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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24085
AMERICAN XTAL TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3031310
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
4281 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 683-5900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on
December 31, 1999 as reported on the Nasdaq National Market, was approximately
$248,780,000. Shares of common stock held by each officer, director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
As of December 31, 1999, 18,658,919 shares, $.001 par value, of the
registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant's 2000 annual
meeting of stockholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
form are incorporated by reference into Part III of this Form 10-K report.
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PART I
This report includes forward-looking statements which reflect our current
views with respect to future events and our potential financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in "Business", "Management's Discussion and Analysis
of Financial Condition and Results of Operations", and elsewhere in this report,
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
ITEM 1. BUSINESS
American Xtal Technology, Inc., or AXT designs, develops, manufactures and
distributes high-performance compound semiconductor substrates, laser-diodes,
light-emitting diodes, or LEDs and consumer and commercial products utilizing
laser-diodes and LEDs.
AXT expanded its markets in 1999 through the acquisition of Lyte Optronics,
Inc. (See note 2 to the consolidated financial statements). The Lyte Optronic's
business now operates as two separate divisions of AXT: the visible emitter
division, focusing on the manufacture of LEDs and laser-diodes, and the consumer
products division, focusing on the design and marketing of laser-pointing,
laser-alignment and LED products. The Substrate division comprises the third
operating unit of AXT.
BACKGROUND
Substrate Division:
At our substrate division, we use a proprietary vertical gradient freeze
technique, commonly referred to as "VGF," to produce high-performance compound
semiconductor substrates which are used in a variety of electronic and
opto-electronic applications such as wireless and fiber optic
telecommunications, lasers, LEDs, satellite solar cells and consumer
electronics. We primarily manufacture and sell gallium arsenide, called GaAs,
substrates. Sales of GaAs substrates accounted for approximately 80.1% of
division revenues and 56.3% of company revenues in 1999. We also manufacture and
sell indium phosphide, or InP, and germanium, or Ge, substrates and are
currently developing other high-performance compound substrates including
gallium nitride, or GaN.
Recent advances in communications and information technologies have created
a growing need for power efficient, high-performance electronic systems that
operate at very high frequencies, have increased computational and display
capabilities, and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. Silicon-based
semiconductor devices, however, have performance limitations in power efficient,
high-performance electronic applications. In addition, silicon-based
semiconductor devices currently do not possess the electrical properties
necessary to be used effectively in most opto-electronic applications such as
LEDs and lasers.
As a result of the limitations of silicon, semiconductor device
manufacturers are increasingly utilizing alternative substrates to improve the
performance of semiconductor devices or to enable new applications. These
alternative substrates may be composed of a single element, such as Ge, or
multiple elements, which may include:
- gallium,
- aluminum,
- indium,
- arsenic,
- phosphorus, and
- nitrogen.
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Substrates that consist of more than one element are commonly referred to
as "compound substrates" and include GaAs, InP, gallium phosphide (GaP) and GaN.
GaAs is currently the most widely used compound substrate. In comparison to
silicon, compound substrates have electrical properties that allow semiconductor
devices to operate at much higher speeds or at the same speed with lower power
consumption. For example, electrons move up to five times faster in GaAs than in
silicon. Compound substrates also have better opto-electronic characteristics
than silicon which allow them to convert energy into light and lasers, or to
detect light and convert light into electrical energy. The GaAs substrate market
is divided into two segments, semi-insulating and semi-conducting.
Semi-insulating GaAs substrates. The market for semi-insulating GaAs
substrates is the fastest growing segment of the GaAs market. According to
projections by Dataquest, IDC and Strategies Unlimited, the market for
semi-insulating GaAs substrates was estimated at $125 million in 1998 and is
expected to grow to approximately $400 million by the year 2002. This growth is
being driven by increasing demand for semi-insulating GaAs substrates in a
variety of power-efficient, high-performance applications, including cellular
phones, radars, satellite communication systems and direct broadcast systems.
Manufacturers integrate semi-insulating GaAs substrates into devices using
either an ion implantation or epitaxial process. Ion implantation is the process
of implanting ions directly into the semi-insulating GaAs substrate to modify
the electrical parameters of the substrate so that it can be used to manufacture
many of today's high-performance electronic devices. This process requires the
electrical parameters of the substrate to be as uniform as possible. Epitaxy, a
more recently developed process, involves the growth of layers of other
materials onto the semi-insulating GaAs substrate. While generally more
expensive than the ion implantation process, the epitaxial process enables
devices to achieve even greater performance advantages. The epitaxial process
requires that the GaAs substrate have an extremely smooth surface, few physical
imperfections, uniform electrical properties and low dislocation density, which
is a measurement of the crystalline perfection of the substrate material.
Traditionally, crystals for semi-insulating GaAs substrates for the ion
implantation and epitaxy markets have been grown using the liquid-encapsulated
czochralski, or LEC technique. The LEC technique requires a high temperature
gradient in the manufacturing process. Because the temperature gradient in the
LEC technique is high, the resulting crystals have a relatively high dislocation
density, which weakens a crystal's physical structure and increases the risk of
breakage of the GaAs substrate during device manufacturing. In addition, as
semi-insulating GaAs substrates continue to grow in size to support increasingly
complex devices, the manufacturing challenges facing the LEC technique increase.
Semi-conducting GaAs substrates. We believe that the market for
semi-conducting GaAs substrates, based on 1999 market data and annual growth
rates projected by Dataquest, IDC and Strategies Unlimited, was approximately
$90 million in 1998 and we expect that the market will continue to grow. The
market for semi-conducting GaAs substrates is being driven by increasing demand
for a number of opto-electronic applications such as LEDs and lasers, which are
incorporated into a variety of products including:
- traffic lights,
- digital versatile discs, more commonly known as DVD players,
- CD players,
- CD-ROMs,
- laser printers,
- automobile lights and
- electronic displays.
In contrast to semi-insulating GaAs substrates which undergo either an ion
implantation or epitaxial process, semi-conducting GaAs substrates only undergo
an epitaxial process. As with semi-insulating GaAs substrates, semi-conducting
GaAs substrates that undergo the epitaxial process must have a smooth surface,
few physical imperfections, uniform electrical properties and a low dislocation
density. The traditional method of growing crystals for producing
semi-conducting GaAs substrates is the Horizontal Bridgeman, or HB,
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technique. With the HB technique, the crystal is grown in a semi-cylindrical
container, which results in a semi-circular, or D-shaped, substrate. In order to
produce a round semi-conducting GaAs substrate, the HB technique requires that
the D-shaped substrate be cut into a circle, resulting in a large amount of
discarded substrate. In addition, crystals grown using the HB technique
generally have a relatively high dislocation density and less uniform electrical
properties. These and other inherent technical difficulties limit the ability of
the HB technique to be used to cost-effectively produce high-quality substrates
greater than three inches in diameter.
Other high-performance substrates. We believe that opportunities also
exist in the markets for other high-performance substrates. For example, we
believe that the markets for InP and GaP substrates, based on 1998 market data
and annual growth rates projected by Dataquest, IDC and Strategies Unlimited,
were an aggregate of approximately $150 million in 1998 and we expect that these
markets will continue to grow. Semi-insulating InP substrates are used in
power-efficient, high-performance electronic applications such as wireless and
high-bandwidth communications and semi-conducting InP substrates are used in
such applications as fiber optic communications and lasers. GaP substrates are
used by manufacturers of LEDs. The traditional method for growing crystals for
InP and GaP substrates has been the LEC, technique. In addition to compound
substrates, the market for the element Ge is developing in response to the
growing demand for solar cells in satellite communications. We believe that the
market for Ge substrates used to manufacture solar cells was approximately $60
million in 1998 and we expect that the market will continue to grow in relation
to the demand for satellites. This application requires the use of Ge substrates
which must be manufactured with few defects and minimal breakage. We believe the
further development of these markets depends on the ability of suppliers to
cost-effectively manufacture power-efficient, high-performance compound and
single-element substrates
The AXT Solution. We use a proprietary VGF technique to produce
high-performance GaAs and other substrates for use in a variety of electronic
and opto-electronic applications. We believe that our VGF technique, which we
have developed over the past 13 years, provides certain significant advantages
over traditional manufacturing methods for growing crystals used in the
production of semi-insulating and semi-conducting GaAs substrates. We believe
that we are currently the only high-volume supplier of GaAs substrates
manufactured by using the VGF technique and are positioned to become a leading
manufacturer and supplier of other compound and Ge substrates.
In the GaAs substrate market, crystals grown using our proprietary VGF
technique have a dislocation density that is significantly lower than crystals
grown using either the LEC or HB technique. As a result, we believe our GaAs
substrates have greater mechanical strength, which often results in reduced
breakage during the ion implantation and epitaxial growth processes.
Furthermore, we believe the low dislocation density of our semi-insulating and
semi-conducting GaAs substrates translates into fewer defects in the materials
layered onto the substrate during the epitaxy process. In addition,
semi-insulating GaAs substrates produced using our VGF technique have more
uniform electrical properties than LEC-produced GaAs substrates, which is
important for the ion implantation process. In the semi-conducting GaAs
substrate market, VGF-grown crystals, unlike those grown using the traditional
HB technique, can be processed into round substrates with minimal wasted
material. Using our VGF technique, we have been able to produce GaAs substrates
as large as six inches in diameter.
In addition to the GaAs substrate market, we believe we can leverage our
expertise in the VGF technique to manufacture and produce commercial volumes of
other compound and single-element substrates. In 1999, we shipped over $9
million of Ge and InP substrates to customers and qualified our wafers with many
more potential customers.
Visible Emitter Division:
The Visible Emitter division designs, develops, manufactures and sells
visible semiconductor laser-diode chips and high brightness visible
light-emitting diodes, or HBLEDs. Our laser-diode chips are currently sold
primarily into the laser pointer market. Sales of laser-diodes accounted for
approximately 85.8% of division revenues and 19.6% of company revenues in 1999.
Our laser-diodes and red, amber and yellow HBLEDs are
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built on our proprietary aluminum indium gallium phosphide, or AlInGaP material
technology. The red, amber and yellow HBLEDs are sold as wafers that are
processed into LED chips and lamps by our customers. Sales of HBLEDs accounted
for approximately 5.1% of division revenues and 1.2% of company revenues in
1999.
The advancement of the material and device technology for the LEDs made in
the last decade has resulted in increased device efficiency. LEDs with
efficiencies higher than incandescent light bulbs are commonly available. The
HBLED is a class of LED that is visible under normal sunlight. In the past,
HBLEDs were cost prohibitive in applications requiring large quantities.
However, improvements in technology have reduced the cost sufficiently to enable
the HBLEDs to be used in applications such as full color video display signs,
back lighting for LCD displays in cell phones and automobile instrument panels
and white LED illumination. Management estimates that the current HBLED market
is approximately $600 million.
In the fourth quarter of 1999, we began shipping a blue LED product in
pilot quantities. This new 470 nm aluminum indium gallium nitride, or
A1InGaN-based high brightness blue LED has approximately 1.5 milliwatt power
output at 20 milliamps. The new blue LED builds upon the company's current
offering of A1InGaP products. The blue LED product will be sold as chips to be
packaged by our customers for use in full color displays, back lighting for
cellular phones and automobile panels and general illumination lighting. We
expect that the blue LED chips will account for an increasing portion of
division and company revenues in future periods.
Consumer Products Division:
The consumer products division designs, develops, manufactures and sells
visible laser and LED products for consumer, commercial and industrial
applications. Our products utilize laser-diodes made from our GaAs substrates
and the LEDs fabricated in other AXT divisions to make premium consumer
products, alignment and targeting systems and industrial modules. Approximately
50% of sales are generated from laser pointers, 40% from laser targeting systems
and 10% from industrial products.
We sell laser pointers into the business presentation and office products
markets. We utilize 635nm laser-diodes in many of our product lines, which
contain the highest beams allowable under FDA guidelines. These pointer markets
are becoming mature in terms of the volume of shipments and have experienced
significant decreases in average selling prices during the past three years.
We also sell laser alignment systems for industrial markets such as the
garment industry. Since laser light is directed in a straight line, companies
use lasers to increase accuracy in their manufacturing operations. We supply
these companies with customized laser modules for their unique applications. In
addition, we sell laser-targeting sights for the weapons industry.
STRATEGY
Substrate Division:
Our strategy is to be the leading developer and supplier of
high-performance GaAs substrates for both the semi-insulating and
semi-conducting markets, and to continue to expand into the development and
supply of other substrates. The key elements of our strategy include:
Advance VGF technology leadership. We pioneered the commercial use of the
VGF technique and have continued to develop and enhance our technology through
substantial investments in research and development. Our efforts have led to
significant improvements in the dislocation density, mechanical strength and
uniformity of the electrical properties of GaAs substrates. We believe that our
experience and expertise in VGF technology provides us with a competitive
advantage over more recent market entrants who are utilizing variations of the
VGF technology. We intend to continue to advance our VGF technology through
continued investment in research and development and participation in certain
government sponsored research programs.
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Extend leadership in GaAs market. We are currently one of the largest
suppliers of GaAs substrates worldwide. Historically, we have been a leading
supplier of GaAs substrates in the epitaxy segment of the semi-insulating market
and in the semi-conducting market for GaAs substrates for lasers. We intend to
continue to provide high-quality, price-competitive substrates. In addition, in
the semi-insulating GaAs substrate market, we intend to leverage our
demonstrated success in the epitaxy segment to further penetrate the ion
implantation segment. In the semi-conducting GaAs substrate market, we also
intend to capitalize on our leadership to further penetrate the high-volume,
cost-sensitive LED market.
Leverage VGF technology to manufacture additional substrates. We believe
our VGF technology is a platform that we can leverage to rapidly develop and
cost-effectively manufacture additional high-quality compound substrates for
emerging applications in markets such as wireless and fiber optic
communications. For example, we have shipped InP and Ge substrates developed
using our VGF technique to customers. Unlike the more traditional methods of
growing crystals, we can use our VGF technology to grow the crystals for these
other substrates without having to make a significant investment in new capital
equipment.
Increase manufacturing capacity to target high-volume markets. We
increased our manufacturing capacity by approximately 30,000 square feet in the
fourth quarter of 1998. In addition, in June 1998, we purchased an additional
58,000 square foot facility in Fremont, California. In January 1999, we
announced the receipt of a business license for operations in Beijing, China and
the purchase of a 31,000 square foot facility in a major tax-free industrial
park in Beijing. We recently announced we have acquired an additional 31,000
square foot facility in this same industrial park in Beijing and plan to
commence production by the middle of 2000. We believe that this increased
manufacturing capacity will enable us to further lower unit production costs and
provide our high-performance substrates at competitive prices for high-volume
markets such as LEDs.
Leverage existing customer relationships. We currently sell our GaAs
substrates to over 200 customers, some of our largest include:
- EMCORE
- Hewlett Packard
- Motorola
- NEC
- Nortel
- Siemens
- Sony
- TRW
We intend to expand our past success by providing high-quality GaAs
substrates to these customers and to supply them additional substrates as their
needs develop. For example, we have shipped InP substrates to TRW, which
currently purchases a significant portion of its GaAs substrates from us. In
addition, we intend to establish alliances and joint development arrangements
with customers to develop new products, increase manufacturing efficiencies and
more effectively serve our customers' needs.
