<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the quarterly period ended June 30, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ______________ to ______________
Commission File Number 0-24085
--------------------
AXT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3031310
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4281 Technology Drive, Fremont, California 94538
(Address of principal executive offices) (Zip code)
(510) 683-5900
(Registrant's telephone number, including area code)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at June 30, 2000
------- ----------------------------
<S> <C>
Common Stock, $.001 par value 18,947,781
</TABLE>
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AXT, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999
Condensed Consolidated Income Statements for the three and
six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999
Notes To Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AXT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets
Cash and cash equivalents $ 5,149 $ 6,062
Accounts receivable, net of allowance for doubtful
accounts of $1,702 and $778 20,889 17,561
Inventories 43,630 35,470
Prepaid expenses and other current assets 6,071 8,945
Deferred income taxes 4,585 3,210
--------- ---------
Total current assets 80,324 71,248
Property, plant and equipment 52,476 40,865
Other assets 2,427 1,405
Goodwill 1,945 2,244
--------- ---------
Total assets $ 137,172 $ 115,762
========= =========
Liabilities and Stockholders' Equity:
Current liabilities
Short-term bank borrowing $ 12,980 $ 11,298
Note payable 4,000 --
Accounts payable 12,575 8,294
Accrued liabilities 10,801 7,464
Current portion of long-term debt 1,862 1,568
Current portion of capital lease obligation 3,437 2,162
--------- ---------
Total current liabilities 45,655 30,786
Long-term debt, net of current portion 14,034 15,254
Long-term capital lease, net of current portion 8,137 6,853
Other long-term liabilities 100 410
--------- ---------
Total liabilities 67,926 53,303
--------- ---------
Stockholders' equity:
Preferred stock
$.001 par value per share; 1,000,000 shares
authorized; 980,655 shares issued and outstanding 1 1
Additional paid-in capital 3,989 3,989
Common stock
$.001 par value per share; 100,000,000 shares
authorized; 18,947,781 and 18,658,919 shares
issued and outstanding respectively 19 19
Additional paid-in capital 48,606 46,321
Deferred compensation (162) (217)
Retained earnings 16,695 12,370
Cumulative translation adjustments 98 (24)
--------- ---------
Total stockholders' equity 69,246 62,459
--------- ---------
Total liabilities and stockholders' equity $ 137,172 $ 115,762
========= =========
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
3
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AXT, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 28,944 $ 20,783 $ 52,878 $ 39,680
Cost of revenue 17,859 13,971 32,198 30,211
-------- -------- -------- --------
Gross profit 11,085 6,812 20,680 9,469
Operating expenses:
Selling, general and administrative 4,564 3,196 8,417 6,843
Research and development 1,863 858 3,851 1,520
Acquisition costs -- 2,810 -- 2,810
-------- -------- -------- --------
Total operating expenses 6,427 6,864 12,268 11,173
-------- -------- -------- --------
Income (loss) from operations 4,658 (52) 8,412 (1,704)
Interest expense (1,149) (730) (1,918) (1,360)
Other income and expense 303 29 499 722
-------- -------- -------- --------
Income (loss) before provision for income taxes 3,812 (753) 6,993 (2,342)
Provision for income taxes 1,459 782 2,668 178
-------- -------- -------- --------
Net Income (loss) before extraordinary item 2,353 (1,535) 4,325 (2,520)
Extraordinary item -- 508 508
-------- -------- -------- --------
Net Income (loss) $ 2,353 $ (2,043) $ 4,325 $ (3,028)
======== ======== ======== ========
Basic income (loss) per share:
Income before extraordinary item $ 0.13 $ (0.08) $ 0.23 $ (0.14)
Extraordinary item (0.03) (0.03)
Net income 0.13 (0.11) 0.23 (0.16)
Diluted income (loss) per share:
Income before extraordinary item $ 0.12 $ (0.08) $ 0.23 $ (0.14)
Extraordinary item (0.03) (0.03)
Net income 0.12 (0.11) 0.21 (0.16)
Shares used in per share calculations:
Basic 18,654 18,443 18,687 18,451
Diluted 20,149 18,443 20,178 18,451
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
4
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AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss): $ 4,325 $ (3,028)
Adjustments to reconcile net income (loss) to cash used in operations:
