 4,005
Operating expenses:
Selling, general and
administrative........... 500 457 507 569 642 674 703 940 966
Research and development... 98 148 172 174 222 296 306 465 640
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.......... 598 605 679 743 864 970 1,009 1,405 1,606
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations....... 941 867 702 1,027 927 1,411 1,684 1,838 2,399
Interest expense............. (19) 17 (74) (94) (115) (151) (158) (146) (181)
Other income (expense)....... 14 (33) (49) (4) (91) 77 (8) (12) 21
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before provision for
income taxes............... 936 851 579 929 721 1,337 1,518 1,680 2,239
Provision for income taxes... 355 323 219 352 274 508 577 639 854
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income................... $ 581 $ 528 $ 360 $ 577 $ 447 $ 829 $ 941 $1,041 $1,385
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth selected consolidated financial information
as a percentage of total revenues for each of the Company's last nine quarters.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues........... 81.6% 87.5% 91.0% 90.4% 88.2% 86.4% 93.1% 94.3% 94.9%
Contract revenues.......... 18.4 12.5 9.0 9.6 11.8 13.6 6.9 5.7 5.1
----- ----- ----- ----- ----- ----- ----- ----- ------
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues... 53.7 59.2 59.4 56.5 55.0 51.1 55.4 54.4 56.1
Cost of contract
revenues................. 8.0 4.4 3.4 3.8 9.8 10.5 3.2 2.5 2.7
----- ----- ----- ----- ----- ----- ----- ----- ------
Total cost of
revenues.......... 61.7 63.6 62.8 60.3 64.8 61.6 58.6 56.9 58.8
----- ----- ----- ----- ----- ----- ----- ----- ------
Gross margin................. 38.3 36.4 37.2 39.7 35.2 38.4 41.4 43.1 41.2
Operating expenses:
Selling, general and
administrative........... 12.5 11.3 13.7 12.8 12.6 10.8 10.8 12.5 9.9
Research and development... 2.4 3.7 4.6 3.9 4.4 4.8 4.7 6.2 6.6
----- ----- ----- ----- ----- ----- ----- ----- ------
Total operating
expenses.......... 14.9 15.0 18.3 16.7 17.0 15.6 15.5 18.7 16.5
----- ----- ----- ----- ----- ----- ----- ----- ------
Income from operations....... 23.4 21.4 18.9 23.0 18.2 22.8 25.9 24.4 24.7
Interest expense............. (0.5) 0.4 (2.0) (2.1) (2.3) (2.4) (2.4) (1.9) (1.9)
Other income (expense)....... 0.3 (0.8) (1.3) (0.1) (1.7) 1.2 (0.2) (0.2) 0.2
----- ----- ----- ----- ----- ----- ----- ----- ------
Income before provision for
income taxes............... 23.2 21.0 15.6 20.8 14.2 21.6 23.3 22.3 23.0
Provision for income taxes... 8.8 8.0 5.9 7.9 5.4 8.2 8.9 8.5 8.8
----- ----- ----- ----- ----- ----- ----- ----- ------
Net income................... 14.4% 13.0% 9.7% 12.9% 8.8% 13.4% 14.4% 13.8% 14.2%
===== ===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
25
<PAGE> 27
The following table sets forth product and contract gross profits and gross
margins for the nine quarters ended December 31, 1997.
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product gross profit.... $1,121 $1,143 $1,175 $1,513 $1,689 $2,193
Product gross margin.... 34.2% 32.3% 34.8% 37.6% 37.6% 40.9%
Contract gross profit... $ 418 $ 329 $ 206 $ 257 $ 102 $ 188
Contract gross margin... 56.6% 64.8% 62.0% 60.3% 17.0% 22.3%
<CAPTION>
SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Product gross profit.... $2,456 $3,002 $3,778
Product gross margin.... 40.5% 42.3% 40.9%
Contract gross profit... $ 237 $ 241 $ 227
Contract gross margin... 53.0% 55.8% 46.1%
</TABLE>
The Company's total revenues have increased in each of the nine quarters
ended March 31, 1998, except for the quarter ended September 30, 1996. These
quarterly increases reflect increased product shipments to both the
semi-insulating and semi-conducting GaAs markets. The decline in product
revenues for the quarter ended September 30, 1996 was primarily due to the
Company's move from a leased facility that was operating at full capacity to a
new manufacturing facility, which had significant start-up time. The decline in
contract revenues for the quarters ended June 30 and September 30, 1996 was
primarily due to completion of the first phase of the Title III GaAs contract in
the quarter ended March 30, 1996, under which the Company recognized $567,000 of
contract revenues under the Title III contract. 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 research contract. In the
quarters ended December 31, 1997 and March 31, 1998, product revenues increased
primarily because the Company began selling Ge substrates and continued
increased shipments of GaAs substrates.
The Company experienced lower product gross margins in the first three
quarters of 1996 primarily as a result of duplicate expenses of approximately
$500,000 due to simultaneous operations of two facilities and manufacturing
inefficiencies relating to the transition to the new production facility. As a
result of a recycling program implemented in the quarter ended December 31,
1997, the Company was 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 the
Company will continue the recycling program, the Company expects the program to
have a less significant impact on product gross margins in the future. The
increase in product gross margin in the quarter ended December 31, 1997 was
partially offset by lower product gross margins from sales of Ge substrates. The
Company 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 research.
Selling, general and administrative expenses for the quarter ended June 30,
1996 were lower than for the quarter ended March 31, 1996 primarily due to
expenses incurred in the prior quarter associated with preparing for the closing
of the Company's Dublin facility. Selling, general and administrative expenses
for the quarters ended September 30, 1996, December 31, 1996 and March 30, 1997
were higher than previous quarters as a result of the Company's incurrence of
additional administrative costs relating to the transition to the new production
facility. 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 the Company built its management infrastructure to support its
increased sales volume.
Research and development expenses for the quarter ended December 31, 1997
significantly increased primarily due to material purchased for research on InP
substrates and for the GaAs LED market.
The Company believes that its 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 the Company's 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. The Company may, in some
future quarter, have operating results that will be below the expectations of
stock
26
<PAGE> 28
market analysts and investors. In such event, the price of the Company's Common
Stock could be materially adversely affected. See "Risk Factors -- Fluctuations
in Operating Results."
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 of $5.9 million for Preferred Stock completed in March 1997.
At March 31, 1998, the Company had working capital of $14.9 million, including
cash of $3.0 million, compared to working capital at December 31, 1997 of $14.2
million, including cash of $3.1 million, compared to working capital at December
31, 1996 of $5.5 million, including cash of $756,000, and compared to working
capital at December 31, 1995 of $3.8 million, including cash of $835,000.
During the year ended December 31, 1995, net cash provided by operations of
$744,000 was due primarily to net income of $2.7 million, depreciation of
$513,000 and an increase in accounts payable of $215,000, partially offset by
increases in accounts receivable, inventory, other assets and deferred income
taxes of $2.3 million and a decrease in accrued liabilities of $398,000. The
increases in accounts receivable and inventory were related to the 94.2%
increase in revenues from the prior year and the increase in other assets was
primarily the result of an increase in unbilled revenues for contract research
projects.
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 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 sales at December 31, 1996.
During the year ended December 31, 1997, net cash used in operations of
$1.2 million was primarily due to increases in inventories 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, 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 and the introduction of Ge revenues.
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 three months ended March 31, 1998, net cash provided by
operations of $961,000 was primarily due to net income of $1.4 million,
depreciation of $408,000, and increases in accounts payable of $898,000 and
accrued liabilities of $856,000, offset in part by increases in accounts
receivable of $1.1 million, inventory of $498,000 and prepaid and other assets
of $960,000. The increases in accounts receivable, inventory and accounts
payable were primarily the result of the 91.0% increase in total revenues. The
increase in accrued liabilities was the result of increased income tax expense.
The increase in prepaid and other assets was primarily due to deposits on the
new 58,000 square foot facility, production equipment and materials and prepaid
research and development expenses. Days sales outstanding decreased from 64 days
at December 31, 1997 to 61 days at March 31, 1998, reflecting improved
collection efforts. The inventory turnover ratio improved from 2.2 turns per
year at December 31, 1997 to 2.5 turns per year at March 31, 1998 due primarily
to lower Ge substrate inventories.
Net cash used in investing activities was $3.9 million, $3.9 million, $4.9
million and $1.5 million for the years ended December 31, 1995, 1996 and 1997
and the three months ended March 31, 1998, respectively, and was due primarily
in each period to the purchase of property, plant and equipment. The Company
27
<PAGE> 29
anticipates using $6.0 million of the net proceeds of this Offering for
equipment for its current facilities and the potential acquisition of a new
facility.
Net cash provided by financing activities was $3.0 million, $3.5 million,
$8.4 million and $369,000 for the years ended December 31, 1995, 1996 and 1997
and the three months ending March 31, 1998, respectively. For the year ended
December 31, 1995, net cash provided by financing activities resulted primarily
from long-term borrowings of $2.4 million for construction-in-progress of the
Company's manufacturing facility and short-term borrowings of $600,000 for
general operating purposes. 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 the Company's 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 payment of $300,000 of
short-term borrowings. For the three months ended March 31, 1998, net cash
provided by financing activities resulted primarily from proceeds of short-term
and long-term borrowings of $345,000.
The Company has generally financed its equipment purchases through secured
equipment loans over five-year terms at interest rates ranging from 7.7% to 9.0%
per annum. The Company's manufacturing facility was financed by a $3.5 million
bank loan and a $1.0 million SBA loan. The bank loan has an interest rate of
8.3% per annum, matures in 2006 and is secured by the land and building. The
bank loan is subject to certain financial covenants regarding current financial
ratios such as a minimum tangible net worth of not less than $18.0 million,
working capital in excess of $10.0 million, a current ratio in excess of 1.25:1
and cash flow requirements, which were met as of December 31, 1997. The Company
must obtain the lender's approval to obtain additional borrowings or to further
pledge its assets, except for borrowings obtained in the normal course of
business or the pledging of equipment. The SBA loan has an interest rate of 7.3%
per annum, matures in 2016 and is subordinate to the bank loan. At March 31,
1998, $4.4 million was outstanding under the bank and SBA loans.
The Company's addition of approximately 30,000 square feet to its
manufacturing facility currently in process is being financed by a construction
loan of $1.4 million. At March 31, 1998, $600,000 was outstanding under the
construction loan. The construction loan is subject to certain financial
covenants regarding current financial ratios and cash flow requirements, which
have all been met as of December 31, 1997. The construction loan will convert
into a term loan at the time of building completion. This term loan will have a
maturity of ten years with 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. The Company's
anticipated purchase of the additional 58,000 square foot facility is expected
to be financed by outside sources or a portion of the proceeds from the
Offering.
The Company currently has 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. The line of credit is subject to certain financial covenants regarding
current financial ratios and cash flow requirements,were met as of December 31,
1997. As of March 31, 1998, $77,000 was outstanding under this line of credit.
The Company anticipates 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. The Company's future capital requirements will be depend on many
factors, including the rate of revenue growth, the Company's 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 the Company's products. The Company expects that it may need to
raise additional equity or debt financing in the future, although it is not
currently negotiating for additional financing nor does it have any plans to
obtain additional financing following the Offering. There can be no assurance
that additional equity or debt financing, if required, will be available on the
acceptable terms or at all. If the Company is unable to obtain such additional
capital, if needed, the Company may be required to reduce the scope of its
planned product development and selling and marketing activities, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. In the event that the Company does
28
<PAGE> 30
raise additional equity financing, further dilution to investors in the Offering
will result. See "Risk Factors -- Future Capital Needs; Uncertainty of
Additional Financing."
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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Statements of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information." The
adoption of both statements is required for fiscal years beginning after
December 15, 1997. SFAS 130 is required to be adopted in the interim financial
statements in the year of adoption. Under SFAS 130, the Company is required to
report in the financial statements, in addition to net income, comprehensive
income including, as applicable, foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities. The Company adopted
SFAS 130 in January 1998. The Company has reported comprehensive income
including foreign currency items in its consolidated financial statements. SFAS
131 requires that companies report separately, in the financial statements,
certain financial and descriptive information about operating segments, 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. The
adoption of SFAS 131 will not have any impact on the Company's financial
statements.