Visible Emitter Division:
Our strategy is to become a leading provider of HBLEDs for the full range
of colors, including red, yellow, amber, blue and green LEDs.
Develop high brightness AlInGaP-based red, amber and yellow-green LEDs. We
will continue to invest in research and development of AlInGaP material and
device fabrication techniques to further improve LED brightness and performance.
Develop AlInGaN-based blue and green HBLEDs. We will continue to invest in
AlInGaN material and device fabrication techniques to further improve LED
brightness and performance.
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Develop a high volume low cost manufacturing model and become the market
leader in the supply of AlInGaN-based HBLEDs. We will continue to invest in our
domestic production capability and to expand our operations in Xiamen, China to
increase capacity and to lower manufacturing costs.
Consumer Products Division:
Focus on the premium segment of the laser pointer market. We will continue
to manufacture and sell laser-pointing devices primarily to the middle to
premium price segments of the marketplace. An agreement with the 3M Corporation,
to exclusively distribute and market premium laser pointers to the office
products retailers, has solidified our position in this important market
segment.
Develop proprietary new laser and LED-based consumer products. We are
designing and developing new visible laser and LED products that capitalize on
our visible laser and LED technologies.
We have announced that we expect to introduce a new home security device in
the second quarter of 2000 that guides people out of a fire with three lasers,
named Safe Escape. Most home fires occur late at night and wake people from a
deep sleep. After breathing carbon monoxide and waking to the panic of a fire,
it is common for even the most athletic individuals to have difficulty finding
their way out of their own homes.
Safe escape activates based on the sound of a smoke detector and projects
three bright and safe laser arrows to the ground that cut through smoke and
guide people to a safe exit. Safe Escape utilizes digital sound activation
technology to listen for the sound of a smoke detector while discriminating
against other common sounds.
Another new product we are introducing in the first quarter of 2000 is our
LED flashlight called MiniBrite, which is our first product utilizing super
bright LEDs. Offered in five extremely bright colors, this product can be used
as a mini flashlight that attaches to a key chain. This relatively low cost
product has an LED that we believe will last up to ten years of constant use.
Establish relationships with key Asian suppliers. We are reducing our
dependence on U.S. based manufacturing and creating alliances with quality
oriented Asian manufacturers. This direction will allow us to reduce labor,
overhead and material costs while focusing attention on developing and marketing
new products.
CUSTOMERS
In 1999, our top ten customers accounted for 36.1% of our total revenues.
No customer accounted for more than 10.0% of our total revenues in 1997, 1998
and 1999. In 1997, 1998, and 1999, our five largest customers accounted for
20.4% and 27.9% and 22.9%, respectively, of our total revenues. Generally, we do
not have long-term or other non-cancelable commitments from our customers and
usually sell products pursuant to customer purchase orders. The loss of any
major customer could have a material adverse effect on our business and
operating results.
We have historically entered into significant contracts with a number of
government agencies and customers for the development of certain products. For
more information regarding our development efforts, see "Research and
Development."
TECHNOLOGY
Substrate Division:
AXT's VGF technique. Our proprietary VGF technique produces high-quality
crystals from which we produce high-performance compound and single-element
substrates for use in a variety of electronic and opto-electronic applications.
Our VGF technique is designed to control the crystal-growth process with
minimal temperature variation. Unlike traditional techniques, our VGF technique
places the hot GaAs melt above the cool crystal, thereby reducing the turbulence
of the GaAs melt which results when the melt and crystal are inverted. The
temperature gradient between the melt and the crystal in the VGF technique is
significantly lower than in
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traditional techniques. These aspects of the VGF technique enable us to grow
crystals that have a relatively low dislocation density and high uniformity. One
of the benefits of these characteristics is that the crystal, and the substrate
into which the crystal is manufactured, are mechanically strong. The mechanical
strength often results in substrates with lower breakage rates during a
customer's manufacturing process.
Under the VGF technique, the GaAs melt and growing crystal are contained in
a closed chamber. A number of benefits result from the use of this closed
system. Because the VGF system is sealed and the crystal growth is isolated,
both semi-insulating and semi-conducting crystals can be grown in the same
system without the time consuming and expensive process of completely
reconfiguring the system. The closed system isolates the crystal from the
outside environment during growth and significantly reduces potential
contamination of the crystal by impurities. The closed system also allows for
more precise control of the gallium-to-arsenic ratio, which results in better
consistency and uniformity of the crystals. Therefore, crystals grown using the
VGF technique are consistently of a high quality. In addition, the use of
cylindrical crucibles, which are sized to meet a customer's requirements,
enables us to produce circular substrates with a minimum amount of discarded
material.
The VGF technique is highly automated and the temperature gradient is
controlled electronically rather than by physically moving the crystal or
furnace. As a result, there is no physical movement to disturb the sensitive
crystal. The entire crystal growth process is run under computer control with
minimal operator intervention. A single operator can supervise the control of
many VGF furnaces which results in significant cost savings.
We believe the VGF technology is a platform, which we can leverage to
rapidly develop and cost-effectively manufacture additional high-quality
substrates. Unlike the more traditional methods of growing crystals, we can use
the VGF technology to grow crystals from these other substrates without having
to make a significant investment in new capital equipment. For example, we use
the proprietary VGF technique to manufacture InP and Ge substrates.
VGF compared to traditional techniques for producing GaAs substrates. We
believe our proprietary VGF technique provides significant advantages over the
traditional crystal growth techniques. The LEC technique is the traditional
method for producing semi-insulating GaAs substrates. Unlike the VGF technique,
the LEC technique is designed so that the hotter GaAs melt is located beneath
the cooler crystal, which results in greater turbulence in the melt. The LEC
technique requires a temperature gradient between the GaAs melt and the cool
crystal, which is approximately 50 to 200 times higher than the temperature
gradient of the VGF technique. The turbulence and the high temperature gradient
cause LEC-grown crystals to have a higher dislocation density than VGF-grown
crystals. This characteristic results in a higher rate of breakage of the
LEC-developed substrate during the device manufacturing process. In addition,
the LEC technique is essentially an open process whereby the melt and growing
crystal are exposed to the environment for the entire duration of the crystal
growth process. This exposure results in greater propensity for impurity
contamination as well as difficulty in controlling the ratio of gallium to
arsenic. Because the crystal is not contained in a crucible, fluctuations in
temperature cause the diameter of the crystal to vary. Thus, to ensure proper
size with the LEC technique, the crystal must be grown significantly larger than
the desired size of the resulting substrate. During the LEC process the crystal
is grown by dipping a seed crystal through molten boric oxide into a melt and
slowly pulling the seed up into the cool zone above the boric oxide where the
crystal hardens. As the GaAs melt is consumed, the crucible containing the
remaining liquid must be raised in coordination with the pulling of the crystal.
These moving parts and the relative complexity of the system result in higher
maintenance costs. Unlike the VGF technique, the LEC technique uses large,
complex electro-mechanical systems that are expensive to acquire and require
highly skilled personnel to operate.
The HB technique is the traditional method for producing semi-conducting
GaAs substrates. The HB technique holds the GaAs melt in a semi-cylindrical
"boat." Because of the semi-cylindrical shape of the boat, semi-conducting GaAs
crystals grown using the HB technique have a semi-circular cross-section. As a
result of this semi-circular shape, more crystal material must be discarded to
cut the crystal ingot into a cylindrical shape from which round substrates can
be produced. Furthermore, crystals grown using the HB technique have a higher
dislocation density than VGF-grown crystals. These and other inherent technical
difficulties
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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.
Visible Emitter Division:
Our material technology utilizes a metal-organic chemical vapor deposition,
or MOCVD technique to synthesize compound semiconductor thin films on substrates
such as GaAs and sapphire (Al2O3). The thin film, which consists of multiple
layers, is actually where the LED or laser-diode devices are formed. The device
performance is closely related to the design of the layered structure and how it
is synthesized in the MOCVD process. The same layered structure can be made
under different process conditions and result in a different device performance.
The MOCVD process is a chemical reaction between metal-organic material,
such as trimethylgallium (TMGa), and hydride, such as arsine (AsH3). The
chemical reaction takes place on the surface of a heated substrate like GaAs.
When TMGa and AsH3 react on a heated GaAs substrate, a thin GaAs film is then
deposited on the GaAs substrate. In theory, many different compounds can be
deposited this way such as aluminum gallium arsenide (AlGaAs), indium gallium
arsenide phosphide InGaAsP, and aluminum indium gallium phosphide (AlInGaP).
Because it is a relatively low cost production process, MOCVD reactors have
become the choice of the opto-electronic industry for fabricating thin film
devices such as LEDs, laser-diodes and high-speed electronic circuits.
Commercial MOCVD reactors are now available from more than one vendor. These
reactors usually can process multiple wafers and some reactors can even do more
than 35 wafers per run. In general, the larger the size of the reactor, the more
economic the production cost. However, larger reactor geometry also presents
higher technical challenges for wafer uniformity. The visible emitter division
currently has several multi-wafer MOCVD reactors in operation. Proprietary
processes have been developed to grow high quality AlInGaP thin films on GaAs
and aluminum indium gallium nitride (AlInGaN) thin films on sapphire. The
devices fabricated from these materials have demonstrated performance comparable
to the high end products on the market.
Consumer Products Division:
Our laser pointers, targeting systems and industrial products all utilize a
type of laser module. A laser module usually consists of a laser-diode,
collimating optics or lenses, a tuned control circuit and a protective brass or
steel housing. Often, an additional optic is included to shape the projected dot
into a line, cross or some other pattern. Our visible emitter division supplies
the laser-diode chips and our consumer products division adds automatic power
control circuitry, a collimating lens and assembles the product. Our lenses
often use a proprietary active alignment process to align the beam axis to the
housing. Pattern generating optics are then added where required.
We are currently developing digital control circuits for visible laser
products to control lasers directly from small micro controllers.
PRODUCTS
Substrate Division:
We currently sell the compound substrates GaAs and InP, and the
single-element substrate Ge. We supply various sizes of substrates in 2, 3, 4,
and 6 square inches according to our customers' specifications and work closely
with our customers to ensure that we manufacture substrates to each customer's
particular specifications.
8
<PAGE> 10
The table below sets forth our 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 2,3,4 - 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>
Visible Emitter Division:
We sell laser-diodes primarily for the pointer industry and we sell LED
products for use in displays, traffic lights, back lighting for a variety of
products and for general illumination purposes. Both the laser diodes and LEDs
must meet customer specifications.
Consumer Products Division:
We sell laser pointers, laser alignment and targeting systems and
industrial module products utilizing laser-diodes and LEDs manufactured by our
visible emitter division. We offer 15 products within our laser pointer line
primarily directed at the office products and business presentation markets. We
offer approximately twenty products in our laser alignment line including
laser-targeting sights for training purposes. In our industrial module business,
we offer laser modules for the garment industry and other industrial uses such
as levelers. Our industrial products are sold within the OEM markets.
We have announced two new products for shipment in the first half of 2000.
Our Safe Escape product, which utilizes lasers to guide people from a burning
house or building, is expected to ship in the second quarter of 2000. Our
MiniBrite LED flashlight, which is a super bright LED personal light, began
shipping in the first quarter of 2000.
MANUFACTURING
Substrate Division:
Our manufacturing operations, which include crystal growth, slicing,
testing, edge grinding, polishing, inspecting and packaging the substrates for
shipment, are located at our headquarters in Fremont, California. Our Fremont
facilities are ISO 9002 certified. Many of our manufacturing operations are
computer monitored or controlled, enhancing reliability and yield.
We depend on a single or limited number of suppliers for certain critical
materials, including gallium, for use in the production of substrates. We
generally purchase these materials through standard purchase orders and not
pursuant to long-term supply contracts. We seek to maintain sufficient levels of
inventory for certain materials to guard against interruptions in supply and to
meet our near term needs. To date, we have been able to obtain sufficient
supplies of materials in a timely manner. However, a stoppage or delay in
supply, receipt of defective or contaminated materials, or increases in the
pricing of such raw materials could materially adversely affect our operating
results.
In the third quarter of 1998, we completed the expansion of our
approximately 50,000 square feet facility located in Fremont, California by
approximately 30,000 square feet to meet anticipated production needs
9
<PAGE> 11
through 1999. Because we currently perform all steps in our manufacturing
process at our Fremont facility, any interruption resulting from earthquake,
fire, equipment failures or other causes would have a material adverse effect on
our results of operations. For more information regarding the risks relating to
our manufacturing process and our new facility, see "Factors Affecting Future
Results -- If we do not achieve acceptable yields of crystals and the successful
and timely production of substrates, the shipment of our products would be
delayed and our business adversely affected," and "Factors Affecting Future
Results -- We are subject to additional risks as a result of the recent
completion of a new manufacturing facility," respectively.
In connection with further expanding our manufacturing capacity, we
purchased an additional 58,000 square foot facility in Fremont, California in
June 1998 and a 31,000 square foot facility in Beijing, China in 1998. We have
recently acquired an additional 31,000 square foot facility in Beijing and plan
to commence production by the middle of 2000.
Visible Emitter Division:
Our visible emitter division currently operates in three facilities, two in
Southern California and one in China. Our office and device production is
located in Monterey Park, California, our MOCVD wafer production is located in
El Monte, California and most of our laser chip assembly is done in Xiamen,
China. We purchased an additional 27,000 square foot facility in El Monte,
California in late 1998. This new facility will be used primarily for MOCVD
expansion. Improvements are being planned and we expect the facility to be fully
functional by the second half of 2000. This additional space will allow us to
more than double our LED production.
MOCVD equipment currently has about a six to nine month lead-time for
delivery and is supplied by two major companies. Our substrate materials or raw
wafers are primarily purchased from our substrate division based upon six to ten
week forecasts of production.
We are currently developing processes and procedures that comply with ISO
standards and we are working toward ISO certification.
Consumer Products Division:
Our consumer products division operates a 15,000 square foot manufacturing
facility in Torrance, California. This facility is designed to optimize the
product flow and minimize material handling. The major manufacturing processes
include receiving and testing of raw materials, storage of raw material
inventories, product assembly, inspection of finished products, finished goods
storage and shipping. A number of our products, including laser pointers, are
being sourced in Asia as we move to reduce product costs and manufacturing
overhead. We have established quality control procedures and personnel in Asia
to support this function. We currently have several sources for assembly of our
pointers located in China.
We are currently developing processes and procedures that comply with ISO
standards and we anticipate our production facilities will be ISO certified by
the end of 2000.