Depreciation 2,917 1,162
Deferred income taxes (1,375) (404)
Amortization of goodwill 299 300
Stock compensation 55 55
Changes in assets and liabilities:
Accounts receivable (3,328) (929)
Inventories (8,160) (4,491)
Prepaid expenses and other current assets 2,874 (4,407)
Other assets (1,022) 790
Accounts payable 4,281 189
Accrued liabilities 3,337 3,764
Other long-term liabilities (310) (103)
-------- --------
Net cash provided by (used in) operating activities 3,893 (7,102)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (11,101) (3,853)
-------- --------
Net cash used in investing activities (11,101) (3,853)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of):
Issuance of common stock 2,285 359
Capital leases (868) (268)
Short-term bank borrowings 5,682 4,526
Long-term debt borrowings (926) 157
-------- --------
Net cash provided by financing activities 6,173 4,774
-------- --------
Effect of exchange rate changes 122 (53)
-------- --------
Net increase (decrease) in cash and cash equivalents (913) (6,234)
Cash and cash equivalents at the beginning of the period 6,062 16,438
-------- --------
Cash and cash equivalents at the end of the period $ 5,149 $ 10,204
======== ========
Non cash activity:
Purchases of PP&E through capital leases $ 3,427 $ 39
======== ========
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
5
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AXT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements for the
three-month and six-month periods ended June 30, 2000 and 1999 are unaudited.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, considered necessary to present fairly the
financial position, results of operations and cash flows of AXT, Inc. (the
"Company") and its subsidiaries for all periods presented. Certain prior period
reclassifications have been made to conform to the current period presentation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these condensed consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
The results of operations are not necessarily indicative of the results to
be expected in the future or for the full fiscal year. It is recommended that
these condensed consolidated financial statements be read in conjunction with
the Company's consolidated financial statements and the notes thereto included
in its 1999 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Note 2. Net Income Per Share
Basic earnings per common share is calculated by dividing net earnings by
the weighted average number of common shares outstanding during the period.
Diluted earnings per common and common equivalent share include the dilutive
effect of common stock equivalents outstanding during the period calculated
using the treasury stock method. Common stock equivalents consist of the shares
issuable upon the exercise of stock options. Common equivalent shares of
approximately 1.0 million are excluded from the computation for the three month
and six month periods ended June 30, 1999, as their effect is antidilutive.
A reconciliation of the numerators and denominators of the basic and
diluted net income per share calculations is as follows (in thousands except per
share data):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------- --------------------------------------------------
2000 1999 2000 1999
----------------------- ----------------------- ----------------------- -------------------------
Per Per Per Per
Net Share Net Share Net Share Net Share
Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------- ------ ------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS calculation $2,353 18,654 $0.13 $(2,043) 18,443 $(0.11) $4,325 18,687 $0.23 $(3,028) 18,451 $(0.16)
Effect of dilutive
securities
Common stock options 1,495 1,491
Diluted EPS calculation $2,353 20,149 $0.12 $(2,043) 18,443 $(0.11) $4,325 20,178 $0.21 $(3,028) 18,451 $(0.16)
====== ====== ===== ======= ====== ====== ====== ====== ===== ======= ====== ======
</TABLE>
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Note 3. Inventories
The components of inventory are summarized below (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Inventories:
Raw materials $ 16,693 $ 13,503
Work in process 20,987 16,151
Finished goods 5,950 5,816
-------- --------
$ 43,630 $ 35,470
======== ========
</TABLE>
Note 4. Comprehensive Income
The components of comprehensive income are summarized below (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------ -------- ------ --------
<S> <C> <C> <C> <C>
Net Income (loss) $2,353 $ (2,043) $4,325 $ (3,028)
Foreign currency translation gain (loss) 89 25 122 (53)