29
<PAGE> 31
BUSINESS
COMPANY 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 primarily manufactures
and sells compound semiconductor substrates composed of GaAs. Sales of GaAs
substrates accounted for 94.9% of the Company's product revenues for the year
ended December 31, 1997. The Company also manufactures and sells InP and Ge
substrates and is currently developing other high-performance compound
substrates such as GaP and GaN. The Company manufactures substrates from
crystals grown using the Company's proprietary VGF technique and then slices the
substrates into wafers. The Company's substrates are sold to semiconductor
device manufacturers for use in applications such as wireless and fiber optic
telecommunications, lasers, LEDs, satellite solar cells and consumer
electronics. The Company's customers include EMCORE, Hewlett Packard, Motorola,
NEC, Nortel, Siemens, Sony, Spectrolab and TRW.
The Company was originally founded in 1986 under the name Bestal
Corporation and commenced product sales in 1990. The Company has one subsidiary,
AXT-Japan, which was established in 1995.
INDUSTRY OVERVIEW
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 are composed of a single element such as Ge, or multiple
elements which may include, among others, gallium, aluminum, indium, arsenic,
phosphorus and nitrogen. Substrates that consist of more than one element are
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 a
January 1997 Dataquest report, the market for semi-insulating GaAs substrates
was estimated at $95 million in 1997 and is expected to grow to approximately
$227 million by the year 2000. 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
30
<PAGE> 32
process requires that the GaAs substrate have an extremely smooth surface, few
physical imperfections, uniform electrical properties and low dislocation
density (i.e., 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 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 of the LEC technique increase.
Semi-Conducting GaAs Substrates. The Company believes that the market for
semi-conducting GaAs substrates, based on 1996 market data and annual growth
rates projected by Business Communications, a market research firm, was
approximately $80 million in 1997 and the Company expects that the market will
continue to grow. The market for semi-conducting GaAs substrates is being driven
by the demand for a number of opto-electronic applications such as LEDs and
lasers, which are incorporated into such products as traffic lights, digital
versatile discs ("DVDs"), CD players, CD-ROMs, laser printers, automobile lights
and electronic displays. 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 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. The Company believes there are
significant growth opportunities in manufacturing other high-performance
substrates. For example, the Company believes that the markets for InP and GaP
substrates, based on 1996 market data and annual growth rates projected by
Business Communications, were an aggregate of approximately $129 million in 1997
and the Company expects 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. The Company believes that the market for Ge substrates used to
manufacture solar cells was approximately $50 million in 1997 and expects 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. The
Company believes 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
AXT uses a proprietary VGF technique to produce high-performance GaAs and
other substrates for use in a variety of electronic and opto-electronic
applications. The Company believes that its VGF technique, which it has
developed over the past 11 years, provides certain significant advantages over
traditional manufacturing methods for growing crystals used in the production of
semi-insulating and semi-conducting GaAs substrates. The Company believes that
it is currently the only high-volume supplier of GaAs substrates manufactured by
using the VGF technique and is positioned to become a leading manufacturer and
supplier of other compound and Ge substrates.
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<PAGE> 33
In the GaAs substrate market, crystals grown using the Company's
proprietary VGF technique have a dislocation density that is significantly lower
than crystals grown using the either the LEC or HB technique. As a result, the
Company believes its GaAs substrates have greater mechanical strength and
reduced breakage during the ion implantation and epitaxial growth processes.
Furthermore, the Company believes the low dislocation density of the Company's
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 the Company's 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 its VGF technique, the Company has been able to
produce GaAs substrates as large as six inches in diameter.
In addition to the GaAs substrate market, the Company believes that it can
leverage its expertise in the VGF technique to manufacture and produce
commercial volumes of other compound and single-element substrates. For example,
in 1997, the Company began shipping InP and Ge substrates to customers and
delivered GaP substrates to certain customers for their evaluation.
STRATEGY
The Company's 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 the Company's strategy include:
Advance VGF Technology Leadership. The Company pioneered the commercial use
of the VGF technique and has continued to develop and enhance its technology
over the course of 11 years through substantial investments in research and
development. The Company's efforts have led to significant improvements in the
dislocation density, mechanical strength and uniformity of the electrical
properties of GaAs substrates. The Company believes that its experience and
expertise in VGF technology provides it with a competitive advantage over more
recent market entrants who are utilizing variations of the VGF technology. The
Company intends to continue to advance its VGF technology through continued
investment in research and development and participation in certain government
sponsored research programs.
Extend Leadership in GaAs Market. The Company is currently one of the
largest suppliers of GaAs substrates worldwide. Historically, the Company has
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. The Company intends to increase its share of these markets by continuing
to provide high-quality, price-competitive substrates. In addition, in the
semi-insulating GaAs substrate market, the Company intends to leverage its
demonstrated success in the epitaxy segment to further penetrate the ion
implantation segment. In the semi-conducting GaAs substrate market, the Company
also intends to leverage its leadership to further penetrate the high-volume,
cost-sensitive LED market.
Leverage VGF Technology to Manufacture Additional Substrates. The Company
believes its VGF technology is a platform which it 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, the Company recently began shipping InP and Ge
substrates developed using its VGF technique to customers. Unlike the more
traditional methods of growing crystals, the Company can use its 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. The Company
is currently increasing its manufacturing capacity by approximately 30,000
square feet and expects that this additional space will be available in the
third quarter of 1998. In addition, the Company is planning the construction of
an additional facility of up to 50,000 square feet in Northern California and
does not believe this new facility will begin commercial production of
substrates prior to the end of 1999. The Company believes that the increased
production capacity will enable it to further lower unit production costs and
provide its high-performance substrates at competitive prices for high-volume
markets such as LEDs.
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<PAGE> 34
Leverage Existing Customer Relationships. The Company currently sells its
GaAs substrates to over 200 customers, including EMCORE, Hewlett Packard,
Motorola, NEC, Nortel, Siemens, Sony, Spectrolab and TRW. The Company believes
its past success in providing high-quality GaAs substrates to these customers
will provide it with a competitive advantage in supplying them additional
substrates as their needs develop. For example, the Company recently began
shipments of InP substrates to TRW, which currently purchases a significant
portion of its GaAs substrates from the Company. In addition, the Company
intends to establish alliances and joint development arrangements with customers
to develop new products, increase manufacturing efficiencies and more
effectively serve its customers' needs.
CUSTOMERS
The Company sold its products to over 200 customers during the Company's
last fiscal year. Each of the customers listed below purchased substrates in
excess of $500,000 during the Company's last fiscal year:
<TABLE>
<S> <C>
Alpha Industries, Inc. Opto Tech Corporation
EMCORE Siemens
Epitaxial Products International Ltd. Sony
Hewlett Packard Spectra-Physics Lasers, Inc.
Motorola Spectrolab
NEC Sumitomo Chemical Co., Ltd.
Nortel TRW
</TABLE>
The Company has historically entered into significant contracts with a
number of government agencies and customers for the development of certain
products. See "-- Research and Development."
In the three months ended March 31, 1998, one customer accounted for 19.4%
of the Company's total revenues. No customer accounted for more than 10.0% of
the Company's total revenues in 1996 and 1997. In 1996, 1997 and the three
months ended March 31, 1998, the Company's five largest customers accounted for
35.5%, 34.9% and 51.7%, respectively, of the Company's total revenues.
Generally, the Company does not have long-term or other non-cancelable
commitments from its customers and usually sells products pursuant to customer
purchase orders. The loss of any major customer could have a material adverse
effect on the Company.
33
<PAGE> 35
TECHNOLOGY
The Company's VGF Technique. The Company's proprietary VGF technique
produces high-quality crystals from which the Company produces high-performance
compound and single-element substrates for use in a variety of electronic and
opto-electronic applications. The diagram below illustrates the VGF technique:
[VGF DIAGRAM]
The Company's VGF technique is designed to control the crystal-growth
process with minimal temperature variation. Unlike traditional techniques, the
Company's 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 the Company 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.
In 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 meet a customer's requirements, enables the Company to produce circular
substrates with a minimum amount of discarded material.
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<PAGE> 36
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.
The Company believes its VGF technology is a platform which it can leverage
to rapidly develop and cost-effectively manufacture additional high-quality
substrates. Unlike the more traditional methods of growing crystals, the Company
can use its VGF technology to grow the crystals for these other substrates
without having to make a significant investment in new capital equipment. For
example, the Company uses its proprietary VGF technique to manufacture InP and
Ge substrates.
VGF Compared to Traditional Techniques for Producing GaAs Substrates. The
Company believes that its 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
The Company currently sells the compound substrates GaAs and InP, and the
single-element substrate Ge. In addition, the Company has delivered GaP
substrates to certain customers for their evaluation. The Company supplies
various sizes of substrates according to its customers' specifications and works
closely with its customers to ensure that it manufactures substrates to each
customer's particular specifications. See "Risk Factors -- Manufacturing Risks."
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<PAGE> 37
The table below sets forth the Company's products, their available sizes
and selected applications:
<TABLE>
<CAPTION>
SUBSTRATE MATERIAL DIAMETER (IN INCHES) APPLICATIONS
------------------ -------------------- ------------
<S> <C> <C>
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
</TABLE>
MANUFACTURING
The Company's manufacturing operations, which include crystal growth,
slicing, testing, edge grinding, polishing, inspecting and packaging the
substrates for shipment, are located at the Company's headquarters in Fremont,
California. The Company's facility is ISO 9002 certified. Many of the Company's
manufacturing operations are computer monitored or controlled, enhancing
reliability and yield.
The Company depends on a single or limited number of suppliers for certain
critical materials, including gallium, for use in the production of substrates.
The Company generally purchases these materials through standard purchase orders
and not pursuant to long-term supply contracts. The Company seeks to maintain
sufficient levels of inventory for certain materials to guard against
interruptions in supply and to meet its near term needs. To date, the Company
has generally been able to obtain sufficient supplies of materials in a timely
manner. However, the Company's results of operations could be materially
adversely affected by a stoppage or delay in supply, receipt of defective or
contaminated materials, or increases in the pricing of such raw materials.
The Company owns an approximately 50,000 square foot facility, of which
approximately 45,000 square feet are used for manufacturing. The Company is in
the process of expanding the size of this facility by approximately 30,000
square feet to meet its anticipated future production needs through 1999. The
expansion is scheduled to be completed and operations are expected to commence
in the third quarter of 1998. In addition, the Company has recently entered into
the Purchase Agreement regarding the purchase of an additional 58,000 square
foot facility in Fremont, California. This new facility will provide additional
manufacturing capacity for the Company and will not replace its current
facility. Pursuant to the terms of the Purchase Agreement, the cost of the new
facility is $9.0 million, and the purchase is expected to close in June 1998. In
addition, 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. Because the Company
currently performs all steps in its manufacturing process at its Fremont
facility, any interruption resulting from earthquake, fire, equipment failures
or other causes would have a material adverse effect on the Company's results of
operations. See "Risk Factors -- Manufacturing Risks" and "-- Limitations of
Existing Manufacturing Capacity."
SALES AND MARKETING
The Company sells its products worldwide through its direct sales force as
well as through independent international sales representatives. The Company's
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. The Company's direct sales force operates out of the
Company's corporate office in Fremont, California and its Japanese subsidiary.
The Company's 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 to the customer's
exact specifications. The Company believes that maintaining a close relationship
with customers and providing customers with ongoing technical
36
<PAGE> 38
support improves customer satisfaction and will provide the Company with a
competitive advantage in selling other substrates to its customers.
International sales as a percentage of total revenues in 1995, 1996 and
1997 and the three months ended March 31, 1998 were 36.0%, 38.2%, 38.2% and
25.6%, respectively. In addition to the Company's direct sales force in Japan,
the Company has independent sales representatives in France, Japan, South Korea,
Taiwan, and the United Kingdom. Except for sales by its Japanese subsidiary,
which are denominated in yen, the Company receives all payments for products in
U.S. dollars.
In order to raise market awareness of its products, the Company advertises
in trade publications, distributes promotional materials, publishes technical
articles, conducts marketing programs and participates in industry trade shows
and conferences. See "Risk Factors -- Dependence on Sales Outside the United
States" and "Note 10 -- Notes to Consolidated Financial Statements."
RESEARCH AND DEVELOPMENT
The Company's 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. The Company has assembled a
multi-disciplinary team of highly skilled scientists, engineers and technicians
to meet its research and development objectives. Among other projects, the
Company has research and development projects involving the development of GaN
and high purity GaAs epitaxy substrates.