SALES AND MARKETING
Substrate Division:
We sell our products worldwide through our direct sales force as well as
through independent international sales representatives. Our direct sales force
consists of sales engineers who are knowledgeable in the manufacturing and use
of compound and single-element substrates. Our direct sales force operates out
of our corporate office in Fremont, California and our Japanese subsidiary. Our
sales engineers work with customers during all stages of the substrate
manufacturing process, from developing the precise composition of the substrate
through manufacturing and processing the substrate to the customer's exact
specifications. We believe that maintaining a close relationship with customers
and providing customers with ongoing technical support improves customer
satisfaction and will provide us with a competitive advantage in selling other
substrates to our customers.
10
<PAGE> 12
International sales, excluding Canada, as a percentage of total revenues in
1997, 1998, and 1999 were 26.8%, 29.6%, and 45.1%, respectively. In addition to
our direct sales force in Japan, we have independent sales representatives in
France, Japan, South Korea, Taiwan and the United Kingdom. Except for sales by
our Japanese subsidiary, which are denominated in yen, we receive all payments
for products in U.S. dollars.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, publish technical articles,
conduct marketing programs and participate in industry trade shows and
conferences. For more information regarding the risks relating to our
international operations, see "Factors Affecting Future Results -- We derive a
significant portion of our revenues from international sales and our ability to
sustain and increase our international sales involve significant risks".
Visible Emitter Division:
The majority of our laser-diode chips are sold in China and elsewhere in
Asia. We primarily rely upon independent sales representatives for the sale of
laser-diodes in China and in Asia. We also conduct some sales in Asia on a
direct basis.
We anticipate the new LED product line to be introduced during 2000 will
initially be sold into lamp packaging manufacturers in Taiwan and China. We
intend to sell products through independent local sales representatives and our
direct sales force. We also intend to make subsequent sales of our HBLEDs, in
particular our blue LEDs, into U.S. and European markets. We anticipate
utilizing our own direct sales force for this sales effort.
Consumer Products Division:
We currently sell our products through a combination of our own direct
sales force and independent sales representatives. Our direct sales force
consists of professionals experienced in all phases of major account sales
within the consumer products industry. Independent sales representatives are
primarily used for our sighting and alignment products with over 45
representatives covering the majority of the United States. The vast majority of
our sales are to customers in the United States.
For our international sales of our consumer products, we utilize
independent agents and expect to increase our reliance on independent agents in
future periods. We also participate in major trade shows and fund cooperative
customer advertising to promote our products to the end users.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on developing new
substrates and LEDs and improving the performance of existing products and
processes, and reducing costs in the manufacturing process. We have assembled a
multi-disciplinary team of highly skilled scientists, engineers and technicians
to meet our research and development objectives. Among other projects, we have
research and development projects involving the development of GaN and high
purity GaAs epitaxy substrates.
Our internally-funded research and development expenses in 1997, 1998, and
1999 were $1.3 million, $2.7 million, and $3.1 million respectively.
In addition to internally-funded research and development, we have also
funded a significant portion of our research and development efforts through
contracts with the U.S. government and customer funded research projects. Under
our contracts, we retain rights to the VGF and wafer fabrication technology
which we develop. The U.S. government retains the rights to utilize the
technologies we develop for government purposes only. In 1997, 1998, and 1999,
we received $2.3 million, $1.8 million, and $1.6 million, respectively, from
U.S. government agencies and customer funded research contracts. Over the same
periods, we expensed $1.5 million, $.8 million, and $1 million respectively of
externally-funded research and development proceeds. In future periods, we
expect our government contracts will significantly decline as we shift to
internally-funded research and development projects.
11
<PAGE> 13
Our total internally-funded and externally-funded research and development
costs for 1997, 1998, and 1999 were $2.8 million, $3.5 million, and $4.1 million
respectively.
We expect to continue to expend substantial resources on research and
development. The development of compound and single-element substrates and LEDs
is highly complex. There can be no assurance that we will successfully develop
and introduce new products in a timely and cost-effective manner or that our
development efforts will successfully permit our products to meet changing
market demands. For more information regarding the risks relating to our
research and development efforts, see "Factors Affecting Future Results -- We
must effectively respond to rapid technological changes by continually
introducing new products that achieve broad market acceptance."
COMPETITION
Substrate Division:
The markets for GaAs substrates are intensely competitive. Our principal
competitors in the market for semi-insulating GaAs substrates currently include:
- Freiberger;
- Hitachi Cable;
- Litton Airtron; and
- Sumitomo Electric.
In the semi-conducting GaAs substrate market, our principal competitors
currently are Sumitomo Electric and Hitachi Cable. We also face competition from
manufacturers that produce GaAs substrates for their own use. In addition, we
face competition from companies, such as IBM, that are actively developing
alternative materials to GaAs. As we enter new markets, such as the Ge and InP
substrate markets, we expect to face competitive risks similar to those for its
GaAs substrates. Many of our competitors and potential competitors have been in
the business longer than us and have greater manufacturing experience, more
established technologies than our VGF technique, broader name recognition and
significantly greater financial, technical and marketing resources than us. We
cannot assure you that we will compete successfully against these competitors in
the future or that our competitors or potential competitors will not develop
enhancements to the LEC, HB or VGF techniques that will offer price and
performance features that are superior to ours. Increased competitive pressure
could also lead to intensified price-based competition, resulting in lower
prices and margins, which would materially adversely affect our business,
financial condition and results of operations.
We believe that the primary competitive factors in the markets in which our
products compete are:
- quality,
- price,
- performance,
- customer support and satisfaction, and
- customer commitment to competing technologies.
Our ability to compete in target markets also depends on factors such as:
- the timing and success of the development and introduction of new
products by us and our competitors,
- the availability of adequate sources of raw materials, and
- protection of our products by effective utilization of intellectual
property laws and general economic conditions.
12
<PAGE> 14
In order to remain competitive, we believe we must invest significant
resources in developing new substrates and in maintaining customer satisfaction
worldwide.
Visible Emitter Division:
The LED industry is very competitive. LED manufacturers in Taiwan and China
have a competitive pricing advantage due to low overhead and small research and
development investment. In order to remain competitive, we intend to continue to
invest technological advances for our products. Currently, our primary
competitors include:
- Cree Research
- Hewlett Packard
- Nichia Chemicals
- Toyoda Gosei
- United Epitaxy
- Epistar
Many of our competitors or potential competitors have been in business
longer than we have and have greater manufacturing experience, broader name
recognition and significantly greater financial, technical and marketing
resources than we do. In addition, our Asian competitors may have greater
success in Asian markets.
Consumer Products Division:
The pointer market has experienced a reduction in competition due to market
and price erosion for laser-diodes and finished products. We are at risk from
direct competition with Asian sources. In many instances our products are
purchased directly from Asian companies and repackaged under our product brands.
One risk factor for the consumer products division is our customers are able to
buy similar products from the same or other Asian sources at low cost, thus
eroding our profit margins. We offer many advantages such as domestic
warranties, FDA required specifications, shorter delivery times and special
marketing programs. However, we are at risk from lower cost products. Our
principal competitors in the pointer market include:
- Mega Power
- Transverse
- Opcom
The targeting sight market has seen an increase in competitors over the past
twelve months and our principal competitors include:
- Alpec
- Clear Line
- Beam Shot
We believe that the primary competitive factors for which our products compete
are:
- Quality
- Price
- Product performance
- Customer service
- Customer satisfaction
13
<PAGE> 15
There can be no assurance that any of our products in any of our divisions will
continue to compete favorably or that we will be successful in the face of
competition from existing competitors or new companies entering our target
markets. If we fail to compete successfully, our financial condition and results
of operation would be materially adversely affected.
PROTECTION OF OUR INTELLECTUAL PROPERTY
Our success and competitive position for our VGF technique depends
materially on our ability to maintain trade secrets, patents and other
intellectual property protections. To protect our trade secrets, we take certain
measures to ensure their secrecy, such as executing non-disclosure agreements
with our employees, customers and suppliers. Despite our efforts, we cannot
assure you that others will not gain access to our trade secrets, or that we can
meaningfully protect our intellectual property. In addition, effective trade
secret protection may be unavailable or limited in certain foreign countries.
Although we intend to protect our rights vigorously, these measures may not be
successful.
We rely primarily on the technical and creative ability of our personnel,
rather than on patents, to maintain our competitive position. To date, we have
been issued one U.S. patent, which relates to our VGF technique, and have two
patent applications, one of which relates to our VGF technique, pending. We have
one pending application for a Japanese patent but no issued foreign patents.
There can be no assurance that our pending applications or any future U.S. or
foreign patent applications will be approved, that any issued patents will
protect our intellectual property or will not be challenged by third parties, or
that the patents of others will not have an adverse effect on our ability to do
business. Moreover, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as the laws of the United
States. We believe that, due to the rapid pace of technological innovation in
the GaAs and other substrate markets, our ability to establish and maintain a
position of technology leadership in the industry depends more on the skills of
our development personnel than upon the legal protections afforded our existing
technologies.
Although there are currently no pending material lawsuits against us or
unresolved notices that we are infringing intellectual property rights of
others, we may be notified in the future that we are infringing the patent
and/or other intellectual property rights of others. Litigation may be necessary
in the future to enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. We cannot assure you that we would prevail in any future litigation.
Any litigation, whether or not determined in our favor or settled by us, would
be costly and would divert the efforts and attention of our management and
technical personnel from normal business operations, which would have a material
adverse effect on our business, and results of operations. Adverse
determinations in litigation could result in the loss of our proprietary rights,
subject us to significant liabilities, require us to seek licenses from third
parties or prevent us from licensing our technology, any of which could have a
material adverse effect on our business and results of operations.
ENVIRONMENTAL REGULATIONS
We are subject to federal, state and local laws and regulations concerning
the use, storage, handling, generation, treatment, emission, release, discharge
and disposal of certain materials used in our research and development and
production operations, as well as laws and regulations concerning environmental
remediation and employee health and safety. The growing of crystals and the
production of substrates involve the use of certain hazardous raw materials,
including, but not limited to, arsenic. We cannot guarantee that our control
systems will be successful in preventing a release of these materials or other
adverse environmental conditions. Any release or other failure to comply with
present or future environmental laws and regulations could result in the
imposition of significant fines against us, the suspension of production or a
cessation of operations. In addition, there can be no assurance that existing or
future changes in laws or regulations will not require expenditures or
liabilities to be incurred by us, or in restrictions on our operations.
We are cooperating with Cal-OSHA in an investigation regarding higher than
permissible levels of potentially hazardous materials in certain areas of the
manufacturing facility in Fremont, California. The Company has put in place
engineering, administrative and personnel protective equipment programs to
14
<PAGE> 16
address this issue. No accidents or injuries resulted from this matter and the
facility is in full operation. Civil and criminal charges can be imposed by
Cal-OSHA, although the current focus is on civil enforcement.
BACKLOG
We include in backlog only those customer orders which have been accepted
by us and which shipment is generally expected within 12 months. As of December
31, 1999, our backlog was approximately $16.6 million.
Backlog can fluctuate greatly based upon, among other matters, the timing
of orders. In addition, purchase orders in our backlog are subject to changes in
delivery schedules or to reduction in size or cancellation at the option of the
purchaser without significant penalty. We have experienced, and may continue to
experience, cancellation, reduction and rescheduled delivery of orders in our
backlog. Our backlog may vary significantly from time to time depending upon the
level of capacity available to satisfy unfilled orders. Accordingly, although
useful for scheduling production, backlog as of any particular date may not be a
reliable indicator of sales for any future period.
EMPLOYEES
As of December 31, 1999, we had 888 full-time employees, of whom 749 were
principally engaged in manufacturing, 112 in sales, general and administration
and 27 in research and development. Of these employees, 554 are located in the
US and 326 at our facilities in China. Our success is in part dependent on our
ability to attract and retain highly skilled workers, who are in high demand in
the Silicon Valley area. None of our employees is represented by a union and we
have never experienced a work stoppage. Management considers its relations with
its employees to be good.
EXECUTIVE OFFICERS
As of December 31, 1999, our executive officers and directors were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Morris S. Young, Ph.D 54 Chairman of the Board of Directors, President and Chief
Executive Officer
Theodore S. Young, Ph.D 59 Senior Vice President, Marketing and Director
Davis Zhang 43 Senior Vice President, Production
Gary S. Young 56 Vice President, Sales
Guy D. Atwood 57 Vice President and Chief Financial Officer, Treasurer and
Secretary
Xiao Gordon Liu 35 Vice President, Engineering and Development
Jesse Chen (1)(2) 41 Director
B.J. Moore (1)(2) 63 Director
Donald L. Tatzin (1)(2) 47 Director
</TABLE>
- ---------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Morris S. Young, Ph.D. co-founded AXT in 1986 and has served as our
chairman of the board of directors since February 1998 and president and chief
executive officer, as well as a director since 1989. Dr. Young holds a B.S. in
Metallurgical Engineering from Chengkung University, Taiwan, an M.S. in
Metallurgy from Syracuse University and a Ph.D. in Metallurgy from Polytechnic
University.
Theodore S. Young, Ph.D. co-founded AXT in 1986 and has served as our
senior Vice President, Marketing since 1989 and served as President from 1987 to
1989. He has also acted as a director since our inception, including as the
Chairman of the Board of Directors from January 1987 to January 1998. Dr. Young
holds a B.S. in Physics from National Taiwan University, an M.S. in Geophysics
from the University of Alaska and a Ph.D. in Plasma Physics from the
Massachusetts Institute of Technology.
15
<PAGE> 17
Davis Zhang co-founded AXT in 1986 and has served as our senior Vice
President, Production since January 1994. From 1987 to 1993, Mr. Zhang served as
our Senior Production Manager. Mr. Zhang holds a B.S. in Mechanical Engineering
from Northern Communication University, Beijing, China.
Gary S. Young joined us in 1991 and has served as our Vice President, Sales
since July 1993. From 1991 to 1993, Mr. Young served as our Sales and
Administrative Manager. From 1973 to 1991, Mr. Young worked in various
capacities with several companies, including as a Systems Engineer for IBM and
as a software engineer for Boole & Babbage, Inc., an independent software
vendor. Mr. Young holds a B.S. in Mathematics from National Taiwan Normal
University, an M.A. in Mathematics from Northeast Missouri State University and
an M.S. in Operations Research from Purdue University.
Guy D. Atwood joined us in August 1997 as our Vice President and Chief
Financial Officer and has served as our Treasurer and Secretary since February
1998. From 1991 to August 1997, Mr. Atwood served at various times as Chief
Financial Officer for several private companies, most recently the alumni
association for the University of California at Berkeley and AvenuSoftware, a
film and video software company, of which he was also its President. Mr. Atwood
was self-employed as a financial consultant from 1994 to 1995, and also provided
services in such capacity to us from June to September 1995. Mr. Atwood holds a
B.S. in Accounting from the University of California at Berkeley.
Xiao Gordon Liu joined us in 1995 as Senior Engineer and was promoted to
Vice President, Engineering and Development in November 1998. Prior to joining
us, Mr. Liu was a postdoctoral fellow and associate specialist at University of
California at Berkeley and a research associate at the University of Lund,
Sweden. Mr. Liu holds a Ph.D in Physics from the University of Lund, Sweden and
has published more than 30 scientific papers.