------ -------- ------ --------
Comprehensive income $2,442 $ (2,018) $4,447 $ (3,081)
====== ======== ====== ========
</TABLE>
Note 5. Segment Information
Selected industry segment information is summarized below (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Substrates
Net revenues from external customers $ 26,212 $ 14,405 $ 45,337 $ 26,137
Gross profit 12,466 5,549 21,148 10,381
Operating income 8,782 1,164 14,418 4,023
Identifiable assets 105,151 82,068 105,151 82,068
Visible emitters
Net revenues from external customers 1,728 4,792 4,868 9,391
Gross profit (loss) (1,409) 1,622 (1,120) (110)
Operating income (loss) (3,811) 111 (5,592) (2,884)
Identifiable assets 26,920 20,675 26,920 20,675
Consumer products
Net revenues from external customers 1,004 1,586 2,673 4,152
Gross profit (loss) 28 (359) 652 (802)
Operating loss (313) (1,327) (414) (2,843)
Identifiable assets 5,100 5,095 5,100 5,095
Total
Net revenues from external customers 28,944 20,783 52,878 39,680
Gross profit 11,085 6,812 20,680 9,469
Operating income (loss) 4,658 (52) 8,412 (1,704)
Identifiable assets 137,171 107,838 137,171 107,838
</TABLE>
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<PAGE> 8
The Company sells its products in the United States and in other parts of the
world. Also, the Company has operations in China and Japan. Revenues by
geographic location based on the country of the customer are summarized below
(in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues:
United States $15,462 $10,807 $27,869 $19,991
Europe 3,265 1,889 5,956 3,694
Canada 1,203 48 1,211 124
Japan 2,311 1,627 4,436 3,081
Asia Pacific and other 6,703 6,412 13,406 12,790
------- ------- ------- -------
Consolidated $28,944 $20,783 $52,878 $39,680
======= ======= ======= =======
</TABLE>
Note 6. Short-Term Bank Borrowing
The Company has a $15 million bank line of credit that expires on August
31, 2000. The Company has received a commitment from its bank for a new two-year
$20 million line of credit and additional long-term debt of $6 million.
Management expects that the new credit facility will be completed by August 31,
2000.
Note 7. Notes Payable
On June 15, 2000, the Company entered into a short-term note with its bank
in the amount of $4 million. The note bears interest at 1% above the lender's
variable prime rate that was 9.5% at June 30, 2000. The principal and unpaid
interest of the note is due August 31, 2000. The proceeds of the note were
primarily used to fund the current operating and capital expenditure needs of
the Company.
Note 8. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. In June 2000, SFAS No. 133 was amended
by SFAS No. 138. The Company has not determined what the effect of SFAS No. 133
will be on the operations and financial position of the Company. The Company
will be required to implement SFAS No. 133 as amended by SFAS No. 137, beginning
in 2001. Adopting the provisions of SFAS 133 is not expected to have a material
effect on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 would have no material effect on the financial position or results of
operations of the Company.
8
<PAGE> 9
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44")
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The Company does not
expect that the adoption of FIN 44 will have a material impact on its financial
position or results of operations.
Note 9. Subsequent Events
On July 25, 2000 the Company completed a private securities offering, raising
approximately $8.5 million in exchange for 234,115 shares of common stock. The
shares issued have not been registered under the Securities Act of 1933 and are
"restricted securities" as defined by rule 144 promulgated under the act. The
securities may not be sold or offered for sale or otherwise distributed except
in conjunction with an effective registration statement for the shares under the
Act, in compliance with rule 144, or pursuant to an opinion of counsel
satisfactory to the Company, that such registration or compliance is not
required as to said sale, offer or distribution. The Company is obligated to
register the shares no later than ten days after the completion of its next
public securities offering.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "future," "intends," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. This
discussion should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 as
filed with the Securities and Exchange Commission and the condensed consolidated
financial statements included elsewhere in this report.