The Company's research and development expenses in 1995, 1996 and 1997 and
the three months ended March 31, 1998 were $448,000, $592,000, $1.3 million and
$640,000, respectively. In addition to internally funded research and
development, the Company has also funded a significant portion of its research
and development efforts through contracts with the U.S. government and customer
funded research projects. In 1995, 1996 and 1997 and the three months ended
March 31, 1998, the Company received $3.0 million, $2.0 million, $2.3 million
and $492,000, respectively, from U.S. government agencies and customer funded
research contracts. Under the Company's contracts, the Company retains rights to
the VGF and wafer fabrication technology which it developed. The U.S. government
retains rights to utilize the technologies that the Company develops for
government purposes only.
The Company's total research and development costs, including both contract
funded and internally funded research and development expenses, for the years
ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998
totaled $2.7 million, $1.4 million, $2.8 million and $905,000, respectively. The
Company expects that it will 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 the Company will
successfully develop and introduce new products in a timely and cost-effective
manner or that its development efforts will successfully permit the Company's
products to meet changing market demands. See "Risk Factors -- Rapid
Technological Change; Reliance Upon Continued Product Development" and
"Management's Discussion and Analysis of 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, Hitachi Cable, Litton and 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
37
<PAGE> 39
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 believes that the primary competitive factors in the markets in
which the Company's products compete are quality, price, performance and
customer support and satisfaction, as well as customer commitment to competing
technologies. 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 target markets. Failure of the Company to
compete successfully would materially adversely affect the Company's business,
financial condition and results of operations. See "Risk
Factors -- Competition."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success and competitive position for its VGF technique
depends materially on its ability to maintain trade secrets, patents and other
intellectual property protections. In order to protect its trade secrets, the
Company takes certain measures to ensure their secrecy, such as executing
non-disclosure agreements with its employees, customers and suppliers. Despite
the Company's efforts, there can be no assurance that others will not gain
access to the Company's trade secrets, or that the Company can meaningfully
protect its intellectual property. In addition, effective trade secret
protection may be unavailable or limited in certain foreign countries. Although
the Company intends to protect its rights vigorously, there can be no assurance
that such measures will be successful.
The Company relies primarily on the technical and creative ability of its
personnel, rather than on patents, to maintain its competitive position. To
date, 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 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 would 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
38
<PAGE> 40
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.
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.
BACKLOG
The Company includes in backlog only those customer orders which have been
accepted by the Company and which shipment is generally expected within 12
months. As of March 31, 1998, the Company's backlog was approximately $10.5
million. Backlog can fluctuate greatly based upon, among other matters, the
timing of orders. In addition, purchase orders in the Company's backlog are
subject to changes in delivery schedules or to reduction in size or cancellation
at the option of the purchaser without significant penalty. The Company has
experienced, and may continue to experience, cancellation, reduction and
rescheduled delivery of orders in its backlog. The Company's 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
At March 31, 1998, the Company had approximately 242 full-time employees,
of whom 198 were principally engaged in manufacturing, 26 in sales, general and
administration and 18 in research and development. The Company's success is in
part dependent on its ability to attract and retain highly skilled workers, who
are in high demand. None of the Company's employees is represented by a union
and the Company has never experienced a work stoppage. Management considers its
relations with its employees to be good. See "Risk Factors -- Dependence on Key
Employees."
FACILITIES
The Company owns approximately 50,000 square feet of office, research and
development and manufacturing space in Fremont, California. The Company is in
the process of expanding the size of this 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 in the third quarter of 1998. In addition, in April 1998 the Company
executed the Purchase Agreement for the purchase of an additional 58,000 square
foot facility in Fremont. The Company believes that this new facility, if
purchased by the Company, will not begin commercial production of substrates
prior to the end of 1999. See "Risk Factors -- Limitations of Existing
Manufacturing Capacity."
39
<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of March 31, 1998
with respect to the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Morris S. Young, Ph.D........ 53 Chairman of the Board of Directors,
President and Chief Executive Officer
Theodore S. Young, Ph.D...... 58 Senior Vice President, Marketing and Director
Davis Zhang.................. 42 Senior Vice President, Production
Hsing Kung, Ph.D............. 53 Senior Vice President, Engineering and Business
Development
Gary S. Young................ 55 Vice President, Sales
Guy D. Atwood................ 56 Vice President and Chief Financial Officer,
Treasurer and Secretary
Jesse Chen(1)(2)............. 40 Director
B.J. Moore(1)(2)............. 62 Director
Donald L. Tatzin(1)(2)....... 46 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Morris S. Young, Ph.D. co-founded the Company in 1986 and has served as the
Company's Chairman of the Board of Directors since February 1998 and President
and Chief Executive Officer, as well as a director of the Company since 1989.
From 1985 to 1989, Dr. Young was a physicist at Lawrence Livermore National
Laboratory. From 1979 to 1985, Dr. Young served as a member of the technical
staff with AT&T Bell Laboratories. 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 the Company in 1986 and has served as
the Company's Senior Vice President, Marketing since 1989 and served as the
Company's President from 1987 to 1989. He has also acted as a director since the
Company's inception, including as the Chairman of the Board of Directors from
January 1987 to January 1998. Dr. Young served as a senior physicist at Lawrence
Livermore National Laboratory and Physics International from 1984 to 1987 and
1974 to 1984, respectively. 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 the Company in 1986 and has served as its Senior
Vice President, Production since January 1994. From 1987 to 1993, Mr. Zhang
served as the Company's Senior Production Manager. Mr. Zhang owned and operated
Universal Construction Company, a California corporation, from 1986 to 1987.
From 1981 to 1985, Mr. Zhang also owned and operated a construction material
company in Beijing, China. Mr. Zhang holds a B.S. in Mechanical Engineering from
Northern Communication University, Beijing, China.
Hsing Kung, Ph.D. joined the Company in March 1997 as its Senior Vice
President, Engineering and Business Development. From July 1996 to February
1997, Dr. Kung served as Executive Vice President and a director of Actisys
Corporation, a computer peripherals company. Dr. Kung co-founded SDL, Inc., an
opto-electronic integrated circuit device company, in 1983 and served as its
Vice President, Manufacturing from 1983 to 1996. Dr. Kung holds a B.S. from
Chengkung University, an M.S. from the University of Texas, a Ph.D. from the
University of California-Berkeley, all in Electrical Engineering and an M.B.A.
from Santa Clara University.
Gary S. Young joined the Company in 1991 and has served as its Vice
President, Sales since July 1993. From 1991 to 1993, Mr. Young served as the
Company's Sales and Administrative Manager. From 1973 to 1991, Mr. Young worked
in various capacities with several companies, including as a Systems Engineer
for
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IBM and 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 the Company in August 1997 as its Vice President and
Chief Financial Officer and has served as the Company's 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.
Jesse Chen has served as a director of the Company 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 the Company 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 the Company 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.
The Company's Bylaws currently authorize five directors, which number may
be changed from time to time by the Board of Directors. All directors hold
office until the next annual meeting of stockholders or until their successors
are duly elected and qualified. The Bylaws provide that, beginning with the
first annual meeting of stockholders following the Offering, the Board of
Directors will be divided into three classes, with each class serving staggered
three-year terms. Each executive officer serves at the discretion of the Board
of Directors. There are no family relationships among the directors or officers
of the Company, except that Morris S. Young, Theodore S. Young and Gary S. Young
are brothers (collectively, the "Youngs"), and Davis Zhang is related to the
Youngs by marriage.
BOARD COMMITTEES
In February 1998, the Board of Directors established an Audit Committee.
The Audit Committee reviews the results and scope of the annual audit and other
services provided by the Company's independent auditors, reviews and evaluates
the Company's internal audit and control functions, and monitors transactions
between the Company and its employees, officers and directors. Messrs. Chen,
Moore and Tatzin are the members of the Audit Committee.
In February 1998, the Board of Directors established a Compensation
Committee. The Compensation Committee administers the Company's stock option and
stock purchase plans and designates compensation levels for the Company's
employees and consultants. Messrs. Chen, Moore and Tatzin are the members of the
Compensation Committee.
41
<PAGE> 43
DIRECTOR COMPENSATION
The Company's non-employee directors each receive $500 per Board or
committee meeting, and are reimbursed for reasonable expenses. The directors are
eligible to receive option grants pursuant to the Company's 1997 Stock Option
Plan. See "-- Benefit Plans."
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the Company's other executive officers whose
salary and bonus for services in all capacities to the Company exceeded $100,000
during the fiscal year ended December 31, 1997 and Guy D. Atwood (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------------- SECURITIES
ALL OTHER UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)(2)
--------------------------- --------- -------- ------------------ -------------
<S> <C> <C> <C> <C>
Morris S. Young........................ $152,339 $15,000 $648 130,000
Chairman of the Board of Directors,
President and Chief Executive Officer
Theodore S. Young...................... 133,675 12,000 855 120,000
Senior Vice President, Marketing
Davis Zhang............................ 122,178 12,000 285 120,000
Senior Vice President, Production
Gary S. Young.......................... 104,067 8,000 860 100,000
Vice President, Sales
Guy D. Atwood(3)....................... 38,912 3,500 798 100,000
Vice President and Chief Financial
Officer, Treasurer and Secretary
</TABLE>
- ---------------
(1) Represents premiums paid by the Company for life insurance coverage.
(2) Such options were granted pursuant to the Company's 1997 Stock Option Plan.
(3) The salary amount shown for Guy D. Atwood reflects amount earned from August
18, 1997, his initial date of employment with the Company, to December 31,
1997, and is based on his annual salary of $110,000.
42
<PAGE> 44
OPTION GRANTS, EXERCISES AND HOLDINGS
Option Grants. The following table sets forth certain information regarding
options granted to the Named Executive Officers during the fiscal year ended
December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION OF
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR(%)(1) ($/SHARE)(2) DATE(3) 5%($) 10%($)
---- ---------- ----------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Morris S. Young(5)..... 130,000 9.9% $5.50 07/26/02 $197,541 $436,515
Theodore S. Young(5)... 120,000 9.1 5.00 07/26/07 377,337 956,245
Davis Zhang(5)......... 120,000 9.1 5.00 07/26/07 377,337 956,245
Gary S. Young(5)....... 100,000 7.6 5.00 07/26/07 314,447 796,871
Guy D. Atwood(5)....... 100,000 7.6 5.00 08/18/07 314,447 796,871
</TABLE>
- ---------------
(1) The Company granted options to employees to purchase an aggregate total of
1,315,100 shares of Common Stock pursuant to its 1997 Stock Option Plan and
1997 Employee Stock Purchase Plan during the year ended December 31, 1997.
(2) The exercise price may be paid in cash, check, cash equivalents, promissory
note, assignment of the proceeds of a sale or loan with respect to shares of
the Company's Common Stock being acquired upon exercise or shares of the
Company's Common Stock through a cashless exercise procedure or by any
combination of such methods.
(3) Options may terminate before their expiration date if the optionee's status
as an employee or consultant is terminated or upon optionees' death or
disability.
(4) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annual compound stock price appreciation of 5.0% and 10.0% from the date
the option was granted over the full option term. These assumed annual
compound rates of stock appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
(5) Each option vests at the rate of 25.0% of the shares subject to the option
at the end of 12 months and 2.1% of the shares subject to the option at the
end of each monthly period thereafter as long as such optionee's employment
has not terminated.
43
<PAGE> 45
Option Exercise and Holdings. The following table sets forth certain
information regarding exercised stock options during the year ended December 31,
1997 and unexercised options held as of December 31, 1997 by each of the Named
Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED YEAR-END(#)(1) FISCAL YEAR-END($)(2)
ON VALUE ----------------------------- ---------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Morris S. Young.......... -- $ -- -- 130,000 $ -- $ --
Theodore S. Young........ -- -- -- 120,000 -- --
Davis Zhang.............. 12,500 38,750 6,250 126,250 19,375 --
Gary S. Young............ 3,750 11,625 7,500 103,750 23,250 --
Guy D. Atwood............ -- -- -- 100,000 -- --
</TABLE>
- ---------------
(1) The Company has a right of repurchase as to any unvested shares upon
optionee's termination of employment at their original exercise price.
(2) The value of "in-the-money" stock options represents the difference between
the exercise price of such stock options and the fair market value of Common
Stock as of December 31, 1997, as determined by the Company's Board of
Directors, multiplied by the total number of shares subject to such options
on December 31, 1997.