Jesse Chen has served as a director of AXT since February 1998. Since May
1997, Mr. Chen has served as a Managing Director of Maton Venture, an investment
company. Prior to that, Mr. Chen co-founded BusLogic, Inc., a computer
peripherals company and served as its Chief Executive Officer from 1990 to 1996.
Mr. Chen serves on the Board of Directors of several private companies. Mr. Chen
has a B.S. degree in Aeronautical Engineering from Chenkung University, Taiwan
and an M.S. in Electrical Engineering from Loyola Marymount University.
B.J. Moore has served as a director of AXT since February 1998. Since 1991,
Mr. Moore has been self-employed as a consultant and has served as a director to
several technology-based companies. Mr. Moore currently serves on the Board of
Directors for Adaptec, Inc., a computer peripherals company and Dionex
Corporation, an ion chromatography systems company, as well as several private
companies. From 1986 to 1991, Mr. Moore served as President and Chief Executive
Officer of Outlook Technology, an electronics test equipment company. Mr. Moore
holds a B.S. and an M.S. degree in Electrical Engineering from the University of
Tennessee.
Donald L. Tatzin has served as a director of AXT since February 1998. Since
1993, Mr. Tatzin has served as Executive Vice President of Showboat, Inc., a
gaming company. In addition, Mr. Tatzin served as a director for Sydney Harbour
Casino, an Australian gaming company from 1995 to 1996 and as its Chief
Executive Officer from April to October 1996. Prior to that, Mr. Tatzin was a
director and consultant with Arthur D. Little, Inc. from 1976 to 1993. Mr.
Tatzin holds an S.B. in Economics and an S.B. and masters degrees in City
Planning from the Massachusetts Institute of Technology and an M.S. in Economics
from Australian National University.
ITEM 2. PROPERTIES
In the third quarter of 1998, we completed the expansion of our
approximately 50,000 square feet facility located in Fremont, California by
approximately 30,000 square feet to meet anticipated production needs through
1999. Additionally, in connection with further expanding our manufacturing
capacity, we purchased an additional 58,000 square foot facility in Fremont,
California and a 31,000 square foot facility in Beijing, China in 1998.
16
<PAGE> 18
The principal operating company properties are included on the following
table.
We consider each facility to be in good operating condition and adequate
for its present use, and believe that each facility has sufficient plant
capacity to meet its current and anticipated operating requirements.
<TABLE>
<CAPTION>
SQUARE FEET
---------------
LOCATION PROPERTY DESCRIPTION OWNED LEASED
- -------- ----------------------------- ------ ------
<S> <C> <C> <C>
Fremont, CA Production and Administration 58,000
Fremont, CA Production 80,000
Beijing, China Production 31,000
Monterey Park, CA Production and Administration 22,000
El Monte, CA Production 27,000
El Monte, CA Production 7,000
Xiamen, China Production 14,000
Torrance, CA Administration 7,000
Torrance, CA Production 15,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AXT common stock has been trading publicly on the Nasdaq National Market
under the symbol "AXTI" since May 20, 1998, the date we consummated our initial
public offering. The following table sets forth, for the periods indicated, the
range of quarterly high and low closing sales prices for AXT's common stock on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1998
January 1, 1998 through May 19, 1998...................... Not Applicable
May 20, 1998 through June 30, 1998........................ $15.000 $10.125
Third Quarter ended September 30, 1998.................... $15.500 $ 7.000
Fourth Quarter ended December 31, 1998.................... $10.813 $ 6.000
Fiscal 1999
First Quarter ended March 31, 1999........................ $22.500 $ 9.063
Second Quarter ended June 30, 1999........................ $27.000 $19.375
Third Quarter ended September 30, 1999.................... $35.125 $17.750
Fourth Quarter ended December 31, 1999.................... $23.875 $12.063
</TABLE>
As of December 31, 1999, there were 164 holders of record of our common
stock. Because many shares of AXT's common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders.
We have never paid or declared any cash dividends on our common stock and
do not anticipate paying cash dividends in the foreseeable future.
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<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995(3) 1996(3) 1997(3) 1998(2) 1999(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $24,117 $31,272 $43,313 $61,314 $81,521
Cost of revenues............................. 14,773 21,037 29,650 38,949 57,369
------- ------- ------- ------- -------
Gross profit................................. 9,344 10,235 13,663 22,365 24,152
Operating expenses:
Selling, general, and administrative......... 4,774 5,534 9,921 11,538 14,016
Research and development..................... 448 592 1,289 2,684 3,086
Acquisition costs............................ -- -- -- -- 2,810
------- ------- ------- ------- -------
Total operating expenses........... 5,222 6,126 11,210 14,222 19,912
Income from operations....................... 4,122 4,109 2,453 8,143 4,240
Interest expense............................. (12) (170) (793) (1,481) (2,150)
Interest and other income (expense).......... 282 (72) (57) 598 729
------- ------- ------- ------- -------
Income before provision for income taxes..... 4,392 3,867 1,603 7,260 2,819
Provision for income taxes................... 1,599 1,516 783 2,976 2,139
------- ------- ------- ------- -------
Income before extraordinary item............. 2,793 2,351 820 4,284 680
Extraordinary item -- early extinguishment of
debt....................................... -- -- -- -- 508
------- ------- ------- ------- -------
Net income................................... $ 2,793 $ 2,351 $ 820 $ 4,284 $ 172
======= ======= ======= ======= =======
Basic net income (loss) per share:
Income before extraordinary item............. $ 0.96 $ 0.65 $ 0.22 $ 0.27 $ 0.04
Extraordinary item........................... -- -- -- -- (0.03)
Net income................................... 0.96 0.65 0.22 0.27 0.01
Diluted net income (loss) per share:
Income before extraordinary item............. $ 0.23 $ 0.19 $ 0.06 $ 0.26 $ 0.03
Extraordinary item........................... -- -- -- -- (0.03)
Net income................................... 0.23 0.19 0.06 0.26 $ --
Shares used in basic net income per share
calculations............................... 2,921 3,595 3,697 16,076 18,655
Shares used in diluted net income per share
calculations............................... 11,913 12,524 13,598 16,325 19,771
</TABLE>
- ---------------
(1) Includes Substrates, Consumer Products, and Visible Emitters for the full
year.
(2) Includes Substrates and Consumer Products for the full year, and Visible
Emitters for the three months ended December 31, 1998.
(3) Includes Substrates and Consumer Products only.
18
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995(2) 1996(2) 1997(2) 1998(1) 1999(1)
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments.............................. $ 1,121 $ 1,171 $ 3,199 $ 16,438 $ 6,062
Working capital............................ 5,144 6,866 12,612 41,644 40,462
Total assets............................... 15,067 23,178 37,796 102,283 115,762
Long-term debt, net of current portion..... 2,350 5,833 7,728 19,842 18,501
Stockholders' equity....................... 7,869 10,237 17,387 61,164 62,459
</TABLE>
- ---------------
(1) Includes Substrates, Consumer Products, and Visible Emitters
(2) Includes Substrates and Consumer Products
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the "Factors Affecting Future Results" and
elsewhere in this report that could cause actual results to differ materially
from historical results or those anticipated. In this report, the words
"anticipates," "believes," "expects," "future," "intends," and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
RESULTS OF OPERATIONS
Overview
We use a proprietary VGF technique to produce high-performance compound
semiconductor substrates for use in a variety of electronic and opto-electronic
applications. We were founded in 1986 and commenced substrate sales in 1990. We
currently sell GaAs, InP and GaN substrates to manufacturers of semiconductor
devices for use in applications such as wireless and fiber optic
telecommunications, lasers, LEDs, and consumer electronics. We also sell Ge
substrates for use in satellite solar cells.
On May 28, 1999, we completed our acquisition of Lyte Optronics, Inc., a
Nevada corporation, with operations in Southern California and The People's
Republic of China. Lyte Optronics is a manufacturer of LED's and laser-diodes.
Lyte Optronics also designs and markets laser-pointing and alignment products
for the consumer, commercial and industrial markets. Lyte Optronics is operated
as two separate divisions of AXT: the visible emitter division, focusing on the
manufacture of LED's and laser diodes, and the consumer products division,
focusing on the design and marketing of laser-pointing and alignment products.
Of the approximately 380 employees of Lyte Optronics retained after the
acquisition about 320 are with the visible emitter division, with about 200
employees located in China.
Under the terms of the acquisition, we issued approximately 2,363,000
shares of common stock and 983,000 shares of preferred stock with a $4 million
liquidation preference over common stock, in exchange for all of the issued and
outstanding shares of capital stock of Lyte Optronics. Ten percent of the shares
issuable to the Lyte Optronics' shareholders will be held in escrow for up to
one year to satisfy any claims that we may bring under the agreement during that
period. The transaction was accounted for as a pooling of interests. In
connection with the acquisition, we reported a charge of $2.8 million in the
second quarter of 1999 to reflect transaction costs and other one-time charges
incurred in connection with the acquisition.
We have been profitable on an annual basis since 1990. Our total revenues
were $43.3 million for the year ended December 31, 1997, $61.3 million for the
year ended December 31, 1998 and $81.5 million for the year ended December 31,
1999. Total revenues primarily consist of product revenues. Product revenues are
generally recognized upon shipment of products to customers. Historically, a
significant portion of our product
19
<PAGE> 21
revenues have been derived from sales of GaAs substrates and laser-pointing and
alignment products. In the years ended December 31, 1997, GaAs substrates
accounted for 50.4%, 55.4% in 1998 and 56.3% in 1999 of our total revenues and
laser-pointing and alignment products accounted for 41.5%, 20.0% and 7.5%,
respectively. Since October 1998, we have included the sales of products from
our visible emitter division in our financial results. In 1999, sales from our
visible emitter division generated 22.9% of total revenues. We began selling InP
and Ge substrates to our customers in late 1997, GaN substrates in late 1998 and
in late 1999 we began selling LED's to our customers.
Historically, revenues generated from research and development contracts
with U.S. government agencies and customer-funded research projects comprised
more than 5.0% of our total revenues. We expect our contract revenue to decline
to less than 1.0% of our total revenues in future periods as a result of our
shift to internally generated research and development projects from government
and customer-funded contracts.
In 1995, we established a wholly-owned subsidiary in Japan to distribute
our products. This subsidiary serves primarily as a direct sales and support
office for our customers in Japan. We also utilize independent sales
representatives in France, Japan, South Korea, Taiwan and the United Kingdom.
Domestic sales are generated by our direct sales force. International sales,
excluding Canada, accounted for 26.8% of total revenues for the year ended
December 31, 1997, 29.6% in 1998, and 45.1% in 1999. Except for sales in Japan
and some sales in Taiwan, which are denominated in yen, we denominate and
collect our international sales in U.S. dollars. Doing business in Japan
subjects us to fluctuations in exchange rates between the U.S. dollar and the
Japanese yen. During the year ended December 31, 1997, we incurred foreign
transaction exchange loss of $186,000, a loss of $24,000 in 1998, and a gain of
$652,000 in 1999. During the year ended December 31, 1999, we bought foreign
exchange contracts to hedge against certain trade accounts receivable in
Japanese yen. The outstanding commitments with respect to such foreign exchange
contracts had a total value of approximately $1.9 million as of December 31,
1999.
From July 1996 to October 1998, we conducted all of our substrate
operations in a 50,000 square foot office and production facility located in
Fremont, California. Prior to transitioning our manufacturing operations to this
facility, we leased a 20,000 square foot manufacturing facility in Dublin,
California. In late 1998, we expanded the size of our current manufacturing
facility by approximately 30,000 square feet to meet our anticipated future
production needs through 2000. In June 1998, we purchased an additional 58,000
square foot facility in Fremont, California directly across the street from our
existing manufacturing facility and moved marketing, sales, engineering and
administrative personnel into a portion of the building. We believe that this
new facility will not be used for production of substrates until late 2000. In
January 1999, we received a business license for operations in Beijing, China
and purchased a 31,000 square foot facility in a major tax-free industrial park
in Beijing. This facility became operational during the third quarter of 1999.
We intend to expand this facility by another 31,000 square feet beginning in the
first quarter of 2000. We expect that our proprietary VGF crystal growth
operations will continue to be housed in Fremont, California, and our other
manufacturing operations will be conducted in both Fremont and Beijing.
Our consumer product division's operations have been located in Torrance,
California since 1998 and consist of a 22,000 square foot office and production
facility. Prior to 1998, a portion of the consumer products division was located
in Arizona and a portion in Los Angeles, California. Since 1997, our visible
emitter division has been located in a 22,000 square foot office and production
facility in Monterey Park, California and a 7,000 square foot production
facility in El Monte, California. In 1998, we acquired another 27,000 square
foot facility in El Monte for future production in 2000. In late 1998, we
acquired a 14,000 square foot production facility in Xiamen, China for
processing laser diodes.
In connection with the granting of stock options, we recorded aggregate
deferred compensation of $322,000 for the year ending December 31, 1997,
$203,000 in 1998 and $0 in 1999, representing the difference between the deemed
fair value of the Common Stock for accounting purposes and the option exercise
price at the date of grant. This deferred compensation will be amortized over
the vesting period of the applicable options of which $102,000 was amortized
during the year ended December 31, 1997, $96,000 in 1998 and $110,000 in 1999.
20
<PAGE> 22
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 68.5% 63.5% 70.4%
----- ----- -----
Gross margin................................................ 31.5% 36.5% 29.6%
Operating expenses:
Selling, general and administrative....................... 22.9% 18.8% 17.2%
Research and development.................................. 3.0% 4.4% 3.8%
Acquisition costs......................................... 0.0% 0.0% 3.5%
----- ----- -----
Total operating expenses.......................... 25.9% 23.2% 24.5%
----- ----- -----
Income from operations...................................... 5.6% 13.3% 5.1%
Interest expense............................................ (1.8)% (2.4)% (2.6)%
Interest and other income (expense)......................... (0.1)% 1.0)% 0.9%
----- ----- -----
Income before provision for income taxes.................... 3.7% 11.9% 3.4%
Provision for income taxes.................................. 1.8% 4.9% 2.6%
----- ----- -----
Income before extraordinary item............................ 1.9% 7.0% 0.8%
Extraordinary item -- early extinguishment of debt.......... 0.0% 0.0% 0.6%
----- ----- -----
Net income.................................................. 1.9% 7.0% 0.2%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues increased 33.0%, or $20.2 million from $61.3 million
for the year ended December 31, 1998 to $81.5 million for the year ended
December 31, 1999. The increase in revenues resulted primarily from a $13.7
million increase in sales of GaAs and InP substrates to existing domestic and
international customers and the addition of new customers, a $12.7 million
increase due to the inclusion of the visible emitter division for a full year in
1999 compared to only the fourth quarter in 1998, and a $6.0 million decrease in
consumer product sales reflecting declining sales prices for laser pointer
products, an increase in sales returns due to product quality problems, and a
change in government regulations regarding the allowable strength of laser
products sold to the consumer product market in Europe.