Results of Operations
The following table sets forth certain information relating to the
operations of the Company expressed as a percentage of total revenues for the
periods indicated:
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 61.7 67.2 60.9 76.1
------ ------ ------ ------
Gross profit 38.3 32.8 39.1 23.9
Operating expenses:
Selling, general and administrative 15.8 15.4 15.9 17.2
Research and development 6.4 4.1 7.3 3.8
Acquisition costs -- 13.5 -- 7.1
------ ------ ------ ------
Total operating expenses 22.2 33.0 23.2 28.1
------ ------ ------ ------
Income (loss) from operations 16.1 (0.2) 15.9 (4.3)
Interest expense (4.0) (3.5) (3.6) (3.4)
Other income and expense 1.0 0.1 0.9 1.8
------ ------ ------ ------
Income (loss) before provision for income taxes 13.1 (3.6) 13.2 (5.9)
Provision for income taxes 5.0 3.8 5.0 0.4
------ ------ ------ ------
Net income (loss) before extra ordinary item 8.1 (7.4) 8.2 (6.3)
Extra ordinary item -- 2.4 -- 1.3
------ ------ ------ ------
Net Income (loss) after extra ordinary item 8.1% (9.8)% 8.2% (7.6)%
====== ====== ====== ======
</TABLE>
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Revenues. Revenues increased $8.1 million, or 39.3%, to $28.9 million for
the three months ended June 30, 2000 compared to $20.8 million for the three
months ended June 30, 1999. The increase in revenues was primarily due to an
$11.8 million, or 82.0%, increase in substrate sales comprised of a $12.5
million, or 98.8%, increase in sales of GaAs and InP substrates offset by a
$718,000 decrease in Ge sales and contract revenues at the substrate division.
The increase in GaAs and InP substrate sales was primarily due to increased
sales volume to existing and new domestic and foreign customers due in part to
strong growth in the fiber optic and wireless handset markets. The decrease in
Ge sales is the result of a cancellation of a contract by a major customer due
to weakness in the satellite market. Additionally, sales at our visible emitter
division decreased $3.1 million, or 63.9% of visible emitter sales and sales at
our consumer products division decreased $582,000, or 36.7% of consumer product
sales, due to declining sales prices and lower demand for laser pointer
products.
International revenues decreased to 46.6% of total revenues for the three
months ended June 30, 2000 compared to 48.0% of total revenues for the three
months ended June 30, 1999. The decrease in the percentage of international
revenue to total revenue was primarily the result of increased substrate sales
to domestic customers.
Gross margin. Gross margin increased to 38.3% of total revenues for the
three months ended June 30, 2000 compared to 32.8% of total revenues for the
three months ended June 30, 1999. The gross margin at the substrate division
increased to 47.6% of substrate revenues for the three months ended June 30,
2000 compared to 38.5% of substrate revenues for the period ended June 30, 1999.
The increase was primarily due to higher volume and the realization of lower
labor and manufacturing overhead costs as a result of expanding our wafer
production capacity in China. The gross margin at the visible emitter division
decreased to negative 81.5% of visible emitter revenues for the three months
ended June 30, 2000 compared to 33.8% of visible emitter revenues for the period
ended June 30, 1999. The decrease was primarily due to increased costs
associated with the start-up of blue LED and other product production. The gross
margin at the consumer products division increased to 2.8% of consumer product
revenues for the three months ended June 30, 2000 compared to a negative 22.6%
of consumer product
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<PAGE> 11
revenues for the three months ended June 30, 1999. The increase was primarily
due to manufacturing process improvements and cost reductions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.4 million, or 42.8%, to $4.6 million for
the three months ended June 30, 2000 compared to $3.2 million for the three
months ended June 30, 1999. As a percentage of total revenues, selling, general
and administrative expenses were 16.1% for the three months ended June 30, 2000
compared to 15.4% for the three months ended June 30, 1999. Selling, general and
administrative expenses increased 42.8% compared to increased total revenues of
39.3% for the three months ended June 30, 2000. The increase in selling, general
and administrative expenses was primarily due to increases in personnel and
related expenses required to support current and future increases in sales
volume.
Research and development expenses. Research and development expenses
increased $1.0 million, or 117.1%, to $1.9 million for the three months ended
June 30, 2000 compared to $858,000 for the three months ended June 30, 1999. As
a percentage of total revenues for these three-month periods, research and
development expenses were 6.4% in 2000 and 4.1% in 1999. The increase was
primarily the result of increases in personnel and related expenses and
materials to support LED and other product research and development at the
visible emitter division.