No compensation intended to serve as incentive for performance to occur
over a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any Named Executive Officer. The
Company does not have any defined benefit or actuarial plan under which benefits
are determined primarily by final compensation or average final compensation and
years of service with any of the Named Executive Officers.
BENEFIT PLANS
1993 Stock Option Plan. The 1993 Stock Option Plan (the "1993 Plan")
provides for the grant of stock options to employees (including officers),
directors and consultants of the Company and its subsidiaries. The 1993 Plan
provides for the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code") or
nonstatutory stock options, although incentive stock options may be granted only
to employees. The 1993 Plan is administered by the Board of Directors or a duly
approved committee (the "Administrator"). Subject to the provisions of the 1993
Plan, the Administrator determines the persons to whom options are to be
granted, the number of shares subject to each option and all other terms and
conditions of the options. As of March 31, 1998, options to purchase an
aggregate of 177,950 shares of Common Stock were outstanding under the 1993
Plan. Options granted under the 1993 Plan will remain outstanding in accordance
with their terms, but the Board of Directors has determined that no further
options will be granted under the 1993 Plan. In the event of certain changes in
control of the Company, the acquiror or successor corporation may assume or
substitute for options outstanding under the 1993 Plan. If the options
outstanding under the 1993 Plan are not assumed or substituted for, the Board of
Directors may, in its sole discretion, (i) cancel the options in exchange for a
cash payment to the optionee equal to the excess of the market value of the
shares subject to the option over the option exercise price, or (ii) except in
the event of a dissolution, liquidation or sale of substantially all of the
Company's assets, terminate the outstanding options, provided that the optionees
will be given at least 35 days' notice of the transaction and will have at least
30 days to exercise the unexpired options prior to the change in control.
1997 Employee Stock Purchase Plan. The 1997 Employee Stock Purchase Plan
(the "1997 ESPP") provides for the grant of stock purchase rights to full-time
employees of the Company and its subsidiaries. As of March 31, 1998, 67,000
shares of Common Stock had been issued pursuant to the exercise of stock
purchase rights granted under the 1997 ESPP and no shares remained available for
issuance thereunder.
44
<PAGE> 46
1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the "1997
Plan") was approved by the Board of Directors in July 1997 and by the
stockholders as of July 1997. The 1997 Plan provides for the grant of incentive
stock options to employees within the meaning of section 422 of the Code and for
grants of nonstatutory stock options to employees, non-employee directors and
consultants. Because non-employee directors are eligible to receive grants under
the 1997 Plan, the Company has not adopted a separate plan which provides for
the formula grant of stock options to nonemployee directors.
The 1997 Plan is administered by the Board of Directors or a committee
thereof. Subject to the provisions of the 1997 Plan, the Board or committee has
the authority to select the persons to whom options are granted and determine
the terms of each option, including (i) the number of shares of Common Stock
covered by the option, (ii) when the option becomes exercisable, (iii) the per
share option exercise price, which, in the case of incentive stock options, must
be at least 100% of the fair market value of a share of Common Stock as of the
date of grant, in the case of options granted to persons who own 10.0% or more
of the total combined voting power of the Company (or any parent or subsidiary
of the Company) (a "10.0% Stockholder"), must be at least 110% of the fair
market value of a share of Common Stock as of the date of grant, and, in the
case of nonstatutory stock options, must be at least 85.0% of the fair market
value of a share of Common Stock as of the date of grant, and (iv) the duration
of the option (which may not exceed ten years, or 5 years for incentive stock
options granted to 10.0% Stockholders). Generally, options granted under the
1997 Plan become exercisable as the shares vest pursuant to a schedule
established by the Board of Directors or committee thereof. Options granted
under the 1997 Plan are non-transferable other than by will or the laws of
descent and distribution. In the event of certain changes in control of the
Company, the acquiring or successor corporation may assume or substitute for
options outstanding under the 1997 Plan. To the extent that the options
outstanding under the 1997 Plan are not assumed, substituted for or exercised
prior to such change in control, they will terminate.
A total of 2,800,000 shares have been reserved for issuance under the 1997
Plan. Of the shares of Common Stock currently reserved for issuance under the
1997 Plan as of March 31, 1998, no shares have been issued upon the exercise of
options, options for the purchase of a total of 1,289,000 shares at a weighted
average exercise price of $5.11 per share were outstanding and a maximum of
1,511,000 shares were available for future option grants.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was approved by the Board of Directors in
February 1998, subject to stockholder approval. A total of 250,000 shares of
Common Stock have been reserved for issuance under the Purchase Plan, none of
which have been issued as of the effective date of this Offering. The Purchase
Plan, which is intended to qualify under section 423 of the Code, is
administered by the Board of Directors or by a committee thereof. Employees
(including officers and employee directors of the Company) of the Company or any
subsidiary designated by the Board of Directors for participation in the
Purchase Plan are eligible to participate in the Purchase Plan if they are
customarily employed for more than 20 hours per week and more than five months
per year. The Purchase Plan will be implemented by overlapping 24-month
offerings, the first of which will commence on the effective date of this
Offering and the initial offering period will terminate on January 31, 2000.
Each offering will generally be comprised of four six-month purchase periods,
with shares purchased on the last day of each purchase period (a "Purchase
Date"). After the effective date of this Offering, offering periods under the
Purchase Plan will generally begin on February 1 and August 1 of each year. The
Board of Directors may change the dates or duration of one or more offerings,
but no offering may exceed 27 months. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions at a price no less
than 85.0% of the lower of the fair market value of the Common Stock on (i) the
first day of the offering, or (ii) the Purchase Date. Participants generally may
not purchase more than 5,000 shares in a 24-month offering or stock having a
value (measured at the beginning of the offering) greater than $25,000 in any
calendar year. In the event of certain changes in control of the Company, the
Board may accelerate the Purchase Date of the then current purchase period(s) to
a date prior to the change in control unless the acquiring corporation assumes
or replaces the purchase rights outstanding under the Purchase Plan.
401(k) Plan. The Company provides a tax-qualified employee savings and
retirement plan (the "401(k) Plan") which covers the Company's eligible
employees. Pursuant to the 401(k) Plan, employees may elect to
45
<PAGE> 47
reduce their current annual compensation up to the lesser of 15.0% or the
statutorily prescribed limit ($9,500 in calendar year 1997 and $10,000 in
calendar year 1998), and have the amount of such reduction ("elective
deferrals") contributed to the 401(k) Plan. The 401(k) Plan provides for
discretionary matching contributions by the Company in an amount not to exceed
66.7% of each participant's first 6.0% of elective deferrals, with a maximum
matching contribution of 4.0% of compensation for each 12 consecutive months,
ending on the 31st day of December. The 401(k) Plan is intended to qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended, so
that contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions will be deductible by the Company
when made. The trustee of the 401(k) Plan invests the assets of the 401(k) Plan
in the various investment options as directed by the participants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of directors
or compensation committee. The Compensation Committee makes recommendations
regarding the Company's employee stock plans and makes decisions concerning
salaries and incentive compensation for employees and consultants of the
Company.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the provisions of the Delaware General Corporation Law, the
Company's Certificate of Incorporation provides that directors of the Company
shall not be personally liable for monetary damages to the Company or its
stockholders for a breach of fiduciary duty as a director, except for liability
as a result of (i) a breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) an act related to
the unlawful stock repurchase or payment of a dividend under Section 174 of
Delaware General Corporation Law, and (iv) transactions from which the director
derived an improper personal benefit. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company intends
to enter into separate indemnification agreements with its directors and
officers which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees to the fullest extent permitted by
law. The Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of the indemnified party.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
46
<PAGE> 48
CERTAIN TRANSACTIONS
Since January 1995, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000, and in which any
director, executive officer or holder of more than 5% of any class of voting
securities of the Company and members of such person's immediate family had or
will have a direct or indirect material interest other than the transactions
described below.
In March 1997, pursuant to a Series C Preferred Stock Purchase Agreement,
the Company issued an aggregate of 1,200,000 shares of Series C Preferred Stock
at a price of $5.00 per share to a group of investors (the "Series C
Financing"), including an aggregate of 200,000 shares to Hotung Venture Capital
Corporation ("Hotung") and its affiliates Daitung Venture Capital Corporation
("Daitung"), Litung Venture Capital Corporation ("Litung") and Futung Venture
Capital Corporation ("Futung"); an aggregate of 200,000 shares to Min-Chen Hsieh
and Min-Hui Hsieh; and 18,000 shares to the Lian Soung and Grace Soung Community
Property Trust dated 9/20/94. Hotung is a beneficial holder of more than 5% of a
class of the Company's voting securities, and S.C. Hong, a director of the
Company at the time of the Series C Financing, is the President of Hotung,
Daitung, Litung and Futung. S.C. Hsieh, a director of the Company at the time of
the Series C Financing, is Min-Chen Hsieh and Min-Hui Hsieh's father. Grace
Soung, a director of the Company at the time of the Series C Financing, is a
co-trustee of the Lian Soung and Grace Soung Community Property Trust dated
9/20/94.
Since January 1995, Morris Young, the Company's Chairman of the Board of
Directors, President and Chief Executive Officer, and/or Theodore Young, the
Company's Senior Vice President, Marketing and a director of the Company,
entered into certain agreements to guarantee, in part or in full, the
indebtedness incurred by the Company pursuant to the following loan
transactions:
(i) In September 1995, Morris Young and Theodore Young each entered
into a guaranty agreement with the Commercial Bank of Fremont ("CBF"),
which was subsequently acquired by U.S. Bank, in connection with a real
estate "bridge" loan from CBF to the Company in the principal amount of
$4.5 million (the "Bridge Loan");
(ii) The Company entered into a loan agreement with CBF in July 1996
and Bay Area Employment Development Company ("Bay Area") in August 1996 to
refinance the Bridge Loan. Morris Young and Theodore Young each entered
into a guaranty agreement with CBF and Bay Area in connection with such
refinancing;
(iii) In May 1997, Morris Young and Theodore Young each entered into
guaranty agreements with U.S. Bank in connection with a construction loan
and a line of credit from U.S. Bank to the Company in the aggregate
principal amount of $3.8 million; and
(iv) From December 1995 to July 1997, Morris Young or Theodore Young
entered into guaranty agreements with Belvedere Equipment Finance
Corporation, as agent on behalf of various lenders, in connection with
certain equipment financing loans to the Company in the aggregate principal
amount of $2.4 million.
Both Morris Young and Theodore Young have since been released from their
guaranty agreements with CBF and U.S. Bank.
Since January 1995, Equipment & Materials Inc. ("EMI"), a California
corporation engaged in international trading with the People's Republic of China
("China") and quartz fabrication, has supplied the Company with various raw
materials from China and also has manufactured quartz for the Company. Christina
X. Li, the sole shareholder and President of EMI, is the wife of Davis Zhang,
the Company's Senior Vice President, Production. The aggregate revenue received
by EMI from the Company for such supply and production up through March 1998 is
$3.3 million, with $380,000, $760,000, $1.5 million and $635,000 in revenue
received by EMI from the Company in 1995, 1996 and 1997 and the three months
ended March 31, 1998, respectively.
47
<PAGE> 49
In January 1996, Davis Zhang, and in February 1996, George Liu, Morris
Young's father-in-law, each loaned the Company the principal amount of $50,000
and $224,000, respectively. The foregoing loans, plus interest, have since been
paid by the Company.
For a description of the compensation of officers and directors of the
Company and the eligibility of officers and directors of the Company to
participate in the Company's employee benefit plans, see "Management -- Director
Compensation," "-- Executive Compensation" and "-- Benefit Plans."
The Company believes that all transactions between the Company and its
officers, directors, principal stockholders and other affiliates have been and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. To date, the Company has made no loans to officers,
directors, principal stockholders or other affiliates other than advances of
reimbursement expenses.
The Company intends to enter into indemnification agreements with each of
its executive officers and directors. See "Management -- Limitation on Liability
and Indemnification Matters."
48
<PAGE> 50
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998, and as adjusted to
reflect the sale of the shares offered hereby, assuming no exercise of the
Underwriters' over-allotment option, (i) by each person who is known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii) by
each of the Named Executive Officers and by each of the Company's directors and
(iii) by all executive officers and directors as a group. Except pursuant to
applicable community property laws or as indicated in the footnotes to this
table, each stockholder identified in the table possesses sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.