International revenues, excluding Canada, increased from 29.5% of total
revenues, or $18.1 million, for the year ended December 31, 1998, to 45.1% or
$36.8 million for the year ended December 31, 1999. The increase in
international revenues resulted primarily from a $7.3 million increase in GaAs
and InP sales to new and existing international customers and a $10.0 million
increase due to the inclusion of the visible emitter division for a full year in
1999 compared to only the fourth quarter in 1998.
Gross margin. Gross margins decreased from 36.5% for the year ended
December 31, 1998, to 29.6% for the year ended December 31, 1999. The gross
margins for substrates decreased slightly from 41.4% to 40.2%, primarily due to
a decline in sales prices. The gross margins on products sold by the visible
emitter division that was included for the full year in 1999 compared to only
the fourth quarter in 1998 was 36.2% in 1998 compared to 11.7% in 1999. The
decrease in margins at the visible emitter division was primarily due to
significant sales price decreases for laser diodes, a $1.5 million charge to
settle a patent dispute, and a $2.4 million charge to write down obsolete
inventory. Excluding these charges, the gross margin was 32.6% in 1999. Gross
margins on products sold by the consumer products division decreased from 18.7%
in 1998 to (19.3)% in 1999, due to significant sales prices decreases for laser
pointer products and a $2.1 million charge to write down obsolete inventory.
Excluding these charges, the gross margin was 14.9% in 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 21.5%, or $2.5 million, from $11.5 million for
the year ended December 31, 1998 to $14.0 million for the year
21
<PAGE> 23
ended December 31, 1999. The inclusion of the visible emitter division for the
full year in 1999 compared to only the fourth quarter of 1998 resulted in an
increase of $3.3 million. Substrate division expenses increased $1.2 million
primarily due to increases in personnel and related expenses required to support
additional sales volume. These increases were offset by a decrease of $2.0
million by the consumer products division as a result of the closing of a
manufacturing facility located in Arizona in 1998. Selling, general and
administrative expenses as a percentage of total revenues decreased from 18.8%
for the year ended December 31, 1998 to 17.2% for the year ended December 31,
1999. This decrease was primarily due to an increase in total revenues.
Research and development expenses. Research and development expenses
increased 15.0%, or $402,000, from $2.7 million for the year ended December 31,
1998, to $3.1 million for the year ended December 31, 1999. This increase
resulted primarily from the inclusion of the visible emitter division for a full
year in 1999 compared to only the fourth quarter in 1998. Also, historically the
consumer products division did not separately account for its research and
development expenses which were included as part of its cost of product revenues
and selling, general and administrative expenses and are now classified as
research and development. Research and development expenses as a percentage of
total revenues decreased from 4.4% of total revenues for the year ended December
31, 1998 to 3.8% of revenues for the year ended December 31, 1999. This decrease
was primarily due to an increase in total revenues.
Acquisition cost. As a result of the acquisition of Lyte Optronics in May
1999, we incurred a number of one-time expenses associated with the transaction
in the approximate amount of $2.8 million. Such expenses include fees paid to
our investment bankers, accountants, attorneys, and other outside consultants
and related transaction expenses.
Interest expense. Interest expense increased 45.2%, or $669,000 from $1.5
million for the year ended December 31, 1998, to $2.2 million for the year ended
December 31, 1999. This increase was primarily the result of the interest
expense associated with equipment and real estate debt by the inclusion of the
visible emitter division for a full year in 1999 compared to only the fourth
quarter in 1998 and increased borrowing on the line of credit.
Interest and other income (expense). Interest and other income (expense)
increased 21.9%, or $131,000 from $598,000 for the year ended December 31, 1998
to $729,000 for the year ended December 31, 1999. The increase was primarily the
result of foreign exchange gains on short-term contracts to hedge against
certain accounts receivable denominated in Japanese yen.
Provision for income taxes. Income tax expense, adjusted for acquisition
costs of approximately $2.8 million, decreased from 41.0% to 38.0% of income
before provision for income taxes for the years ended December 31, 1998 and
1999, respectively.
Extraordinary item, net of tax benefit. In connection with the acquisition
of Lyte Optronics in May 1999, we incurred fees associated with a loan that we
repaid as part of the transaction.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues increased 41.6%, or $18.0 million from $43.3 million
for the year ended December 31, 1997 to $61.3 million for the year ended
December 31, 1998. The increase in revenues resulted primarily from a $17.8
million increase in the volume of sales of GaAs and InP substrates to existing
domestic and international customers, the addition of new customers and the
introduction of Ge substrates in the fourth quarter of 1997. Additionally, there
was a $5.9 million increase due to the inclusion of the visible emitter division
for the fourth quarter of 1998, offset by a $5.7 million decrease in revenues at
the consumer products division reflecting declining sales prices for laser
pointer products and a change in government regulations reducing the allowable
strength of lasers sold to the consumer market in Europe.
International revenues, excluding Canada, increased from 26.8% of total
revenues for the year ended December 31, 1997, to 29.6% for the year ended
December 31, 1998. The increase in international revenues resulted primarily
from a $3.8 million increase in substrate sales to new and existing
international customers and a $5.1 million increase due to the inclusion of the
visible emitter division for the fourth quarter of 1998 of which sales are
primarily sold in Asia, offset by a $2.4 million decrease in sales to Europe by
the consumer
22
<PAGE> 24
products division caused by governmental regulation changes reducing the
allowable strength of lasers sold to the consumer market.
Gross margin. Gross margins increased from 31.5% for the year ended
December 31, 1997, to 36.5% for the year ended December 31, 1998. The gross
margins for substrates increased slightly from 40.6% in 1997 to 40.8% in 1998
reflecting higher yields achieved in GaAs and InP production, partially offset
by lower margins on Ge substrates. Total gross margins also benefited from the
inclusion of the visible emitter division for the fourth quarter of 1998, which
had a 36.2% gross margin. Gross margins on products sold by the consumer
products division decreased slightly from 19.8% in 1997 to 18.7% in 1998 due to
declining prices for laser pointer products.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 16.3%, or $1.6 million, from $9.9 million for
the year ended December 31, 1997 to $11.5 million for the year ended December
31, 1998. Substrate division expenses increased $2.1 million primarily due to
increases in personnel and related expenses required to support additional sales
volume. The inclusion of the visible emitter division for the fourth quarter of
1998 added $1.0 million. These increases were offset by a $1.4 million decrease
at the consumer products division as a result of closing a manufacturing
facility located in Arizona in 1998. Selling, general and administrative
expenses as a percentage of total revenues decreased from 22.9% for the year
ended December 31,1997 to 18.8% for the year ended December 31, 1998. This
percentage decrease was primarily due to the 41.6% increase in revenues.
Research and development expenses. Research and development expenses
increased 108.2%, or $1.4 million, from $1.3 million for the year ended December
31, 1997, to $2.7 million for the year ended December 31, 1998. This increase
resulted primarily from hiring additional engineers and the purchase of
materials at the substrate division to develop new products and to enhance
existing products. Also, historically the consumer products division did not
separately account for its research and development expenses which were included
as part of its cost of product revenues and selling, general and administrative
expenses and are now classified as research and development. Research and
development expenses as a percentage of total revenues increased from 3.0% for
the year ended December 31, 1997 to 4.4% for the year ended December 31, 1998,
primarily as a result of the increase in spending.
Interest expense. Interest expense increased 86.8%, or $688,000 from
$793,000 for the year ended December 31, 1997, to $1.5 million for the year
ended December 31, 1998. This increase was primarily the result of additional
borrowings to finance the purchase and lease of buildings and equipment at the
substrate and consumer products divisions.
Interest and other income (expense). Interest and other income (expense)
increased from an expense of $57,000 for the year ended December 31, 1997 to
income of $598,000 for the year ended December 31, 1998. This increase was
primarily the result of interest income earned on the $25.8 million in net
proceeds raised from our initial public offering in May, 1998.
Provision for income taxes. Income tax expense decreased from 48.8% of
income before provision for income taxes in the year ended December 31, 1997 to
41.0% in 1998, due to a decrease in state income taxes caused by the realization
of tax benefits of Lyte Optronics related to operating losses for which
realization was uncertain prior to the merger.
23
<PAGE> 25
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results in dollars and
percentages for the eight quarters ended December 31, 1999. We believe that all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly such quarterly
information. The operating results for any quarter are not necessarily
indicative of results for any subsequent period.
<TABLE>
<CAPTION>
QUARTERS ENDED (IN THOUSANDS)
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998(2) 1998(2) 1998(2) 1998(1) 1999(1) 1999(1) 1999(1) 1999(1)
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $13,186 $13,532 $13,942 $20,654 $18,897 $20,783 $20,017 $21,824
Cost of revenues.................. 8,144 9,189 8,911 12,705 16,240 13,971 13,077 14,081
------- ------- ------- ------- ------- ------- ------- -------
Gross profit...................... 5,042 4,343 5,031 7,949 2,657 6,812 6,940 7,743
Operating expenses:
Selling, general and
administrative................ 2,460 2,238 2,540 4,300 3,647 3,196 3,113 4,060
Research and development........ 640 714 819 511 662 858 670 896
Acquisition costs............... -- -- -- -- -- 2,810 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 3,100 2,952 3,359 4,811 4,309 6,864 3,783 4,956
------- ------- ------- ------- ------- ------- ------- -------
Income from operations............ 1,942 1,391 1,672 3,138 (1,652) (52) 3,157 2,787
Interest expense.................. (238) (274) (325) (644) (53) (730) (752) (615)
Interest and other income
(expense)....................... 19 (48) 248 379 116 29 235 349
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for income
taxes........................... 1,723 1,069 1,595 2,873 (1,589) (753) 2,640 2,521
Provision for income taxes........ 707 437 559 1,273 (604) 782 1,003 958
------- ------- ------- ------- ------- ------- ------- -------
Income before extraordinary
item............................ 1,016 632 1,036 1,600 (985) (1,535) 1,637 1,563
Extraordinary item -- early
extinguishment of debt.......... -- -- -- -- -- 508 -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income........................ $ 1,016 $ 632 $ 1,036 $ 1,600 $ (985) $(2,043) $ 1,637 $ 1,563
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30 DEC. 31,
1998(2) 1998(2) 1998(2) 1998(1) 1999(1) 1999(1) 1999(1) 1999(1)
-------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 61.8% 67.9% 63.9% 61.5% 85.9% 67.2% 65.3% 64.5%
----- ----- ----- ----- ----- ----- ----- -----
Gross margin...................... 38.2% 32.1% 36.1% 38.5% 14.1% 32.8% 34.7% 35.5%
Operating expenses:
Selling, general and
administrative................ 18.7% 16.5% 18.2% 20.8% 19.3% 15.4% 15.6% 18.6%
Research and development........ 4.9% 5.3% 5.9% 2.5% 3.5% 4.1% 3.3% 4.1%
Acquisition costs............... 0.0% 0.0% 0.0% 0.0% 0.0% 13.5% 0.0% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............... 23.5% 21.8% 24.1% 23.3% 22.8% 33.0% 18.9% 22.7%
----- ----- ----- ----- ----- ----- ----- -----
Income from operations............ 14.7% 10.3% 12.0% 15.2% (8.7)% (0.3)% 15.8% 12.8%
Interest expense.................. (1.8)% (2.0)% (2.3)% (3.1)% (0.3)% (3.5)% (3.8)% (2.8)%
Interest and other income
(expense)....................... 0.1% (0.4)% 1.8% 1.8% 0.6% 0.1% 1.2% 1.6%
----- ----- ----- ----- ----- ----- ----- -----
Income before provision for income
taxes........................... 13.1% 7.9% 11.4% 13.9% (8.4)% (3.6)% 13.2% 11.6%
Provision for income taxes........ 5.4% 3.2% 4.0% 6.2% (3.2)% 3.8% 5.0% 4.4%
----- ----- ----- ----- ----- ----- ----- -----
Income before extraordinary
item............................ 7.7% 4.7% 7.4% 7.7% (5.2)% (7.4)% 8.2% 7.2%
Extraordinary item -- early
extinguishment of debt.......... -- -- -- -- -- 2.4% -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income........................ 7.7% 4.7% 7.4% 7.7% (5.2)% (9.8)% 8.2% 7.2%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes Substrates, Visible Emitters and Consumer Products
(2) Includes Substrates and Consumer Products only
24
<PAGE> 26
The following table sets forth the restatement of the first three quarters
of 1999 related to adjustments of account balances at Lyte Optronics, Inc.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------------------------------
Q1 Q1 Q2 Q2 Q3 Q3
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. 19,023 18,897 21,025 20,783 21,389 20,017
Net income (loss)................... 1,259 (985) (538) (2,043) 2,818 1,637
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During the past five years, we have funded our operations primarily from
cash provided by operations, short-term and long-term borrowings and a private
financing of $5.9 million for preferred stock completed in March 1997. We
completed our initial public offering in May 1998, and raised net proceeds of
approximately $25.8 million. As of December 31, 1999, we had working capital of
$40.5 million, including cash and cash equivalents of $6.1 million, compared to
working capital at December 31, 1998 of $41.6 million, including cash of $16.4
million.
During the year ended December 31, 1997, net cash used in operations of
$2.1 million was due primarily to increases in inventory of $5.6 million and
accounts receivable of $2.0 million, offset by net income of $820,000,
depreciation of $1.3 million and an increase in accounts payable and accrued
liabilities of $4.1 million. The increases in inventory, accounts receivable,
accounts payable and accrued liabilities were primarily the result of a 38.5%
increase in revenues from the prior year. The inventory turnover ratio decreased
from 3.9 turns per year at December 31, 1996 to 3.3 turns per year at December
31, 1997 primarily due to an increase Ge inventory. Days sales outstanding
decreased slightly from 56 days at December 31, 1996 to 55 days at December 31,
1997.
During the year ended December 31, 1998, net cash used in operations of
$8.7 million was primarily due to increases in inventory of $11.1 million,
accounts receivable of $4.2 million, prepaid assets of $1.6 million, and
deferred income taxes of $1.1 million, offset by net income of $4.3 million,
depreciation of $3.0 million and an increase in accounts payable and accrued
liabilities of $2.1 million. The increases in inventory, accounts receivable,
prepaid assets, accounts payable and accrued liabilities were primarily the
result of the 41.6% increase in revenues from the prior year. Additionally, the
increase in accounts receivable was in part due to increased international sales
that generally have longer payment cycles. International sales were 26.8% of
revenues in 1997 compared to 29.6% of revenues in 1998. The increase in deferred
taxes was the result of recognizing a tax benefit for prior year losses of Lyte
Optronics as a result of the acquisition. The inventory turnover ratio declined
from 3.3 turns per year at December 31, 1997 to 2.1 turns per year at December
31, 1998 primarily due to our decision to maintain the Ge substrates production
line during the fourth quarter of 1998 in anticipation of large orders, although
shipments to a large customer had been deferred. Days sales outstanding
increased from 55 days at December 31, 1997 to 61 days at December 31, 1998.