Interest expense. Interest expense increased $419,000, or 57.4%, to $1.1
million for the three months ended June 30, 2000 compared to $730,000 for the
three months ended June 30, 1999. The increase was primarily due to utilizing
short-term debt to finance the short-term liquidity needs resulting from our
increased sales volume and the addition of certain capital leases to finance
equipment purchases.
Other income and expense. Other income and expense increased $274,000 to
$303,000 for the three months ended June 30, 2000 compared to $29,000 for the
three months ended June 30, 1999. The increase was primarily due to increases in
foreign exchange gains and rental and interest income.
Provision for income taxes. Income tax expense remained at our effective
tax rate of 38.0% for the three months ended June 30, 2000 and 1999. For the
three months ended June 30, 1999, income tax expense was adjusted for
non-deductible acquisition costs of $2.8 million.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Revenues. Revenues increased $13.2 million, or 33.3%, to $52.9 million for
the six months ended June 30, 2000 compared to $39.7 million for the six months
ended June 30, 1999. The increase in revenues was primarily due to a $19.2
million, or 73.5% increase in substrate sales comprised of a $22.8 million, or
106.9% increase in sales of GaAs and InP substrates offset by a $3.6 million
decrease in Ge sales and contract revenues at the substrate division. The
increase in GaAs and InP substrate sales was due to increased sales volume to
existing and new domestic and foreign customers due in part to strong growth in
the fiber optic wireless handset markets. The decrease in Ge sales is the result
of a cancellation of a contract by a major customer due to weakness in the
satellite market. Additionally, sales at our visible emitter division decreased
$4.5 million, or 48.2% of visible emitter sales, and sales at our consumer
products division decreased $1.5 million, or 35.6% of consumer product sales,
due to declining sales prices and lower demand for laser pointer products.
International revenues decreased to 47.3% of total revenues for the six
months ended June 30, 2000 compared to 49.6% of total revenues for the six
months ended June 30, 1999. The decrease in the percentage of international
revenue to total revenue was primarily the result of increased substrate sales
to domestic customers.
Gross margin. Gross margin increased to 39.1% of revenues for the six
months ended June 30, 2000 compared to 23.9% of revenues for the six months
ended June 30, 1999. The gross margin at the substrate division increased to
46.6% of substrate revenues for the six months ended June 30, 2000 compared to
39.7% of substrate revenues for the period ended June 30, 1999. The increase was
primarily due to higher volume and the realization of lower labor and
manufacturing overhead costs as a result of expanding our wafer production
capacity in China. The gross margin at the visible emitter division decreased to
negative 23.0% of visible emitter revenues for the six
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<PAGE> 12
months ended June 30, 2000 compared to negative 1.2% of visible emitter revenues
for the period ended June 30, 1999. The decrease was primarily due to increased
costs associated with the start-up of blue LED and other product production. The
gross margin at the consumer products division increased to 24.4% of consumer
product revenues for the six months ended June 30, 2000 compared to negative
19.3% of consumer product revenues for the six months ended June 30, 1999. The
increase was primarily due to manufacturing process improvements and cost
reductions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.6 million, or 23.0%, to $8.4 million for
the six months ended June 30, 2000 compared to $6.8 million for the six months
ended June 30, 1999. As a percentage of total revenues, selling, general and
administrative expenses were 15.9% for the six months ended June 30, 2000 and
17.2% for the six months ended June 30,1999. Selling, general and administrative
expenses increased 23.0% compared to increased total revenues of 33.3% for the
six months ended June 30, 2000. The increase in selling, general and
administrative expenses were primarily due to increases in personnel and related
expenses required to support current and future increases in sales volume.
Research and development expenses. Research and development expenses
increased $2.3 million, or 153.4%, to $3.9 million for the six months ended June
30, 2000 compared to $1.5 million for the six months ended June 30, 1999. As a
percentage of total revenues for these six-month periods, research and
development expenses were 7.3% in 2000 and 3.8% in 1999. The increase was
primarily the result of increases in personnel and related expenses and
materials to support LED and other product research and development at the
visible emitter division.