<TABLE>
<CAPTION>
PERCENTAGE OWNED(2)
--------------------
SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
--------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Morris S. Young(3)........................................ 1,953,600 14.8% 12.5%
Entities Affiliated with
Hotung Venture Capital Corporation(4)................... 1,076,470 8.2 6.9
10-F, 261 Sung Ching Road
Taipei, Taiwan, ROC
Gary S. Young(5).......................................... 669,500 5.1 4.3
Theodore S. Young......................................... 579,465 4.4 3.8
Davis Zhang(6)............................................ 238,750 1.8 1.5
Guy D. Atwood............................................. -- -- --
Jesse Chen................................................ -- -- --
B.J. Moore................................................ -- -- --
Donald L. Tatzin.......................................... -- -- --
All directors and executive officers as a group (9
persons)(7)............................................. 3,451,981 26.2 22.0
</TABLE>
- ---------------
(1) Unless otherwise indicated, the address of each of the named individuals is:
c/o American Xtal Technology, Inc. 4311 Solar Way, Fremont, California
94538.
(2) The amounts reported in this table include shares of Common Stock issuable
upon the automatic conversion of all Preferred Stock, which conversion will
occur upon the closing of the Offering. The calculations in the table are
based on 13,190,268 shares of Common Stock outstanding on an as-converted
basis as of March 31, 1998. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days upon the
exercise of options. Calculations of percentages of beneficial ownership
assume the exercise by only the respective named stockholders of all options
for the purchase of Common Stock held by such stockholders which are
exercisable within 60 days of March 31, 1998.
(3) Includes 781,400 shares held by the Morris & Vicke Young Trust, 1,132,200
shares held by Morris S. Young Family Ltd. Partnership, and 20,000 shares
held by the minor children of Morris Young. Also includes 20,000 shares held
jointly by George Liu (Morris Young's father-in-law) and Vicke Young (Morris
Young's spouse), of which Morris Young disclaims beneficial ownership.
(4) Includes 916,470 shares held by Hotung, 60,000 shares held by Futung, 60,000
shares held by Litung and 40,000 shares held by Daitung.
(5) Includes 23,750 shares directly held by Gary Young, 446,087 shares held by
Gary Young Trust A, 190,163 shares held by Gary Young Trust B, 2,000 shares
held by Joanna Young (Gary Young's daughter), and 7,500 shares of Common
Stock subject to options exercisable within 60 days of March 31, 1998.
(6) Includes 187,500 shares directly held by Davis Zhang, 29,000 shares held by
Christina X. Li (Davis Zhang's spouse), 16,000 shares held by Mr. Zhang's
minor children and 6,250 shares of Common Stock subject to options
exercisable within 60 days of March 31, 1998.
(7) Includes 13,750 shares of Common Stock subject to options exercisable within
60 days of March 31, 1998.
49
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock and 2,000,000 shares
of Preferred Stock. The following summary of certain provisions of the Common
Stock and the Preferred Stock of the Company does not purport to be complete and
is subject to, and qualified in its entirety by, the Certificate of
Incorporation and Bylaws of the Company that are included as exhibits to the
Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
COMMON STOCK
As of March 31, 1998, there were 13,190,268 shares of Common Stock
outstanding held of record by 180 stockholders, as adjusted to reflect the
conversion of the outstanding shares of Preferred Stock upon the closing of the
Offering. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the holders of Common
Stock. Subject to preferences applicable to any outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any Preferred
Stock. Holders of Common Stock have no preemptive or subscription rights, and
there are no redemption or conversion rights with respect to such shares. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be issued upon the closing of the Offering will be
fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the Offering, the Board of Directors will have the
authority to issue up to 2,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions granted
to or imposed upon any unissued shares of Preferred Stock and to fix the number
of shares constituting any series and the designations of such series, without
any further vote or action by the stockholders. Although it presently has no
intention to do so, the Board of Directors, without stockholder approval, can
issue Preferred Stock with voting and conversion rights which could adversely
affect the voting power of the holders of Common Stock. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company. See "Risk Factors -- Concentration of Share
Ownership and Voting Power; Anti-Takeover Provisions."
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest, or otherwise, and the
removal of incumbent officers and directors. These provisions are expected to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of the Company to first
negotiate with the Company. The Company believes that the benefits of increased
protection of the Company's potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals, including proposals
that are priced above the then current market value of the Common Stock,
because, among other things, negotiation of such proposals could result in an
improvement of their terms.
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date such stockholder
became an interested stockholder, unless: (i) prior to such date the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an
50
<PAGE> 52
interested stockholder; (ii) upon consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85.0% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders and not by written consent, by the affirmative vote of at least
66.7% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10.0% or more of the assets of
the corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15.0% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
The Company's Certificate of Incorporation requires that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors or
holders of not less than 10.0% of all of the shares entitled to cast votes at
such meetings. The Certificate of Incorporation also provides that, beginning
upon the closing of the Offering, the Board of Directors will be divided into
three classes, with each class serving staggered three-year terms and that
certain amendments of the Company's Certificate of Incorporation, and all
amendments by the stockholders of the Company's Bylaws, require the approval of
holders of at least 66.7% of the voting power of all outstanding stock. These
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American
Securities Transfer & Trust, Inc.
51
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have outstanding an
aggregate of 15,690,268 shares of Common Stock (16,065,268 if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,500,000
shares sold in the Offering (2,875,000 if the Underwriters' over-allotment
option is exercised in full) will be freely tradable without restriction or
further registration under the Securities Act, except for any shares purchased
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act (whose sales would be subject to certain limitations and
restrictions described below). The remaining 13,190,268 shares of Common Stock
held by existing stockholders (the "Restricted Shares") were issued and sold by
the Company in reliance on exemptions from the registration requirements of the
Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1.0% of the number of
shares of Common Stock then outstanding (approximately 156,903 shares
immediately after this Offering) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Commission had indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this Prospectus, may be sold by persons other than affiliates subject
only to the manner of sale provisions of Rule 144 and by affiliates under Rule
144 without compliance with its one-year minimum holding period requirements.
The Company, its officers and directors, and certain beneficial owners of
the Company's Common Stock, owning upon the closing of the Offering, in the
aggregate, 12,979,536 shares of Common Stock, and holders of options to purchase
Common Stock have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other capital stock of the Company or any other
securities convertible into, or exercisable or exchangeable for, any shares of
Common Stock, or other capital stock of the Company, for a period of 180 days
from the date of this Prospectus, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters. As a result
of these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, shares subject to
lock-up agreements will not be salable until the agreements expire. Upon the
expiration of these lock-up agreements, all of the Restricted Shares will become
eligible for sale, subject in some cases to the limitations of Rule 144.
Prudential Securities Incorporated may, in its sole discretion, at any time and
without notice, release all or any portion of the securities subject to such
lock-up agreements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering the 3,463,919 shares subject to outstanding options or
reserved for issuance under the Company's 1993 Stock Option Plan, 1997 Stock
Option Plan and the 1998 Employee Stock Purchase Plan. Accordingly, shares
52
<PAGE> 54
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open market,
except to the extent that such shares are subject to vesting restrictions with
the Company or the contractual restrictions described above. All of the shares
issuable upon exercise of outstanding options are subject to 180-day lock-up
agreements with the Company and/or representatives of the Underwriters.
Following the date 180 days after the date of this Prospectus, an aggregate of
approximately 553,400 shares will be issuable upon the exercise of currently
outstanding options. Such shares will be freely tradable in the public market
upon exercise, pursuant to such registration statement on Form S-8. See
"Management -- Benefit Plans."
Prior to the Offering, there has been no public market for the Company's
Common Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.
53
<PAGE> 55
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Cowen & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the underwriting agreement (the "Underwriting Agreement"), to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated..........................
Cowen & Company.............................................
---------
Total....................................................... 2,500,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby, if any are
purchased.
The Underwriters, through their Representatives, have advised the Company
that they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share;
and that such dealers may reallow a concession of $ per share to
certain other dealers. After the initial public offering, the initial public
offering price and the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 375,000 additional shares of
Common Stock at the initial public offering price, less underwriting discounts
and commissions, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to 2,500,000.
The Company has agreed to indemnify the several Underwriters and contribute
to losses arising out of certain liabilities, including liabilities under the
Securities Act.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Company, its officers and directors, and certain beneficial owners of
the Company's Common Stock and holders of options to purchase Common Stock have
agreed not to, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock or any securities convertible into or exercisable or
exchangeable for any shares of Common Stock or other capital stock of the
Company, for a period of 180 days after the date of this Prospectus without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters. Prudential Securities Incorporated may, in its sole discretion, at
any time and without notice, release all or any portion of the securities
subject to such lock-up agreements.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination will be the
prevailing market conditions, the Company's financial and operating history and
condition, its prospects and
54
<PAGE> 56
the prospects for its industry in general, the management of the Company and the
market prices of securities for companies in businesses similar to that of the
Company.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following the closing of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 375,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of the other Underwriters, the selling concession with
respect to Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gray Cary Ware & Freidenrich, LLP, Palo Alto, California. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 included in this Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and to the exhibits and schedule filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part of the Registration Statement
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission. The Commission maintains a World Wide Website that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commissions. The address of the
website is http://www.sec.gov.
55
<PAGE> 57
AMERICAN XTAL TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1996,
December 31, 1997, March 31, 1998 (unaudited) and Pro
Forma as of March 31, 1998 (unaudited).................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997 and for the
three months ended March 31, 1998 (unaudited)............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996, and 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 58
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 subsidiary at December 31, 1996 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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.