During the year ended December 31, 1999, net cash used in operations of
$7.8 million was primarily due to increases in inventory of $10.1 million,
accounts receivable of $4,4 million and prepaid expenses of $5.7 million, offset
in part by net income of $172,000, depreciation and amortization of $6.2
million, and increases in accounts payable and accrued liabilities of $4.4
million. The increases in inventory, accounts receivable, accounts payable and
accrued liabilities were primarily the result of the 33.0% increase in total
revenues from the prior year. Additionally, the increase in accounts receivable
was in part due as a result of increased international sales that generally have
longer payment cycles. International sales were 29.6% of revenues in 1998
compared to 45.1% of revenues in 1999. The increase in prepaid expenses was
primarily due to an increase in income tax receivables as a result of current
year operating losses at the visible emitter and consumer products divisions.
The inventory turnover ratio decreased slightly from 2.1 turns per year at
December 31, 1998 to 1.9 turns per year at December 31, 1999. Days sales
outstanding increased from 61 days at December 31, 1998 to 69 days at December
31, 1999.
Net cash used in investing activities was $5.2 million, $16.6 million, and
$7.5 million for the years ended December 31, 1997, 1998 and 1999, respectively,
which amounts were attributed in each period to the purchase of property, plant
and equipment. For the year ended December 31, 1998, the property acquired
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included our new 58,000 square foot building at a cost of $9.0 million and the
30,000 square foot addition in Fremont for $2.0 million.
Net cash provided by financing activities was $9.4 million for the year
ended December 31, 1997, $38.3 million for 1998 and $7.9 million for 1999. 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. For the year ended December 31, 1998, net
cash provided by financing activities consisted primarily of net proceeds of
$25.8 million from our initial public offering and long-term net borrowings of
$13.1 million, offset by repayments of short-term borrowings of $2.3 million.
Long-term net borrowings primarily reflected the issuance of $11.6 million in
taxable variable rate revenue bonds in November 1998 and repayment of existing
long-term debt in the amount of $5.6 million. Long-term borrowings were
primarily used for the purchase of the new 58,000 square foot facility, for
construction of the additional 30,000 square foot manufacturing space and
related equipment in Fremont. For the year ended December 31, 1999, net cash
provided by financing activities resulted primarily from short-term bank
borrowings that were used to finance inventories and receivables, deposits for
equipment orders, and to pay off high interest long-term debt acquired in the
acquisition of Lyte Optronics.
We have generally financed our equipment purchases through secured
equipment loans over five-year terms at interest rates ranging from 6.0% to 9.0%
per annum. Our manufacturing facilities have been financed by long-term
borrowings, most of which were repaid by the taxable variable rate revenue bonds
in 1998. The taxable variable rate revenue bonds have a term of 25 years and
mature in 2023 with an interest rate at 200 basis points below the prime rate
and are traded in the public market. Repayment of principal and interest under
the bonds is secured by a letter of credit from our bank and is paid on a
quarterly basis. We have the option to redeem in whole or in part the bonds
during their term. At December 31, 1999, $11.1 million was outstanding under the
taxable variable rate revenue bonds.
We currently have a $15.0 million line of credit with a commercial bank at
an interest rate equal to the prime rate plus one-half percent. This line of
credit is secured by all business assets, less equipment, and expires in May
2000. This line of credit is subject to certain financial covenants regarding
current financial ratios and cash flow requirements, which were met as of
December 31, 1998. We must obtain the lender's approval to obtain additional
borrowings or to further pledge our assets, except for borrowings secured by the
pledge of equipment or obtained in the normal course of business. At December
31, 1999, $8.8 million was outstanding under the $15.0 million line of credit.
We anticipate that the combination of existing working capital and the
borrowings available under current credit agreements will be sufficient to fund
working capital and capital expenditure requirements for the next 12 months. Our
future capital requirements will depend on many factors, including the rate of
revenue growth, our profitability, the timing and extent of spending to support
research and development programs, the expansion of selling and marketing and
administrative activities, and market acceptance of our products. We expect that
we may need to raise additional equity or debt financing in the future, although
we are not currently negotiating for additional financing nor do we have any
plans to obtain additional financing at this time. There can be no assurance
that additional equity or debt financing, if required, will be available on the
acceptable terms or at all. If we are unable to obtain such additional capital,
if needed, we may be required to reduce the scope of our planned product
development and selling and marketing activities, which would have a material
adverse effect on our business, financial condition and results of operations.
In the event that we do raise additional equity financing, further dilution to
our investors will result.
YEAR 2000 READINESS
During 1999, we successfully completed our program to achieve year 2000
readiness. "Year 2000 ready" meant that the performance or functionality of our
internal systems would not be significantly affected by the dates prior to,
during, and after the year 2000, to include leap year calculations and specific
day-of-the-week calculations. As expected, we have not experienced a material
adverse impact on our business, products, results of operations, or financial
condition as a result of the year 2000 issue.
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Costs directly attributed to our internal year 2000 initiative were in line
with the original estimate of approximately $400,000. These costs were expensed
as incurred and were comprised primarily of the costs of hardware and software
required to complete year 2000 testing within the enterprise and consulting
fees.
We will continue to monitor our critical processes, and those of
significant suppliers, third-party external interface suppliers, and utility
organizations that are critical to our operations, for potential year
2000-related problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders' equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2000, is not
expected to have a material effect on the Company's consolidated financial
statements.
FACTORS AFFECTING FUTURE RESULTS
In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business before purchasing
shares of our stock.
RISKS RELATING OUR ACQUISITION OF LYTE OPTRONICS, INC.
Our success depends on our ability to assume and integrate the operations
of Lyte Optronics with our operations. The success of our acquisition of Lyte
Optronics depends in substantial part on our ability to assume and integrate the
operations of Lyte Optronics in an efficient and effective manner. The
assumption of a new business will require the dedication of management
resources, which may temporarily distract attention from our day-to-day
operations. We cannot assure you that we will be able to integrate the business
operations of Lyte Optronics smoothly or successfully. Our inability to do so
could hurt the performance of our business, which may cause the price of our
stock to decline.
The success of our acquisition of Lyte Optronics depends in part on our
ability to retain Lyte Optronics' current customers. We cannot guarantee that
the current customers of Lyte Optronics will continue to seek our services now
that the acquisition is completed. If a substantial number of Lyte Optronics'
customers elect not to seek our services, our operating results will suffer.
We incurred substantial costs in connection with our acquisition of Lyte
Optronics, including the assumption of approximately $11.0 million of debt, much
of which has had to be repaid or renegotiated, resulting in a decline of cash
available. We incurred one-time charges and merger-related expenses of $2.8
million and the extraordinary item of $508,000 in the quarter ended June 30,1999
as a result of the acquisition. We may incur additional unanticipated expenses
related to our assumption of Lyte Optronics' business. If these expenses are
substantial, they may adversely affect our operating results and cause our stock
price to fall.
RISKS RELATING TO OUR OPERATIONS
A number of factors could cause our quarterly financial results to be worse
than expected, resulting in a decline in our stock price. Although we have been
profitable on an annualized basis since 1990, we believe that period-to-period
comparisons of our operating results cannot be relied upon as an indicator of
our future performance. It is likely that in some future quarter, our operating
results may be below the expectations of public market analysts or investors. If
this occurs, the price of our common stock would likely decrease. For more
information regarding our results, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Our quarterly and annual revenues and operating results have varied
significantly in the past and may vary significantly in the future due to a
number of factors, including:
- our recent acquisition of Lyte Optronics and the integration of its
business and separate operations and facilities with our operations;
- fluctuations in demand for our substrates due to reduction in the value
on Asian currencies and the turmoil in the Asian financial markets;
- fluctuations in demand for laser pointing and alignment products and
decreases in the prices of these products;
- our expense levels and expected research and development requirements;
- our ability to develop and bring to market new products on a timely
basis;
- the volume and timing of orders from our customers;
- the availability of raw materials;
- fluctuations in manufacturing yields;
- our manufacturing expansion in Beijing, China and the assumption,
integration and operation of the Chinese operations of Lyte Optronics;
- introduction of products and technologies by our competitors; and
- costs relating to possible acquisitions and integration of technologies
or businesses.
For more information regarding our results, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We acquired Lyte Optronics in May 1999, as part of our business strategy,
and we may engage in future acquisitions. These acquisitions must be
successfully integrated into our business and may dilute our stockholders and
cause us to assume contingent liabilities. As part of our business strategy, we
may in the future review acquisition prospects that would complement our current
product offerings, augment our market coverage or enhance our technical
capabilities, or that may otherwise offer growth opportunities. In the event of
any future acquisitions, we could:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- assume contingent liabilities.
Any of these actions could materially adversely affect our operating
results and/or the price of our common stock. Any future acquisitions creates
risks for us, including:
- difficulties in the assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisition could materially
adversely affect our operating results;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets where we have no or limited prior experience;
- potential loss of key employees of acquired organizations; and
- loss of customers that, through product acquisition, now become
competitors.
These risks and difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. We may not be able to
successfully integrate any businesses, products, technologies or
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personnel that we might acquire in the future, and our failure to do so could
materially adversely affect our operating results.
The sales cycle for our GaAs substrates is long and we may incur
substantial, non-recoverable expenses or devote significant resources to sales
that do not occur as anticipated. Our GaAs substrates typically have a lengthy
sales cycle, ranging from three months to a year or more. During this time, we
may expend substantial funds and sales, marketing and management efforts while
the potential customer evaluates our substrates. However, there is a significant
risk that these expenditures may not result in sales. If sales forecasted from a
specific customer for a particular quarter are not delivered in that quarter, we
may be unable to compensate for the shortfall, which could materially adversely
affect our operating results. In addition, if a customer decides at the design
stage not to incorporate our substrates into its products, we may not have
another opportunity to sell substrates for those products for many months or
even years. We anticipate that sales of any future products under development
will have similar lengthy sales cycles and will, therefore, be subject to risks
substantially similar to those inherent in the lengthy sales cycle of our GaAs
substrates.
The loss of one or more of our key customers would significantly hurt our
operating results. A small number of customers have historically accounted for
a substantial portion of our revenues. We expect that a significant portion of
our future sales will be due to a limited number of customers. Our top five
customers accounted for approximately 20.4%, 27.9% and 22.9% of our revenues in
the years ended December 31, 1997, 1998 and 1999, respectively. If any of these
major customers reduces, delays or cancels its orders with us, our revenues will
decline, which will likely cause our stock price to fall.
Our customers are not obligated to purchase any specified quantity of
products or to provide us with binding forecasts of product purchases. In
addition, our customers may reduce, delay or cancel orders at any time without
any significant penalty. For example, we recently announced the suspension of
our Ge substrates from a major customer who had excess inventories and was
experiencing a slow down in business.
VGF is a new technique for producing substrates, which must achieve
widespread acceptance if we are to succeed. We believe that our competitors
principally utilize the traditional LEC or HB crystal growing processes for
producing semi-insulating and semi-conducting GaAs substrates. We further
believe that we are the only high-volume supplier of semi-insulating and
semi-conducting GaAs substrates which utilize the VGF technique, a newer
technology than either the LEC or HB techniques, however, we believe that one of
our competitors has recently begun shipping, in low volume, GaAs substrates
which utilize a similar technology. We cannot assure you that our current
customers will continue to use our VGF-produced substrates or that additional
companies will purchase our products manufactured from the VGF technique.
Failure to gain increased market acceptance of our VGF technique by either
current or prospective customers could materially adversely affect our operating
results, which in turn could cause our stock price to fall.
A significant portion of our prospective customers for our substrates are
wireless communications manufacturers, fiber optic communications manufacturers
and manufacturers of other high-speed semiconductor devices that are produced
from GaAs substrates using either the LEC or HB techniques. To establish the VGF
technique as a preferred process for producing substrates for these prospective
customers, we must offer products with superior prices and performance on a
timely basis and in sufficient volumes. We must also overcome the reluctance of
these customers to purchase our GaAs substrates due to possible perceptions of
risks relating to concerns about the quality and cost-effectiveness of our GaAs
substrates when compared to substrates produced by the traditional LEC or HB
techniques. In addition, potential GaAs substrate customers may be reluctant to
rely on a relatively small company for critical materials used to manufacture
their semiconductor devices.
If we do not achieve acceptable yields of crystals and the successful and
timely production of substrates, the shipment of our products will be delayed
and our revenues will decline. The highly complex processes of growing crystals
as well as other steps involved in manufacturing substrates that we engage in
can be adversely affected by the following factors:
- chemical or physical defects in the crystals;
- contamination of the manufacturing environment;
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- substrate breakage;
- equipment failure; and
- performance of personnel involved in the manufacturing process.
Our operating results have been adversely affected in the past due to the
occurrence of a combination of these factors, which resulted in product shipment
delays and adversely affected our business.
A significant portion of our manufacturing costs are fixed. As a result, we
must increase the production volume of substrates and improve yields in order to
reduce unit costs, increase margins and maintain and improve our results of
operations. Any significant decrease in production volume and yields could
materially harm our business.
In the past, we have sometimes manufactured substrates that have not met
the manufacturing process requirements of our customers. We have fixed these
occurrences through minor changes to the substrates or the manufacturing
process. Recurrence of these problems and our inability to solve them may
materially hurt our performance.
In 1997, we began producing and shipping Ge and InP substrates in
commercial volume. We also understand that we must achieve the same
manufacturing capability for six inch GaAs wafers. We cannot assure you that we
will be able to manufacture the larger GaAs substrate in commercial volumes with
acceptable yields. Our business and results of operations will be materially
adversely affected if we experience low yields of these successfully developed
substrates.
Because substantially all of our revenues of our AXT substrate division are
derived from sales of our GaAs substrates, we are dependent on widespread market
acceptance of these products. We currently derive substantially all of our
substrate revenues from sales of our GaAs substrates. If there is a decrease on
demand for GaAs substrates by semiconductor device manufacturers or if our
competitors introduce new substrates for electronics applications, such as
wireless communications, fiber optic communications and other high-speed
semiconductor devices, and opto-electronic applications, such as lasers and
LEDs, our revenues may decline and our business will be materially adversely
affected. We expect that revenues from GaAs substrates will account for a
significant majority of our revenues for the next several years.
Further, other companies, including IBM, are actively involved in
developing other devices which could provide the same high-performance, low
power capabilities as GaAs-based devices at competitive prices, such as
silicon-germanium based devices for use in certain wireless applications. If
these silicon-germanium based devices are successfully developed and
semiconductor device manufacturers adopt them, demand for GaAs substrates could
decrease. This development could cause our revenues to fall.
To be successful, we must develop and introduce in a timely manner new
substrates and continue to improve our current substrates to address customer
requirements and compete effectively on the basis of price and performance. We
must also continue to develop our light-emitting and laser diode products, and
develop new markets for this technology, as well as for our laser pointing and
alignment products. We cannot assure you that our product development efforts
will be successful or that our new products will achieve market acceptance. To
the extent that product improvements and new product introductions do not
achieve market acceptance, our business will be materially adversely affected.
In 1997, we began commercial shipments of Ge and InP substrates and are
currently developing other substrates, including galliumnitride and silicon
carbide. Factors that may affect the success of product improvements and product
introductions include the development of markets for such improvements and
substrates, achievement of acceptable yields, price and market acceptance. Many
of these factors are beyond our control.