Interest expense. Interest expense increased $558,000, or 41.0%, to $1.9
million for the six months ended June 30, 2000 compared to $1.4 million for the
six months ended June 30, 1999. The increase was primarily due to utilizing
short-term debt to finance the short-term liquidity needs resulting from our
increased sales volume and the addition of certain capital leases to finance
equipment purchases.
Other income and expense. Other income and expense decreased $223,000 to
$499,000 for the six months ended June 30, 2000 compared to $722,000 for the six
months ended June 30, 1999. The decrease was primarily due to smaller foreign
exchange gains.
Provision for income taxes. Income tax expense remained at our effective
tax rate of 38.0% for the six months ended June 30, 2000 and 1999. For the six
months ended June 30, 1999, income tax expense was adjusted for non-deductible
acquisition costs of $2.8 million.
Financial Condition, Liquidity and Capital Resources
Working capital decreased $5.8 million or 14% to $34.7 million at June 30,
2000 compared to $40.5 million at December 31, 1999. The decrease was primarily
due to increases in short-term obligations necessary to sustain additional
revenue growth and the use of operating cash flows to procure capital equipment.
Total long-term debt including capital leases increased $7.3 million while
property, plant and equipment purchases were $14.5 million.
Operating activities generated $3.9 million for the six months ended June
30, 2000 compared to negative $7.1 million for the six months ended June 30,
1999. The increase was primarily due to increased profitability at the substrate
division.
We invested $14.5 million in capital expenditures during the six months
ended June 30, 2000 compared to $3.9 million during the six months ended June
30, 1999. The increase in spending was primarily due to facility expansion and
equipment additions to increase crystal growth and wafer processing capacity at
the substrate division as well as facility expansion and equipment additions at
the visible emitter division to begin volume epitaxy, wafer processing and chip
production for LED's.
We are currently engaged in constructing an additional 31,000 square foot
building in Beijing, China to expand substrate wafer processing facilities, a
27,000 square foot building in El Monte, California to expand epitaxy
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<PAGE> 13
production, as well as constructing leasehold improvements in a 20,000 square
foot building and a 9,000 square foot building to expand administration offices
and material storage areas in Fremont, California. We are also constructing
improvements to the existing production facilities in Fremont, California to
increase crystal growth and wafer processing capacity. We expect to invest
approximately $47 million in additional facilities and equipment over the next
12 months.
Cash provided by financing activities for the six months ended June 30,
2000 included a $4.0 million note from our bank and $2.3 million in proceeds
from the exercise of stock options from the employee stock option plan.
Total debt was $44.5 million (39% of total capital) at June 30, 2000
compared to $37.1 million (37% of total capital) at December 31, 1999.
We currently have a $15.0 million line of credit with a commercial bank at
an interest rate equal to the bank's prime rate plus one-half percent. The
bank's prime rate was 9.5% at June 30, 2000. This line of credit is secured by
all business assets, less equipment, and expires on August 31, 2000. This line
of credit is subject to certain financial covenants regarding current financial
ratios and cash flow requirements, which were met as of June 30, 2000. We must
obtain the lender's approval to obtain additional borrowings or to further
pledge our assets, except for borrowings obtained in the normal course of
business or the pledging of equipment. At June 30, 2000, $13.0 million was
outstanding under the $15 million line of credit. We have received a commitment
from our bank for a new two-year $20 million line of credit and additional
long-term debt of $6 million. Management expects that the new credit facility
will be completed by August 31, 2000.
On June 15, 2000, we entered into a short-term note with our bank in the
amount of $4 million. The note bears interest at 1% above the lender's variable
prime rate that was 9.5% at June 30, 2000. The principal and unpaid interest of
the note is due August 31, 2000. We expect to repay this note with the proceeds
of the new line of credit. The proceeds of the note were primarily used to fund
our current operating and capital expenditure needs.
We generally finance equipment purchases through secured equipment loans
and capital leases over five-year terms at interest rates ranging from 6.0% to
10.0% per annum. Our manufacturing facilities have been financed by long-term
borrowings, which were repaid by taxable variable rate revenue bonds in 1998.