PRICE WATERHOUSE LLP
San Jose, California
February 6, 1998
F-2
<PAGE> 59
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, PRO FORMA
------------------ --------- MARCH 31, 1998
1996 1997 1998 (NOTE 1)
------- ------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................... $ 756 $ 3,054 $ 2,981 $ 2,981
Accounts receivable, less allowance for
doubtful accounts of $100, $100 and
$145...................................... 2,992 6,005 7,120 7,120
Inventories.................................. 3,955 8,361 8,859 8,859
Prepaid expenses and other assets............ 153 858 1,819 1,819
Deferred income taxes........................ 489 225 259 259
------- ------- ------- -------
Total current assets................. 8,345 18,503 21,038 21,038
Property, plant and equipment, net............. 8,409 12,101 13,163 13,163
Other assets................................... 630 9 8 8
------- ------- ------- -------
Total assets......................... $17,384 $30,613 $34,209 $34,209
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. $ 828 $ 1,722 $ 2,620 $ 2,620
Short-term bank borrowing.................... 300 -- 77 77
Notes payable to related parties............. 276 -- -- --
Accrued liabilities.......................... 1,162 1,827 2,683 2,683
Current portion of long-term debt............ 237 745 760 760
------- ------- ------- -------
Total current liabilities............ 2,803 4,294 6,140 6,140
Long-term debt, net of current portion......... 5,582 7,728 7,981 7,981
------- ------- ------- -------
Total liabilities.................... 8,385 12,022 14,121 14,121
------- ------- ------- -------
Commitments and Contingencies Stockholders'
Equity:
Convertible Preferred Stock, no par value,
25,000,000 shares authorized, 8,928,737
and 10,128,737 and 10,128,737 shares
issued and outstanding, actual; $0.001 par
value, 2,000,000 shares authorized, none
issued and outstanding pro forma.......... 2,618 8,553 8,553 --
Common Stock, no par value, 100,000,000
shares authorized, 2,897,706, 3,041,531
and 3,061,531 shares issued and
outstanding, actual; $0.001 par value,
40,000,000 shares authorized, 13,190,268
issued and outstanding pro forma.......... 159 867 1,119 13
Additional paid in capital................... -- -- -- 9,659
Deferred compensation........................ -- (220) (427) (427)
Retained earnings............................ 6,326 9,584 10,969 10,969
Accumulated other comprehensive income --
cumulative translation adjustments........ (104) (193) (126) (126)
------- ------- ------- -------
Total stockholders' equity........... 8,999 18,591 20,088 20,088
------- ------- ------- -------
Total liabilities and stockholders'
equity............................. $17,384 $30,613 $34,209 $34,209
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 60
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues.................................. $11,520 $14,222 $23,014 $ 4,494 $9,238
Contract revenues................................. 2,958 2,005 2,321 600 492
------- ------- ------- ------- ------
Total revenues.......................... 14,478 16,227 25,335 5,094 9,730
Cost of revenues:
Cost of product revenues.......................... 6,030 9,270 13,674 2,805 5,460
Cost of contract revenues......................... 2,234 795 1,553 498 265
------- ------- ------- ------- ------
Total cost of revenues.................. 8,264 10,065 15,227 3,303 5,725
------- ------- ------- ------- ------
Gross profit...................................... 6,214 6,162 10,108 1,791 4,005
Operating expenses:
Selling, general and administrative............... 1,716 2,033 2,959 642 966
Research and development.......................... 448 592 1,289 222 640
------- ------- ------- ------- ------
Total operating expenses................ 2,164 2,625 4,248 864 1606
------- ------- ------- ------- ------
Income from operations............................ 4,050 3,537 5,860 927 2399
Interest expense.................................. (12) (170) (570) (115) (181)
Other income (expense)............................ 282 (72) (34) (91) 21
------- ------- ------- ------- ------
Income before provision for income
taxes........................................... 4,320 3,295 5,256 721 2,239
Provision for income taxes........................ 1,581 1,249 1,998 274 854
------- ------- ------- ------- ------
Net income........................................ $ 2,739 $ 2,046 $ 3,258 $ 447 $1,385
======= ======= ======= ======= ======
Net income per share:
Basic............................................. $ 0.97 $ 0.71 $ 1.11 $ 0.15 $ 0.45
======= ======= ======= ======= ======
Diluted........................................... $ 0.23 $ 0.17 $ 0.25 $ 0.04 $ 0.10
======= ======= ======= ======= ======
Shares used in net income per share calculations
(Notes 1 and 9):
Basic............................................. 2,821 2,882 2,938 2,896 3,052
======= ======= ======= ======= ======
Diluted........................................... 11,813 11,811 12,839 12,225 13,516
======= ======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 61
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
CONVERTIBLE INCOME--
PREFERRED STOCK COMMON STOCK CUMULATIVE
------------------- ------------------ DEFERRED RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS ADJUSTMENTS
---------- ------ --------- ------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... 8,928,737 $2,618 2,707,956 $ 54 $ -- $ 1,541 $ --
Common Stock options exercised... -- -- 149,000 55 -- -- --
Common Stock repurchased......... -- -- (8,000) (2) -- -- --
Comprehensive income
Net income..................... -- -- -- -- -- 2,739 --
Comprehensive income............. -- -- -- -- -- -- --
---------- ------ --------- ------ ----- ------- -----
Balance at December 31, 1995..... 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) 1,584 (193)
Common Stock options exercised
(unaudited).................... -- -- 20,000 24 -- -- --
Deferred compensation
(unaudited).................... -- -- -- 228 (228) -- --
Amortization of deferred
compensation (unaudited)....... -- -- -- -- 21 -- --
Comprehensive income
Net income (unaudited)......... -- -- -- -- -- 1,385 --
Other comprehensive income
(unaudited)
Currency translation
adjustment (unaudited)..... -- -- -- -- -- -- 67
Comprehensive income
(unaudited).................... -- -- -- -- -- -- --
---------- ------ --------- ------ ----- ------- -----
Balance at March 31, 1998
(unaudited).................... 10,128,737 $8,553 3,061,531 $1,119 $(427) $10,969 $(126)
========== ====== ========= ====== ===== ======= =====
<CAPTION>
COMPREHENSIVE
INCOME TOTAL
------------- -------
<S> <C> <C>
Balance at December 31, 1994..... $ -- $ 4,213
Common Stock options exercised... -- 55
Common Stock repurchased......... -- (2)
Comprehensive income
Net income..................... 2,739 2,739
------
Comprehensive income............. $2,739 --
======
-------
Balance at December 31, 1995..... 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 options exercised
(unaudited).................... -- 24
Deferred compensation
(unaudited).................... -- --
Amortization of deferred
compensation (unaudited)....... -- 21
Comprehensive income
Net income (unaudited)......... 1,385 1,385
Other comprehensive income
(unaudited)
Currency translation
adjustment (unaudited)..... 67 67
------
Comprehensive income
(unaudited).................... $1,452 --
------ -------
Balance at March 31, 1998
(unaudited).................... $20,088
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 62
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $2,739 $2,046 $3,258 $ 447 $1,385
Adjustments to reconcile net income to cash provided
by (used in) operations:
Depreciation and amortization....................... 513 867 1,164 172 408
Deferred income taxes............................... (358) (43) 264 -- (34)
Stock compensation.................................. -- -- 102 -- 21
Changes in assets and liabilities:
Accounts receivable................................. (914) (578) (3,013) (325) (1,115)
Inventory........................................... (626) (2,298) (4,406) (102) (498)
Other assets........................................ (427) (149) (84) (326) (960)
Accounts payable.................................... 215 247 894 768 898
Accrued liabilities................................. (398) 382 665 (18) 856
------ ------ ------ ------ ------
Net cash provided by (used in) operating
activities................................ 744 474 (1,156) 616 961
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (4,597) (3,946) (4,856) (837) (1,470)
Proceeds from the sale of property, plant and
equipment........................................ 239 -- -- -- --
Proceeds from the sale of short-term investments.... 411 -- -- -- --
------ ------ ------ ------ ------
Net cash used in investing activities....... (3,947) (3,946) (4,856) (837) (1,470)
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock.......... 53 52 386 24 24
Proceeds from the issuance of Convertible Preferred
Stock............................................ -- -- 5,935 5,450 --
Proceeds from (payments of) short-term bank
borrowings....................................... 600 (300) (300) (576) 77
Proceeds from long-term debt borrowings............. 2,350 3,469 2,654 (83) 268
Proceeds from (payments of) notes payable to related
parties.......................................... -- 276 (276) -- --
------ ------ ------ ------ ------
Net cash provided by financing activities... 3,003 3,497 8,399 4,815 369
------ ------ ------ ------ ------
Effect of exchange rate changes..................... -- (104) (89) 54 67
------ ------ ------ ------ ------
Net (decrease) increase in cash and cash
equivalents...................................... (200) (79) 2,298 4,648 (73)
Cash and cash equivalents at beginning of year...... 1,035 835 756 756 3,054
------ ------ ------ ------ ------
Cash and cash equivalents at end of year............ $ 835 $ 756 $3,054 $5,404 $2,981
====== ====== ====== ====== ======
SUPPLEMENTAL DISCLOSURES:
Interest paid....................................... $ 12 $ 203 $ 579 $ 36 $ 182
====== ====== ====== ====== ======
Income taxes paid................................... $2,651 $ 794 $1,814 $ -- $ 130
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 63
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. Upon completion of its initial public offering, the
Company will be reincorporated in Delaware. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned Japanese subsidiary. All material intercompany accounts and
transactions have been eliminated.
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.
Foreign Currency Translation
The functional currency of the Company's Japanese subsidiary is the local
currency. Transaction exchange losses resulting from transactions denominated in
currencies other than the U.S. dollar are included in the results of operations
for the year. For the years ended December 31, 1996 and 1997, the Company
incurred foreign transaction exchange losses of $114,000 and $186,000,
respectively. The Company does not undertake any foreign currency hedging
activities.
The assets and liabilities of the subsidiary 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 adjustment in the years
ended December 31, 1996 and 1997 and the three months ended March 31, 1998,
resulted from fluctuations in yen 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.
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 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.
F-7
<PAGE> 64
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1995, 1996 and 1997. For fiscal years
1995 and 1996, one government entity represented 98.6% and 91.3%, respectively,
of contract revenues. For fiscal year 1997, one government entity and a third
party represented 47.4% and 52.6%, respectively, of contract revenues.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1996 and 1997 and March 31, 1998 (unaudited), approximately $22,000,
$2,029,000 and $2,300,000, respectively, of money market funds are included in
cash and cash equivalents.
Inventory
Inventory is stated at the lower of cost, using the weighted average
method, or market.
Property, Plant and Equipment
Acquisitions of 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 Standards 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, 1997.
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.
Net Income Per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted average number of common and potential common shares
outstanding during the period, except if anti-dilutive. Potential
F-8
<PAGE> 65
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common shares consist of the incremental common shares issuable upon conversion
of the Convertible Preferred Stock (using the if-converted method) and shares
issuable upon the exercise of stock options (using the treasury stock method).
(See Note 9 for a reconciliation of the numerators and denominators used in the
calculation).
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") and Statements of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). The
adoption of the both statements is required for fiscal years beginning after
December 15, 1997. SFAS 130 is required to be adopted in the interim financial
statements in the year adoption.
Under SFAS 130, a company is required to report in the financial
statements, in addition to net income, comprehensive income including, as
applicable, foreign currency items and unrealized gains and losses on certain
investments in debt and equity securities. The Company adopted SFAS 130 in
January 1998 and has reported comprehensive income including foreign currency
items in the consolidated statements of stockholders' equity. Comprehensive
income for the three months ended March 31, 1997 was $501,000(unaudited). The
difference between net income reported in the consolidated statements of
operations and comprehensive income represents cumulative translation adjustment
gains of $54,000(unaudited) for the three months ended March 31, 1997.
SFAS 131 requires that companies report separately, in the financial
statements, certain financial and descriptive information about operating
segments 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.
The adoption of SFAS 131 will not have any impact on the Company's financial
statements.
Pro Forma Balance Sheet (unaudited)
If the Offering is consummated, all shares of Convertible Preferred Stock
outstanding will automatically convert into an aggregate of 10,128,737 shares of
Common Stock. The pro forma effect of this conversion has been reflected in the
accompanying unaudited balance sheet as of March 31, 1998.
Interim Results (unaudited)
The accompanying consolidated balance sheet as of March 31, 1998, the
consolidated statements of operations and of cash flows for the three months
ended March 31, 1997 and 1998 and the consolidated statement of stockholders'
equity for the three months ended March 31, 1998 are unaudited. In the opinion
of management, these statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results for the interim periods. The data disclosed in the
notes to the consolidated financial statements as of such dates and for such
periods are unaudited.
F-9
<PAGE> 66
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1996 1997 1998
------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Inventories:
Raw materials................................. $1,865 $ 2,224 $ 2,599
Work in process............................... 1,968 5,623 6,012
Finished goods................................ 122 514 248
------ ------- -------
$3,955 $ 8,361 $ 8,859
====== ======= =======
Property, plant and equipment:
Land.......................................... $1,120 $ 1,120 $ 1,120
Building...................................... 4,731 4,731 4,731
Machinery and equipment....................... 4,350 8,121 9,098
Leasehold improvements........................ 240 240 240
Construction in progress...................... 688 1,773 2,266
------ ------- -------
11,129 15,985 17,455
Less: Accumulated depreciation and
amortization............................... 2,720 3,884 4,292
------ ------- -------
$8,409 $12,101 $13,163
====== ======= =======
Accrued liabilities:
Accrued compensation.......................... $ 392 $ 690 $ 725
Accrued income tax............................ 461 282 1,005
Customer advances............................. 57 260 253
Allowance for sales returns................... 145 247 279
Other......................................... 107 348 421
------ ------- -------
$1,162 $ 1,827 $ 2,683
====== ======= =======
</TABLE>
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. 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 is subject to certain
financial covenants regarding current financial ratios and cash flow
requirements, which have all been met as of December 31, 1997. 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, 1996 and
1997, an aggregate of $4.5 million and $4.4 million was outstanding under these
loans, respectively.
The Company obtained equipment loans totaling $1.4 million and $2.9 million
from several different banks through a financing company during 1996 and 1997,
respectively. These proceeds were used to purchase new manufacturing equipment
for the Company's Fremont, California facility. These loans have a maturity of
five years with interest rates ranging from 7.7% to 9.0% per annum. These loans
are secured by the machinery and equipment purchased with the loans. As of
December 31, 1996 and 1997, $1.3 million and $3.2 million was outstanding under
these loans, respectively.
F-10
<PAGE> 67
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 expires 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 LOC is secured by the Company's business assets,
excluding equipment. Borrowings under the $15.0 LOC bear interest at the bank's
prime interest rate plus one-half percent. The $15.0 LOC is subject to certain
financial covenants regarding current financial ratios and cash flow
requirements which have all been met as of December 31, 1997. At December 31,
1996 and 1997, $300,000 and no amount was outstanding under the $3.0 million
LOC, respectively.