Our limited ability to protect our intellectual property may adversely
affect our ability to compete. We rely on a combination of patents, copyrights,
trademarks and trade secret laws and contractual restrictions on employees,
consultants and third parties from disclosure to protect our intellectual
property rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries
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where the laws may not protect our proprietary rights as fully as in the United
States. We believe that, due to the rapid pace of technological innovation in
the GaAs and other substrate markets, our ability to establish and maintain a
position of technology leadership in the industry depends more on the skills of
our development personnel than upon the legal protections afforded our existing
technologies.
To date, we have been issued one U.S. patent, which relates to the VGF
technique, and have two U.S. patent applications pending, one that relates to
the VGF technique. Additionally, we have one pending application for a Japanese
patent but no issued foreign patents. We do not have any patents on our light-
emitting or laser diode technology, although we do have six patents relating to
our laser pointing and alignment products. We cannot assure you that:
- the pending or any future U.S. or foreign patent applications will be
approved;
- any issued patents will protect our intellectual property;
- third parties will not challenge the ownership rights of the patents or
the validity of the patent applications;
- the patents owned by others will not have an adverse effect on our
ability to do business; or
- others will not independently develop similar or competing technology or
design around any patents issued to us.
Moreover, the laws of certain foreign countries may not lend protection to
our patents to the same extent as the laws of the United States.
If we infringe the proprietary rights of others, we may be forced to enter
costly royalty or licensing agreements. We could in the future receive a claim
that we are infringing the patent, trademark, copyright or other proprietary
rights of other third parties. If any claims were asserted against us for
violation of patent, trademark, copyright or other similar laws as a result of
the use by us, our customers or other third parties of our products, those
claims would be costly and time-consuming to defend, would divert our attention
and could cause product delays. In addition, if we discovered we violated other
third party rights, we could be required to enter into costly royalty or
licensing agreements as a result of those claims. These royalty or licensing
agreements may adversely affect our operating results.
If we fail to comply with stringent environmental regulations, we may be
subject to significant fines or the cessation of our operations. We are subject
to federal, state and local environmental laws and regulations. Any failure to
comply with present or future environmental laws and regulations could result in
the imposition of significant fines on us, the suspension of production or a
cessation of operations. In addition, existing or future changes in laws or
regulations may require us to incur further significant expenditures or
liabilities, or additional restriction in our operations. We are cooperating
with Cal-OSHA in an investigation regarding higher than permissible levels of
potentially hazardous materials in certain areas of the manufacturing facility
in Fremont, California. Although no accidents or injuries have resulted from
this matter and the facility is in full operation, civil and criminal penalties
could be imposed against us by Cal-OSHA.
We purchase critical raw materials required to grow crystals from single or
limited sources, and could lose sales if these sources fail to fill our
needs. We do not have any long-term supply contracts, except for Ge, with any
of our suppliers, and we currently purchase raw materials required to grow
crystals from single or a limited number of suppliers. For example, we purchase
a majority of the gallium we use from GEO Gallium.
Due to our reliance on a limited group of suppliers, we are exposed to
several risks including the potential inability to obtain adequate supply of
materials, reduced control overpricing of our products and meeting customer
delivery schedules.
We have experienced delays receiving orders of certain materials due to
shortages. We may continue to experience these delays due to shortages of
materials and as a result be subject to higher costs. If we are unable to
receive adequate and timely deliveries of critical raw materials, relationships
with current and future customers could be harmed, which could cause our
revenues to decline.
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We are subject to additional risks as a result of our recent acquisition of
new manufacturing facilities. In connection with further expanding our
manufacturing capacity, we purchased an additional 58,000 square foot facility
in Fremont, California and a 31,000 square foot facility in Beijing, China, in
1998. These new facilities subject us to significant risks, including:
- unavailability or late delivery of process equipment;
- unforeseen engineering problems;
- work stoppages;
- unanticipated cost increases; and
- unexpected changes or concessions required by local, state or federal
regulatory agencies with respect to necessary licenses, land use permits
and building permits.
If any of the above occur, our operations at the new facilities would be
adversely affected, which may cause our sales to decline and the price of our
stock to fall.
The additional fixed operating expenses associated with the new facilities
may only be offset by sufficient increases in product revenues. We cannot assure
you that the demand for our products will grow as we currently expect, and if
this does not occur, we may not be able to offset the costs of operating the new
facilities, which may materially adversely affect our results of operations.
We currently only have two machines (MOCVD's) capable of producing
light-emitting diode wafers. Damage to or failure of these machines could cause
production to stop or delay while repairs or replacements are being made. We do
not keep substantial inventory of LED wafers to enable production to continue
while the MOCVD machine is being repaired. Any delay in production of the LED
wafers while the MOCVD is being repaired could result in loss of revenue.
We must effectively respond to rapid technological changes by continually
introducing new products that achieve broad market acceptance. We and our
customers compete in a market that is characterized by rapid technological
changes and continuous improvements in substrates. Accordingly, our future
success depends upon whether we can apply our proprietary VGF technique to
develop new substrates that meet the needs of customers and compete effectively
on the basis of quality, price and performance. Our success in the light-
emitting and laser diode markets depends in part upon our ability to further our
development of this technology and develop additional markets and uses for the
products. If we are unable to timely develop new, economically viable products
that meet market demands, our revenues will decline, which could adversely
affect our results of operation and cause the price of our stock to fall.
It is difficult to predict accurately the time required and the costs
involved in researching, developing and engineering new products. Thus, our
actual development costs could exceed budgeted amounts and our product
development schedules could require extension. We have experienced product
development delays in the past and may experience similar delays in the future.
Any significant delays could harm our business. For example, our introduction of
InP substrates was delayed approximately six months as a result of delays in the
finalization of the manufacturing process for these substrates.
If we are unable to introduce reliable quality products, we could suffer
from reduced orders, higher manufacturing costs, product returns and additional
service expenses, all of which could result in lower revenues.
Our substrates are typically one of many components used in semiconductor
devices that our customers produce. Demand for our products is therefore subject
to many factors beyond our control, including:
- demand for our customers' products;
- competition faced by our customers in their particular industries;
- the technical, sales and marketing and management capabilities of our
customers; and
- the financial and other resources of our customers.
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If, as a result of any of these factors, demand for our products declines, our
business will suffer.
Intense competition in the market for GaAs substrates could prevent us from
increasing revenues and sustaining profitability. The market for GaAs
substrates is intensely competitive. If we cannot successfully compete in this
market, our operating results will be harmed. In the semi-insulating GaAs
substrates market, our principal competitors include:
- Freiberger Compound Materials;
- Hitachi Cable;
- Litton Airtron; and
- Sumitomo Electric Industries.
We also compete with manufacturers that produce GaAs substrates for their
own use. In addition, we compete with companies, such as IBM, that are actively
developing alternative materials to GaAs. As we enter new markets, such as the
Ge and InP substrate markets, we expect to face competitive risks similar to
those for our GaAs substrates.
Many of our competitors and potential competitors have a number of
significant advantages over us, including:
- having been in the business longer than we have;
- more manufacturing experience;
- more established technologies than our VGF technique;
- broader name recognition; and
- significantly greater financial, technical and marketing resources.
Our competitors could develop enhancements to the LEC, HB or VGF techniques
that are superior to ours in terms of price and performance. Our competitors
also could intensify price-based competition, which would result in lower prices
and reduced margins.
The market for laser-pointing and alignment devices is highly competitive
and subject to pressure to decrease the price at which the devices are sold.
Lyte Optronics has opened a manufacturing facility in China enabling production
of components at reduced cost; however this facility has only recently begun
operating and may not be able to handle the volume production that may be
required to meet customer demand. In addition, while we continue to remain
competitive in our pricing structure of laser pointing and alignment devices, if
prices continue to fall, we may not be able to produce and sell these products
at a profit.
We derive a significant portion of our revenues from international sales
and our ability to sustain and increase our international sales involves
significant risks. Our ability to grow will depend in part on the expansion of
international sales and operations, which have and are expected to constitute a
significant portion of our revenues. Our failure to successfully expand our
international operations may cause our revenues not to grow as much as we
anticipate, which could cause our stock price to fall.
International sales, excluding Canada, represented 29.6% and 45.1% of our
total revenues in the years ended December 31, 1998 and December 31, 1999,
respectively. Sales to customers located in Japan and other Asian countries
represented 22.3% and 34.9% of our total revenues in the years ended December
31, 1998 and December 31, 1999. We expect that sales to customers outside the
United States, including device manufacturers located in Japan and other Asian
countries that sell their products worldwide, will continue to represent a
significant portion of our revenues.
Our dependence on international sales involves a number of risks,
including:
- import restrictions and other trade barriers;
- unexpected changes in regulatory requirements;
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- longer periods to collect accounts receivable;
- export license requirements;
- political and economic instability, in particular, the current
instability of the economies of Japan and other Asian countries; and
- unexpected changes in diplomatic and trade relationships.
Our sales, except for sales to our Japanese and Taiwanese customers, are
denominated in U.S. dollars. Thus, increases in the value of the dollar could
increase the price of our products in non-U.S. markets and make our products
more expensive than competitors' products in such markets. For example, doing
business in Japan subjects us to fluctuations in the exchange rates between the
U.S. dollar and the Japanese yen. In the year ended December 31 1998, we
incurred foreign exchange losses of $24,000, and a foreign exchange gain of
$652,000 in the year ended December 31, 1999. If we do not effectively manage
the risks associated with international sales, our business and financial
condition could be materially adversely affected. To minimize our foreign
exchange risk, we have purchased foreign exchange contracts to hedge against
certain trade accounts receivable in Japanese yen. Because we currently
denominate sales in U.S. dollars except in Japan and Taiwan, we do not
anticipate that the adoption of the Euro as a functional legal currency of
certain European countries will materially affect our business.
If we lose key personnel or are unable to hire additional qualified
personnel as necessary, we may not be able to successfully manage our business
or achieve our objectives. Our success depends to a significant degree upon the
continued service of Morris S. Young, Ph.D., AXT's President and Chief Executive
Officer, as well as other key management and technical personnel. We neither
have long-term employment contracts with, nor key person life insurance on, any
of our key personnel, including any of the key personnel from our acquisition of
Lyte Optronics. In addition, our management team has limited experience as
executive officers of a public company.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. The competition for these
employees is intense, especially in Silicon Valley, and we cannot assure you
that we will be successful in attracting and retaining new personnel. The loss
of the services of any of our key personnel, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers, could make it difficult for us to manage our business
and meet key objectives, including the introduction of new products on time.
Continued rapid growth may strain our operations. In addition to our
recent acquisition of Lyte Optronics, we have recently experienced a period of
rapid growth and expansion that has placed, and continues to place, a
significant strain on our operations. To accommodate this anticipated growth, we
will be required to:
- improve existing and implement new operational and financial systems,
procedures and controls;
- hire, train and manage additional qualified personnel;
- effectively manage multiple relationships with our customers, suppliers
and other third parties; and
- maintain effective cost controls.
If we are not able to install adequate control systems in an efficient and
timely manner, or if our current or planned personnel systems, procedures and
controls are not adequate to support our future operations, our sales may not
grow and our business will suffer. We are in the process of installing a new
management information system; however, the functionality of this new system has
not been fully implemented. The difficulties associated with installing and
implementing these new systems, procedures and controls has placed and will
continue to place a significant burden on our management and our internal
resources. In addition, international growth will require expansion of our
worldwide operations and enhance our communications infrastructure. Any delay in
the implementation of these new or enhanced systems, products and controls, or
any disruption in the transition to these new or enhanced systems, products and
controls, could adversely affect
34
<PAGE> 36
our ability to accurately forecast sales demand, manage manufacturing,
purchasing and inventory levels, and record and report financial and management
information on a timely and accurate basis. Our inability to manage growth
effectively could affect our revenues and adversely impact our profitability.
In addition, Lyte Optronics maintains separate operational and financial
systems, procedures and controls that must be integrated with or replaced by our
systems. This integration will take time and divert management attention and
resources. If we are unable to timely integrate or replace these systems, we
maybe unable to accurately forecast sales demand, manage manufacturing,
purchasing and inventory levels for the two divisions acquired with Lyte
Optronics, nor record and report financial and management information on a
timely basis for these divisions, which could adversely affect our ability to
timely produce consolidated financial information.
We may need additional capital to fund our future operations, which may not
be available. We believe that our cash balances and cash available from credit
facilities and future operations will enable us to meet our working capital
requirements for at least the next 12 months. If cash from future operations is
insufficient, or if cash is used for acquisitions or other currently
unanticipated uses, we may need additional capital. To the extent that we raise
additional capital through the sale of equity or convertible debt securities,
the issuance of such securities could result in dilution to existing
stockholders.
In December 1998, we raised approximately $11.6 million by issuing variable
rate taxable demand revenue bonds series 1998 for:
- the purchase of a commercial building and to finance tenant improvements
at 4281 Technology Drive, Fremont, California;
- the refinance an existing loan and to finance tenant improvements on our
principal offices; and
- the permanent financing for an existing bank construction loan.
These debt securities have rights, preferences and privileges that are
senior to holders of common stock. We cannot assure you that if we required
additional capital, it will be available on acceptable terms, or at all. If we
are unable to obtain additional capital, we may be required to reduce the scope
of our planned product development and marketing efforts, which would materially
adversely affect our business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our executive officers and directors control 19% of our common stock and
are able to significantly influence matters requiring stockholder
approval. Executive officers, directors and entities affiliated with them
currently own approximately 19% of our outstanding common stock. These
stockholders, if acting together, are able to significantly influence all
matters requiring our stockholder approval, including the election of directors
and the approval of mergers or other business combination transactions. This
concentration of ownership could delay or prevent a change of control of AXT and
could reduce the likelihood of an acquisition of AXT at a premium price.
Provisions in our charter or agreements may delay or prevent a change of
control. Provisions in our amended and restated certificate of incorporation
and bylaws may have the effect of delaying or preventing a merger or acquisition
or a change of control or changes in our management. These provisions include:
- the division of the board of directors into three separate classes of
three year terms;
- the right of the board to elect the director to fill a space created by
the expansion of the board;
- the ability of the board to alter our bylaws;
- authorizing the issuance of up to 2,000,000 shares of "blank check"
preferred stock; and
- the requirement that at least 10% of the outstanding shares are needed to
call a special meeting of stockholders.
35
<PAGE> 37
Furthermore, because we are incorporated in Delaware, we are subject to the
provisions of section 203 of the Delaware General Corporation Law. These
provisions prohibit large stockholders, in particular those owning 15% or more
of the outstanding voting stock, from consummating a merger or combination with
a corporation unless:
- 66 2/3% of the shares of voting stock not owned by this large stockholder
approve the merger or combination, or
- the board of directors approves the merger or combination or the
transaction which resulted in the large stockholder owning 15% or more of
our outstanding voting stock.