These bonds have a term of twenty-five years and mature in 2023 with an interest
rate at 200 basis points below the prime rate and are traded in the public
market. Repayment of principal and interest under the bonds is secured by a
letter of credit from our bank and is paid on a quarterly basis. We have the
option to redeem in whole or in part the bonds during their term. At June 30,
2000, $10.7 million was outstanding under the taxable variable rate revenue
bonds.
We anticipate that the combination of existing working capital and the
borrowings available under the current and committed credit agreements will be
sufficient to fund working capital and capital expenditure requirements for the
next 12 months. Our future capital requirements will be dependent on many
factors including the rate of revenue growth, our profitability, the timing and
extent of spending to support research and development programs, the expansion
of manufacturing facilities, the expansion of selling and marketing and
administrative activities, and market acceptance of our products. We expect to
raise additional equity and debt financing in the future. We cannot assure you
that additional equity or debt financing, if required, will be available on
acceptable terms or at all. If we are unable to obtain such additional capital,
if needed, we may be required to reduce the scope of our planned product
development, the expansion of our manufacturing facilities, and selling and
marketing activities, which would have a material adverse effect on our
business, financial condition and results of operations. In the event that we do
raise additional equity financing, further dilution to investors will result.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since many of the Company's Japanese and Taiwanese invoices are
denominated in yen, the Company has purchased foreign exchange contracts to
hedge against certain trade accounts receivable in Japanese yen. As of June 30,
2000, the Company's outstanding commitments with respect to the foreign exchange
contracts had a total value of approximately $1.7 million. Many of the contracts
were entered into six months prior to the due date and
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<PAGE> 14
the dates coincide with the receivable terms on customer invoices. By matching
the receivable collection date and contract due date, the Company attempts to
minimize the impact of foreign exchange fluctuations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 Annual Meeting of Stockholders on June 7, 2000. Of the
18,906,558 shares eligible to vote at the meeting, 14,473,242 were present
either in person or by proxy. The following proposals were submitted to
stockholders at the 2000 Annual Meeting of Stockholders.
Proposal 1: Election of two class II directors to hold office for a
three-year term and until their successors are elected and qualified. The
two candidates were Jesse Chen and Donald L. Tatzin.
Election results for this proposal were as follows:
<TABLE>
<CAPTION>
For Withhold Abstain Not Voted
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Jesse Chen 14,392,983 80,259 0 0
Donald L. Tatzin 14,393,191 80,051 0 0
</TABLE>
Proposal 2: To approve an amendment to American Xtal Technology's Certificate of
Incorporation changing its name from "American Xtal Technology, Inc." to "AXT,
Inc."
Election results for this proposal were as follows:
<TABLE>
<CAPTION>
For Withhold Abstain Not Voted
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
14,294,328 96,921 81,993 0
</TABLE>
Proposal 3: To approve amendments to American Xtal Technology's 1997 Stock
Option Plan to increase the number of shares reserved for issuance under the
plan from 3,800,000 to 5,800,000 shares of common stock.
Election results for this proposal were as follows:
<TABLE>
<CAPTION>
For Withhold Abstain Not Voted
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
5,365,878 2,885,827 242,551 5,978,986
</TABLE>
Proposal 4: To approve amendments to American Xtal Technology's 1998 Employee
Stock Purchase Plan to increase the number of shares reserved for issuance under
the plan from 400,000 to 900,000 shares of common stock.
Election results for this proposal were as follows:
<TABLE>
<CAPTION>
For Withhold Abstain Not Voted
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
7,979,590 506,357 8,309 5,978,986
</TABLE>
Proposal 5: To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending December 31, 2000.
Election results for this proposal were as follows:
<TABLE>
<CAPTION>
For Withhold Abstain Not Voted
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
14,445,688 21,098 6,456 0
</TABLE>
14
<PAGE> 15
Item 6. Exhibits and reports on Form 8-K
a. Exhibits
3.1 Amended Certificate of Incorporation
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN XTAL TECHNOLOGY, INC.
Dated: August 11, 2000 By: /s/ Donald L. Tatzin
----------------------------------
Donald L. Tatzin
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
3.1 Amended Certificate of Incorporation
27.1 Financial Data Schedule
</TABLE>