In May 1997, the Company obtained a bank loan for $1.4 million to finance
construction. 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 $15.0 million LOC. The $750,000
loan will convert into a new term loan at the time of building completion and
will have a maturity of ten years with 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. The loan is subject to certain financial covenants regarding current
financial ratios and cash flow requirements, which have all been met as of
December 31, 1997.
The aggregate future repayments of long-term debt outstanding at December
31, 1997 are $1.4 million in 1998, $1.4 million in 1999, $1.4 million in 2000,
$1.5 million in 2001, $1.2 million in 2002 and $2.6 million thereafter.
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. 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 related to this 10.0% withholding were
$265,000, $625,000 and $319,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
For the years ended December 31, 1995, 1996 and 1997, the Company
recognized contract revenues of $2.4 million, $1.5 million, and $364,000,
respectively, under the Title III contract. For the years ended December 31,
1995, 1996 and 1997, the Company incurred costs of $1.4 million, $468,000 and
$211,000, respectively, under the Title III contract. As of December 31, 1997,
approximately $416,000 of contract revenue remains to be recognized under the
Title III contract.
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 $790,000 and
$95,000 for the years ended December 31, 1995 and 1996, 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.
In May 1997, the Company was awarded a $2.5 million, 30-month contract
under the DOD Title III program. The contract is a cost-sharing agreement. For
the year ended December 31, 1997, the Company has recognized contract revenues
of $661,000 under this arrangement and has incurred contract costs of $252,000.
The Company has no additional obligations with regards to any of the above
research and development contracts.
F-11
<PAGE> 68
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $1,558 $1,116 $1,571
State............................................ 381 178 79
Foreign.......................................... -- -- 84
------ ------ ------
Total current............................ 1,939 1,294 1,734
------ ------ ------
Deferred:
Federal.......................................... (322) (36) 235
State............................................ (36) (9) 29
------ ------ ------
Total deferred........................... (358) (45) 264
------ ------ ------
Total provision.......................... $1,581 $1,249 $1,998
====== ====== ======
</TABLE>
The following is a reconciliation of the effective income tax rates and the
U.S. statutory federal income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.................... 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefits...... 5.6 4.7 4.1
Foreign sales corporation benefit.................... (3.5) (2.4) (1.7)
Foreign.............................................. -- -- 1.6
Other................................................ 0.2 1.6 0.0
---- ---- ----
Effective tax rate................................... 36.3% 37.9% 38.0%
==== ==== ====
</TABLE>
Deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bad debt and inventory reserves............................. $ 79 $497
Vacation accrual............................................ 45 67
State taxes................................................. 62 13
Depreciation................................................ 303 --
---- ----
Deferred tax assets....................................... 489 577
Deferred tax liabilities:
Depreciation.............................................. -- (352)
---- ----
Net deferred tax asset............................ $489 $225
==== ====
</TABLE>
NOTE 6. 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
F-12
<PAGE> 69
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
1995, 1996 and 1997 were $40,000, $69,000, and $87,000, respectively.
NOTE 7. CONVERTIBLE PREFERRED STOCK
As of December 31, 1997, the Company had issued and outstanding a total of
10,128,737 shares of Convertible Preferred Stock, no par value, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Series A, 4,924,817 shares authorized, 4,924,817
issued and outstanding........................... $ 658 $ 658 $ 658
Series B, 4,003,921 shares authorized, 4,003,920
issued and outstanding........................... 1,960 1,960 1,960
Series C, 1,200,000 shares authorized, 1,200,000
issued and outstanding........................... -- -- 5,935
------ ------ ------
$2,618 $2,618 $8,553
====== ====== ======
</TABLE>
Conversion
Each share of Series A, B and C Preferred Stock is convertible into one
share of Common Stock, at the option of the holder, subject to certain
adjustments, and automatically converts upon the completion of an underwritten
public offering of Common Stock with gross proceeds of at least $7.5 million.
Liquidation
In the event of a liquidation, the holders of Series C Preferred Stock are
entitled to receive, prior to and in preference to any distribution of any
assets or surplus funds of the Company to the holders of Series A and B
Preferred Stock and the Common Stock, the amount of $5.00 for each share of
Series C Preferred Stock then outstanding plus all declared and unpaid dividends
thereon. The holders of Series B Preferred Stock are entitled to receive, after
Series C preferences have been satisfied, the amount of $0.51 for each share
plus all declared and unpaid dividends thereon. The holders of Series A
Preferred Stock are entitled to receive, after Series C and B preferences have
been satisfied, the amount of $0.30 for each share plus all declared and unpaid
dividends thereon. The holders of Series A, B and C Preferred Stock are then
entitled to share ratably in the remaining assets in the Company with the common
stockholders on an as-if converted basis.
Dividend
Each holder of Series A, B and C Preferred Stock is entitled to receive,
prior to and in preference to any holder of Common Stock, dividends equivalent
to any declared for the Company's Common Stock on an as-if converted basis. Such
dividends are noncumulative and shall be paid only when and as declared by the
Board of Directors. The Company has never declared or paid dividends on its
Common Stock.
Voting Rights
Each share of the Series A, B and C Preferred Stock has voting rights equal
to that of Common Stock on an as-if converted basis.
F-13
<PAGE> 70
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. 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, 1997. 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,
1,300,000 shares of common stock have been reserved for issuance as of December
31, 1997. 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.
Employee Stock Purchase Plan
In May 1997, the Company's Board of Directors approved an Employee Stock
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.
F-14
<PAGE> 71
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the Company's stock option activity under the 1993
Plan, 1997 Plan and the Employee Stock Purchase Plan and related weighted
average exercise price within each category for each of the years ended December
31, 1995, 1996 and 1997 and the three months ended March 31, 1998 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES OPTIONS OPTION
AVAILABLE OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1994............... 44,994 163,500 $0.68
Additional shares authorized............. 500,000 -- --
Granted.................................. (231,400) 231,400 1.75
Exercised................................ -- (149,000) 0.38
Canceled................................. 1,000 (1,000)
Repurchased.............................. 8,000 -- --
---------- ---------
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
---------- ---------
Granted (unaudited)...................... (146,000) 146,000 6.75
Exercised (unaudited).................... -- (20,000) 1.20
Canceled (unaudited)..................... 2,000 (2,000) 5.00
---------- ---------
Balance at March 31, 1998 (unaudited)...... 254,969 1,466,950 $5.02
========== =========
</TABLE>
At December 31, 1995, 1996, 1997 and March 31, 1998, options for 86,800,
107,450, 76,725 and 56,225 shares (unaudited), respectively, were vested.
During the year ended December 31, 1997 and the three months ended March
31, 1998, the Company granted options for the purchase of 1,315,100 shares and
146,000 shares, respectively, of Common Stock to employees at a weighted average
exercise price of $4.95 per share and $6.75 per share, respectively. Management
calculated deferred compensation of $322,000 and $228,000 (unaudited) related to
options granted during the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively. Such deferred compensation will be amortized
over the vesting period relating to these options of which approximately
$102,000 and $21,000 (unaudited) were amortized during the year ended December
31, 1997 and the three months ended March 31, 1998, respectively.
F-15
<PAGE> 72
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information relating to stock options outstanding under the 1993 Plan, 1997
Plan and the Employee Stock Purchase Plan at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------- ---------------- --------------
<S> <C> <C> <C>
Range of exercise prices:
$1.20 - $1.90....................... 107,950 1.5 years $1.60
$5.00 - $5.50....................... 1,235,000 9.6 years 5.05
$1.20 - $5.50....................... 1,342,950 8.9 years 4.77
</TABLE>
<TABLE>
<CAPTION>
OPTIONS VESTED
------------------------
WEIGHTED
NUMBER AVERAGE
VESTED EXERCISE PRICE
------ --------------
<S> <C> <C>
Range of exercise prices:
$1.20 - $1.90......................................... 76,725 $1.50
</TABLE>
Certain Pro Forma Disclosures
In October 1995, SFAS 123, established a fair value based method of
accounting for employee stock options plans. Had compensation cost for the
Company's option plans been determined based on the fair value at the grant
dates, as prescribed in SFAS 123, the Company's net income and pro forma net
income per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported...................................... $2,739 $2,046 $3,258
Pro forma net income............................. 2,725 2,032 3,111
Net income per share:
As reported:
Basic......................................... $ 0.97 $ 0.71 $ 1.11
Diluted....................................... 0.23 0.17 0.25
Pro forma net income:
Basic......................................... $ 0.97 $ 0.71 $ 1.06
Diluted....................................... 0.23 0.17 0.24
</TABLE>
The minimum 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, 1995 and 1997
(no options were granted during the year ended December 31, 1996); dividend
yield of 0.0% for both periods; risk-free interest rates of 5.7% and 6.1% for
options granted during the year ended December 31, 1995 and 1997, respectively;
and expected lives of 4.0 and 4.5 years for options granted during the years
ended December 31, 1995 and 1997, respectively.
Because the determination of the fair value of all options granted after
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding paragraph and, 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.
F-16
<PAGE> 73
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. NET INCOME PER SHARE
Statement of Financial Accounting Standards 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------ ------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS Net income available to
common stockholders................... $2,739 2,821 $0.97 $2,046 2,882 $0.71 $3,258 2,938 $1.11
Effect of dilutive securities Common
Stock options......................... -- 63 -- -- -- -- -- 72 --
Convertible Preferred Stock............. -- 8,929 -- -- 8,929 -- -- 9,829 --
Diluted EPS Net income available to
common stockholders................... $2,739 11,813 $0.23 $2,046 11,811 $0.17 $3,258 12,839 $0.25
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
1997 1998
------------------------ ------------------------
(UNAUDITED)
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS Net income available to common stockholders...... $447 2,896 $0.15 $1,385 3,052 $0.45
Effect of dilutive securities Common Stock options......... -- -- -- -- 335 --
Convertible Preferred Stock................................ -- 9,329 -- -- 10,129 --
Diluted EPS Net income available to common stockholders.... $447 12,225 $0.04 $1,385 13,516 $0.10
</TABLE>
During the years ended December 31, 1995 and 1997 and for the three months
ended March 31, 1998, options to purchase approximately 92,920, 1,254,800, and
126,000 shares (unaudited), respectively, at prices ranging from $1.20 to $7.50
were outstanding but not included in the computation because the exercise price
was greater than the average market price of common shares issued during the
respective period.
Because of the anticipated conversion of the Convertible Preferred Stock
into Common Stock if the Offering is consummated, basic earnings per share is
not indicative of the Company's future capital structure.
F-17
<PAGE> 74
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. GEOGRAPHIC REPORTING AND SIGNIFICANT CUSTOMERS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
United States............................................. $ 9,258 $10,028 $15,653
Europe.................................................... 1,692 2,216 2,497
Canada.................................................... 661 522 1,034
Japan..................................................... 2,027 2,653 4,323
Asia Pacific and other.................................... 840 808 1,828
------- ------- -------
Consolidated.............................................. $14,478 $16,227 $25,335
======= ======= =======
Income (loss) from operations:
United States............................................. $ 4,094 $ 3,529 $ 5,662
Japan..................................................... (44) 8 198
------- ------- -------
Consolidated.............................................. $ 4,050 $ 3,537 $ 5,860
======= ======= =======
Identifiable assets:
United States............................................. $10,927 $16,467 $28,967
Japan..................................................... 389 917 1,646
------- ------- -------
Consolidated.............................................. $11,316 $17,384 $30,613
======= ======= =======
</TABLE>
NOTE 11. RELATED PARTY TRANSACTIONS
In February 1996, the Company obtained a loan for $224,000 from a family
member of an officer. At December 31, 1996, $226,000 of principal and interest
was outstanding under this loan at an interest rate of 10.0% per annum. All
outstanding principal and interest were paid in February 1997.
In January 1996, the Company obtained a loan for $50,000 from an officer.
At December 31, 1996, $50,000 was outstanding at an interest rate of 10.0% per
annum. All outstanding principal and interest were paid in March 1997.
During the years ended December 31, 1995, 1996 and 1997, the Company
purchased $380,000, $760,000 and $1,540,000, respectively, of raw materials and
manufactured quartz from a supplier which is owned by a family member of an
officer.
NOTE 12. SUBSEQUENT EVENT
In February 1998, the Company's Board of Directors approved, subject to
stockholder approval, an increase of 1.5 million shares of Common Stock to be
reserved for issuance under the 1997 Plan and the adoption of the 1998 Employee
Stock Purchase Plan with a reserve of 250,000 shares of Common Stock.
In April 1998, the Company entered into the Purchase Agreement for the
purchase of an additional 58,000 square foot facility in Fremont, California.
Pursuant to the terms of the Purchase Agreement, the cost of the new facility is
$9.0 million and the purchase is expected to close in June 1998.
F-18
<PAGE> 75
COMPANY INTRODUCTION
American Xtal Technology, Inc. ("AXT") uses a proprietary vertical gradient
freeze ("VGF") technique to produce high-performance compound semiconductor
substrates for use in a variety of electronic and opto-electronic applications,
such as wireless and fiber optic telecommunications, lasers, LEDs, satellite
solar cells and consumer electronics. AXT manufactures and sells substrates
composed of gallium arsenide ("GaAs"), indium phosphide ("InP") and germanium
("Ge") and is currently developing other high-performance compound substrates
such as gallium phosphide ("GaP") and gallium nitride ("GaN"). AXT believes that
its VGF technique provides certain significant advantages over traditional
methods for growing crystals for the production of high-performance
semiconductor substrates.
OVERVIEW: APPLICATION OF AXT PRODUCTS AND TECHNOLOGY TO EVERYDAY LIFE
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 are composed of a single element such as Ge, or multiple
elements, which may include, among others, gallium, aluminum, indium, arsenic,
phosphorous and nitrogen. Substrates that consist of more than one element are
referred to as "compound substrates." In comparison to silicon, compound
substrates have electrical properties which allow semiconductor devices to
operate at much higher speeds or at the same speed with lower power consumption,
or to generate light signals. As the products on this page indicate,
high-performance devices that incorporate compound substrates are already used
around the world every day. AXT believes that it is currently the only
high-volume supplier of GaAs substrates manufactured by using the VGF technique
and is positioned to become a leading manufacturer and supplier of other
compound and Ge subtrates.
WIRELESS TELECOMMUNICATIONS
AXT's GaAs substrates are used by semiconductor device
manufacturers in high-performance telecommunication applications.
FIBER OPTIC COMMUNICATIONS
AXT's InP substrates are used by semiconductor device manufacturers
in fiber optic communications.
DISPLAYS
Large full-color displays like this one in Tokyo, which have LEDs that
incorporate GaAs, GaP and GaN substrates, attract attention with news
broadcasts, sports events and commercial advertisements.
TRAFFIC SIGNALS
Extra bright and highly energy-efficient LEDs, which incorporate GaAs
substrates, are being used in traffic lights worldwide.
DVD/CD-ROM LASERS
Lasers manufactured from GaAs substrates are incorporated into most CD-ROM
and DVD drives for the reading and writing of digital data stored on discs.
SATELLITE SOLAR CELLS
AXT's Ge substrates are incorporated into solar cells, which require Ge
substrates manufactured with few defects and minimal breakage, for use in
satellite communications.
CAPTION 1
AXT's proprietary VGF technique is designed to control the crystal-growth
process with minimal temperature variation. As a result, AXT is able to grow
crystals that have a relatively low dislocation density and high uniformity. AXT
believes that its substrates manufactured from such crystals are mechanically
strong, which often results in substrates with lower breakage rates during a
customer's manufacturing process.
FREMONT FACILITY
CAPTION 2
At its ISO 9002-certified manufacturing facility located in Fremont,
California, AXT works closely with customers to manufacture substrates tailored
to each customer's particular specifications. To ensure that every substrate
meets AXT's high standards of quality, the Company performs at its Fremont
facility all manufacturing operations, including crystal growth, slicing,
testing, edge grinding, polishing, inspecting and packaging the substrates for
shipment.
<PAGE> 76
===============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY THE SHARES
OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 6
Use of Proceeds.............................. 16
Dividend Policy.............................. 16
Capitalization............................... 17
Dilution..................................... 18
Selected Consolidated Financial Data......... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 20
Business..................................... 30
Management................................... 40
Certain Transactions......................... 47
Principal Stockholders....................... 49
Description of Capital Stock................. 50
Shares Eligible for Future Sale.............. 52
Underwriting................................. 54
Legal Matters................................ 55
Experts...................................... 55
Additional Information....................... 55
Index to Consolidated Financial Statements... F-1
</TABLE>
===============================================================
===============================================================
2,500,000 Shares
LOGO
Common Stock
---------------------
PROSPECTUS
---------------------
PRUDENTIAL SECURITIES INCORPORATED
COWEN & COMPANY
MAY , 1998
===============================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All amounts shown are estimates except for
the registration fee, the NASD filing fee and the Nasdaq National Market fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Securities and Exchange Commission registration fee......... $ 8,482
NASD filing fee............................................. 3,375
Nasdaq National Market application fee...................... 90,500
Blue sky qualification fees and expenses.................... 1,000
Accounting fees and expenses................................ 250,000
Legal fees and expenses..................................... 300,000
Printing and engraving expenses............................. 130,000
Transfer agent and registrar fees........................... 5,000
Director and Officer liability insurance.................... 100,000
Miscellaneous expenses...................................... 11,643
--------
Total.................................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Delaware Law")
permits the indemnification of officers, directors, and other corporate agents
under certain circumstances and subject to certain limitations. The Registrant's
Certificate of Incorporation (Exhibit 3.1) and Bylaws (Exhibit 3.3) provide that
the Registrant shall indemnify its directors, officers, employees, and agents to
the full extent permitted by Delaware Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements (Exhibit
10.1) with its directors and officers which should require the Registrant, among
other things, to indemnify them against certain liabilities which may arise by
reason of their status or service (other than liabilities arising from willful
misconduct of a culpable nature). These indemnification provisions may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act of 1933, as amended (the "Securities Act").
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1995, Registrant has sold and issued the following
unregistered securities:
(1) From January 1, 1995, to March 31, 1998, Registrant granted
options to purchase 241,400 shares of Common Stock pursuant to its 1993
Stock Option Plan at exercise prices ranging from $1.50 per share to $7.00
per share for a total offering price of $894,260.
(2) From January 1, 1995 to March 31, 1998, Registrant issued and sold
an aggregate of 274,575 shares of Common Stock to its employees, directors
and consultants for an aggregate consideration of $284,050, upon exercise
of stock options granted pursuant to Registrant's 1993 Stock Option Plan at
exercise prices ranging from $0.30 to $1.90.
II-1
<PAGE> 78
(3) In June 1997, Registrant granted purchase rights to purchase up
to, in the aggregate, 67,000 shares of Common Stock to its employees for
the purchase price of $3.75 per share pursuant to its 1997 Employee Stock
Purchase Plan, for a total offering price of $251,250.
(4) In November 1997, Registrant issued and sold an aggregate 67,000
shares of Common Stock to its employees for an aggregate consideration of
$251,250, upon exercise of purchase rights granted pursuant to Registrant's
1997 Employee Stock Purchase Plan (since terminated).
(5) From July 1, 1997 to March 31, 1998, Registrant granted options to
purchase 1,118,100 shares of Common Stock at the exercise price of $5.00
per share, 130,000 shares of Common Stock at $5.50 per share, 50,000 shares
of Common Stock at $7.00 per share, and 6,000 shares of Common Stock at
$7.50 per share pursuant to its 1997 Stock Option Plan, for a total
offering price of $6,700,500.
(6) On March 31, 1997, Registrant issued and sold an aggregate of
1,200,000 shares of Series C Preferred Stock to a group of private
investors for aggregate cash consideration of $6,000,000.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of Prospectus included herein.
The issuances of Securities describe in Items 15(a)(1) through 15(a)(5)
were deemed to be exempt from registration under the Securities Act in reliance
on Rule 701 promulgated thereunder as transactions pursuant to a compensatory
benefit plan or a written contract relating to compensation. The issuance of
securities describe in item 15(a)(6) was deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between American Xtal
Technology, a California corporation, and American Xtal
Technology Delaware Corporation, a Delaware corporation.
3.1+ Certificate of Incorporation of American Xtal Technology
Delaware Corporation, a Delaware corporation.
3.2+ Form of Certificate of Amendment of Certificate of
Incorporation of American Xtal Technology, Inc., a
Delaware corporation.
3.3+ Bylaws of American Xtal Technology Delaware Corporation, a
Delaware corporation.
5.1degrees Opinion of Gray Cary Ware & Freidenrich, LLP.
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 with U.S. Bank dated March 4, 1998.
</TABLE>
II-2
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.7degrees Purchase and Sale Agreement by and between Limar Realty
Corp. #23 and the Company dated April 1998.
21.1+ List of subsidiaries.
23.1 Consent of Independent Accountants.
23.2degrees Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-4 of Registration Statement
No. 333-48085 filed on March 17, 1998.)
27.1 Financial Data Schedule (available in EDGAR format only).
</TABLE>
- ---------------------------
+ Filed previously.
degrees To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
the Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statements relating to the securities
offered therein, and this Offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 80
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Fremont,
County of Alameda, State of California, on the 24th day of April 1998.
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ MORRIS S. YOUNG
------------------------------------
Morris S. Young
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Amendment No. 1
has been signed by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MORRIS S. YOUNG President, April 24, 1998
- -------------------------------------------------------- Chief Executive Officer,
Morris S. Young and Chairman of the Board
(Principal Executive
Officer)
/s/ GUY D. ATWOOD Vice President, Chief April 24, 1998
- -------------------------------------------------------- Financial Officer
Guy D. Atwood (Principal Financial and
Accounting Officer)
THEODORE S. YOUNG degrees Senior Vice President, April 24, 1998
- -------------------------------------------------------- Marketing, Director
Theodore S. Young
DONALD L. TATZIN degrees Director April 24, 1998
- --------------------------------------------------------
Donald L. Tatzin
JESSE CHEN degrees Director April 24, 1998
- --------------------------------------------------------
Jesse Chen
B.J. MOORE degrees Director April 24, 1998
- --------------------------------------------------------
B.J. Moore
</TABLE>
degreesBy:/s/ MORRIS S. YOUNG
---------------------------------
Morris S. Young
(Attorney-in-fact)
II-4
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between American Xtal
Technology, a California corporation, and American Xtal
Technology Delaware Corporation, a Delaware corporation.
3.1+ Certificate of Incorporation of American Xtal Technology
Delaware Corporation, a Delaware corporation.
3.2+ Form of Certificate of Amendment of Certificate of
Incorporation of American Xtal Technology, Inc., a
Delaware corporation.
3.3+ Bylaws of American Xtal Technology Delaware Corporation, a
Delaware corporation.
5.1degrees Opinion of Gray Cary Ware & Freidenrich, LLP.
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 with U.S. Bank dated March 4, 1998.
10.7degrees Purchase and Sale Agreement by and between Limar Realty
Corp. #23 and the Company dated April 1998.
21.1+ List of subsidiaries.
23.1 Consent of Independent Accountants.
23.2degrees Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-4 of Registration Statement
No. 333-48085 filed on March 17, 1998.)
27.1 Financial Data Schedule (available in EDGAR format only).
</TABLE>
- ---------------------------
+ Filed previously.
degrees To be filed by amendment.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 6, 1998,
relating to the consolidated financial statements of American Xtal Technology,
Inc., which appears in such Prospectus. We also consent to the references to us
under the headings "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Jose, California
April 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 MAR-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 3,054 2,981
<SECURITIES> 0 0
<RECEIVABLES> 6,105 7,265
<ALLOWANCES> 100 145
<INVENTORY> 8,361 8,859
<CURRENT-ASSETS> 18,503 21,038
<PP&E> 15,985 17,455
<DEPRECIATION> 3,884 4,292
<TOTAL-ASSETS> 30,613 34,209
<CURRENT-LIABILITIES> 4,294 6,140
<BONDS> 0 0
0 0
8,553 8,553
<COMMON> 867 1,119
<OTHER-SE> 9,171 10,416
<TOTAL-LIABILITY-AND-EQUITY> 30,613 34,209
<SALES> 23,014 9,238
<TOTAL-REVENUES> 25,335 9,730
<CGS> 13,674 5,460
<TOTAL-COSTS> 15,227 5,725
<OTHER-EXPENSES> 4,248 1,606
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 570 181
<INCOME-PRETAX> 5,256 2,239
<INCOME-TAX> 1,998 854
<INCOME-CONTINUING> 3,258 1,385
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,258 1,385
<EPS-PRIMARY> 1.11 0.45
<EPS-DILUTED> 0.25 0.10
</TABLE>