Our stock price has been and may continue to be volatile and is dependent
on external and internal factors. Our stock has fluctuated significantly since
we began trading on the Nasdaq National Market. For the fiscal year ended
December 31, 1999, our stock price closed as low as $9.063 and as high as
$35.125. Various factors could cause the price of our common stock to continue
to fluctuate substantially, including:
- actual or anticipated fluctuations in our quarterly or annual operating
results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- announcements of technological innovations by us or our competitors;
- new product introduction by us or our competitors;
- large customer orders or order cancellations; and
- the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since many of our Japanese invoices are denominated in yen, we have bought
foreign exchange contracts to hedge against certain trade accounts receivable in
Japanese yen. As of December 31, 1999, our outstanding commitments with respect
to the foreign exchange contracts had a total value of approximately $1.9
million equivalent. Many of the contracts were entered six months prior to the
due date and the dates coincide with the receivable terms we have on the
invoices. By matching the receivable collection date and contract due date, we
attempt to minimize the impact of foreign exchange fluctuation.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data required by
this item are set forth at the pages indicated at Item 14 (a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
The SEC allows us to include information required in this report by
referring to other documents or reports we have already or will soon be filing.
This is called "Incorporation by Reference." We intend to file our definitive
proxy statement pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
36
<PAGE> 38
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Proposal No.1 -- Election of Directors" and in Part I of this report under the
heading "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the definitive Proxy Statement under the
heading "Executive Compensation and Other matters."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Executive Compensation and Other matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Certain Relationships and Related Transactions."
37
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 39-40
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 41
Consolidated Income Statements for the Years Ended December
31, 1997, 1998, and 1999.................................. 42
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999.............. 43
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998, and 1999......................... 44
Notes to Consolidated Financial Statements.................. 45
</TABLE>
(2) Financial Statement Schedules
All schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission
of the schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
(3) Exhibits
See Index to Exhibits on page 59 hereof. The exhibits listed in the
accompanying Index to Exhibits are filed as part of this report.
(b) Reports on Form 8-K
None
38
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
American Xtal Technology, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of American Xtal Technology, Inc. and
its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. 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. The consolidated financial statements
give retroactive effect to the merger of Lyte Optronics, Inc. on May 28, 1999 in
a transaction accounted for as a pooling of interests, as described in Note 2 to
the consolidated financial statements. We did not audit the financial statements
of Lyte Optronics, Inc. at December 31, 1998 and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1998, which statements reflect total assets of $25,435,000 as of December 31,
1998 and total revenues of $17,978,000 and $18,137,000 for each of the two years
in the period ended December 31, 1998. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Lyte
Optronics, Inc., is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 20, 2000
39
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Lyte Optronics, Inc.:
We have audited the consolidated balance sheet of Lyte Optronics, Inc. (a
Nevada corporation) and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' investment and cash flows
for the two years in the period ended December 31, 1998 (not presented herein).
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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lyte Optronics, Inc. and
Subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the two years in the period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 27, 1999
40
<PAGE> 42
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
------------ --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 16,438 $ 6,062
Accounts receivable, net of allowance for doubtful
accounts of $948 and $728.............................. 13,128 17,561
Inventories............................................... 25,300 35,470
Prepaid expenses and other current assets................. 3,271 8,945
Deferred income taxes..................................... 2,452 3,210
-------- --------
Total current assets.............................. 60,589 71,248
Property, plant and equipment, net.......................... 37,624 40,865
Receivable from officers and stockholders................... 369 596
Other assets................................................ 1,558 809
Goodwill, net............................................... 2,843 2,244
-------- --------
Total assets...................................... $102,983 $115,762
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank borrowing................................. $ 1,191 $ 8,798
Accounts payable.......................................... 8,587 10,794
Accrued liabilities....................................... 5,242 7,464
Current portion of long-term debt......................... 3,044 2,550
Current portion of capital lease obligation............... 881 1,180
-------- --------
Total current liabilities......................... 18,945 30,786
Long-term debt, net of current portion...................... 19,842 18,501
Long-term capital lease, net of current portion............. 2,428 3,606
Note payable to officers and stockholders................... 604 410
-------- --------
Total liabilities................................. 41,819 53,303
-------- --------
Contingencies (Note 11)
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............................. 3,999 3,989
Common stock,
$.001 par value per share; 100,000,000 shares
authorized;
18,393,113 and 18,658,919 shares issued and
outstanding, respectively............................. 18 19
Additional paid-in capital............................. 45,248 46,321
Deferred compensation..................................... (327) (217)
Retained earnings......................................... 12,198 12,370
Cumulative translation adjustments........................ 27 (24)
-------- --------
Total stockholders' equity........................ 61,164 62,459
-------- --------
Total liabilities and stockholders' equity........ $102,983 $115,762
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 43
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $43,313 $61,314 $81,521
Cost of revenues............................................ 29,650 38,949 57,369
------- ------- -------
Gross profit................................................ 13,663 22,365 24,152
Operating expenses:
Selling, general and administrative....................... 9,921 11,538 14,016
Research and development.................................. 1,289 2,684 3,086
Acquisition costs......................................... -- -- 2,810
------- ------- -------
Total operating expenses.......................... 11,210 14,222 19,912
------- ------- -------
Income from operations...................................... 2,453 8,143 4,240
Interest expense............................................ (793) (1,481) (2,150)
Interest and other income................................... (57) 598 729
------- ------- -------
Income before provision for income taxes.................... 1,603 7,260 2,819
Provision for income taxes.................................. 783 2,976 2,139
------- ------- -------
Income before extraordinary item............................ 820 4,284 680
Extraordinary item, net of tax benefits..................... -- -- 508
------- ------- -------
Net income.................................................. $ 820 $ 4,284 $ 172
======= ======= =======
Basic income per share:
Income before extraordinary item.......................... $ 0.22 $ 0.27 $ 0.04
Extraordinary item........................................ -- -- (0.03)
Net income................................................ 0.22 0.27 0.01
Diluted income per share:
Income before extraordinary item.......................... $ 0.06 $ 0.26 $ 0.03
Extraordinary item........................................ -- -- (0.03)
Net income................................................ 0.06 0.26 0.01
Shares used in net income per share calculations:
Basic..................................................... 3,697 16,076 18,655
Diluted................................................... 13,598 16,325 19,771
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE> 44
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
PREFERRED STOCK COMMON STOCK COMPREHENSIVE INCOME
-------------------- -------------------- DEFERRED RETAINED CUMULATIVE TRANSLATION
SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS ADJUSTMENTS
----------- ------ ---------- ------- ------------ -------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997......... 8,928,737 $2,618 3,648,315 $ 629 $ -- $ 7,094 $(104)
Common stock options exercised..... 84,825 154
Issuance of Series C convertible
preferred stock.................. 1,200,000 5,935
Issuance of Employee Stock Purchase
Plan stock....................... 67,000 232
Deferred compensation.............. 322 (322)
Amortization of deferred
compensation..................... 102
Comprehensive income
Net income....................... 820
Other comprehensive income
Currency translation
adjustment................... (93)
----------- ------ ---------- ------- ----- ------- -----
Balance at December 31, 1997....... 10,128,737 $8,553 3,800,140 $ 1,337 $(220) $ 7,914 $(197)
Common stock options exercised..... 71,407 138
Issuance of common stock........... 123,153 724
Issuance of common stock and Series
A preferred stock in connection
with the acquisition of Alpha
Photonics, Inc................... 980,655 4,000 1,266,464 7,500
Issuance of common stock as
settlement of trade payables..... 4,105 25
Reacquisition and retirement of
common stock..................... (60,689)
Issuance of common stock in
connection with financing........ 184,796 994
Conversion of Series C convertible
preferred stock to common
stock............................ (10,128,737) (8,553) 10,128,737 8,553
Issuance of common stock upon
initial public offering.......... 2,875,000 25,792
Deferred compensation.............. 203 (203)
Amortization of deferred
compensation..................... 96
Comprehensive income
Net income....................... 4,284
Other comprehensive income
Currency translation
adjustment................... 224
----------- ------ ---------- ------- ----- ------- -----
Balance at December 31, 1998....... 980,655 $4,000 18,393,113 $45,266 $(327) $12,198 $ 27
Common stock options exercised..... 200,679 648
Repurchase of shares of common
stock in connection with the
early extinguishment of debt..... (21,064) (211)
Acquisition costs paid by
shareholders..................... (10) (139)
Issuance of Employee Stock Purchase
Plan stock....................... 86,191 776
Deferred compensation.............. --
Amortization of deferred
compensation..................... 110
Comprehensive income
Net income....................... 172
Other comprehensive income
Currency translation
adjustment................... (51)
----------- ------ ---------- ------- ----- ------- -----
Balance at December 31, 1999....... 980,655 $3,990 18,658,919 $46,340 $(217) $12,370 $ (24)
=========== ====== ========== ======= ===== ======= =====
<CAPTION>
COMPREHENSIVE
TOTAL INCOME
------- -------------
<S> <C> <C>
Balance at January 1, 1997......... $10,237
Common stock options exercised..... 154
Issuance of Series C convertible
preferred stock.................. 5,935
Issuance of Employee Stock Purchase
Plan stock....................... 232
Deferred compensation.............. --
Amortization of deferred
compensation..................... 102
Comprehensive income
Net income....................... 820 $ 820
Other comprehensive income
Currency translation
adjustment................... (93) (93)
------- ------
Balance at December 31, 1997....... $17,387 $ 727
======
Common stock options exercised..... 138
Issuance of common stock........... 724
Issuance of common stock and Series
A preferred stock in connection
with the acquisition of Alpha
Photonics, Inc................... 11,500
Issuance of common stock as
settlement of trade payables..... 25
Reacquisition and retirement of
common stock..................... --
Issuance of common stock in
connection with financing........ 994
Conversion of Series C convertible
preferred stock to common
stock............................ --
Issuance of common stock upon
initial public offering.......... 25,792
Deferred compensation.............. --
Amortization of deferred
compensation..................... 96
Comprehensive income
Net income....................... 4,284 4,284
Other comprehensive income
Currency translation
adjustment................... 224 224
------- ------
Balance at December 31, 1998....... $61,164 $4,508
======
Common stock options exercised..... 648
Repurchase of shares of common
stock in connection with the
early extinguishment of debt..... (211)
Acquisition costs paid by
shareholders..................... (149)
Issuance of Employee Stock Purchase
Plan stock....................... 776
Deferred compensation.............. --
Amortization of deferred
compensation..................... 110
Comprehensive income
Net income....................... 172 172
Other comprehensive income
Currency translation
adjustment................... (51) (51)
------- ------
Balance at December 31, 1999....... $62,459 $ 121
======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE> 45
AMERICAN XTAL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 820 $ 4,284 $ 172
Adjustments to reconcile net income to cash provided by
(used in) operations:
Depreciation............................................ 1,341 2,959 5,616
Deferred income taxes................................... (518) (1,126) 758
Amortization of goodwill................................ 149 599
Stock compensation...................................... 102 96 110
Other................................................... 94 5 --
Changes in assets and liabilities:
Accounts receivable................................... (1,984) (4,192) (4,433)
Inventories........................................... (5,616) (11,074) (10,170)
Prepaid expenses...................................... (435) (1,610) (5,674)
Other assets.......................................... (49) (248) 749
Accounts payable...................................... 1,928 1,540 2,207
Accrued liabilities................................... 2,168 533 2,222
------- -------- --------
Net cash provided by (used in) operating
activities....................................... (2,149) (8,684) (7,844)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (5,227) (17,175) (7,527)
Net cash received in connection with purchase of Alpha.... 539 --
------- -------- --------
Net cash used in investing activities.............. (5,227) (16,636) (7,527)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of):
Issuance of common stock................................ 386 27,648 1,074
Issuance of convertible preferred stock................. 5,935 -- --
Capital leases.......................................... (33) (263) (1,379)
Long-term debt borrowings................................. 2,654 18,739 3,072
Long-term debt borrowings............................... (5,574) (4,907)
Line of credit.......................................... 779 (2,320) 7,607
Notes payable to officers and shareholders.............. (252) 110 (421)
------- -------- --------
Net cash provided by financing activities.......... 9,469 38,340 5,046
------- -------- --------
Effect of exchange rate changes............................. (65) 219 (51)
------- -------- --------
Net increase in cash and cash equivalents................... 2,028 13,239 (10,376)
Cash and cash equivalents at the beginning of the period.... 1,171 3,199 16,438
------- -------- --------
Cash and cash equivalents at the end of the period.......... $ 3,199 $ 16,438 $ 6,062
======= ======== ========
Non cash activity:
Purchase of property, plant and equipment through capital
leases.................................................. $ -- $ -- $ 2,856
======= ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 802 $ 1,481 $ 2,288
======= ======== ========
Income taxes paid......................................... $ 1,814 $ 4,338 $ 6,268
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE> 46
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF ACCOUNTING POLICIES
The Company
American Xtal Technology, Inc., or AXT designs, develops, manufactures and
distributes high-performance compound semiconductor substrates, laser-diodes,
light-emitting diodes, or LEDs and consumer and commercial products utilizing
laser-diodes and LEDs.
AXT expanded its markets in 1999 through the acquisition of Lyte Optronics,
Inc. (See note 2). The Lyte Optronic's business now operates as two separate
divisions of AXT: the Visible Emitter Division, focusing on manufacturing LEDs
and laser-diodes, and the Consumer Products division, focusing on designing and
marketing of laser-pointing, laser-alignment and LED products. The Substrate
division comprises the third operating unit of AXT.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The functional currencies of the Company's Japanese and Chinese
subsidiaries are the local currencies. Transaction gains and losses resulting
from transactions denominated in currencies other than the US dollar for the
Company or other than the local currencies for the subsidiaries are included in
the results of operations for the year.
The assets and liabilities of the subsidiaries are translated at the rates
of exchange on the balance sheet date. Income and expense items are translated
at the average rate of exchange for the period. Gains and losses from foreign
currency translation are included as a separate component of stockholders'
equity.
Revenue Recognition
Product revenues are generally recognized upon shipment. We provide 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.
Concentration of Credit Risk
The Company manufactures and distributes GaAs, InP and Ge substrates,
visible semiconductor laser diode chips, light emitting diodes, laser pointer
products 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.
45
<PAGE> 47
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company performs ongoing credit evaluations of our customers' financial
condition, and limit the amount of credit extended when deemed necessary, but
generally do not require collateral.
No customer represented greater than 10% of product revenues in fiscal year
1997, 1998 or 1999.
No customer accounted for 10% or more of the trade accounts receivable
balance as of December 31, 1998, and 1999.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
using the weighted average method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed using the straight-line method over the estimated economic
lives of the assets, generally five years. Leasehold improvements are amortized
over the shorter of the estimated useful life or the term of the lease.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"), the Company reviews long-lived assets based upon a gross cash
flow basis and will reserve for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. Based on its most recent analysis, the Company believes that there
was no impairment of its property, plant, equipment and goodwill as of December
31, 1999.
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.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standard No.
130 "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income is
defined as the change in equity of a company during a period from transactions
and other events and circumstances excluding transactions resulting from
investment by owners and distribution to owners. The difference between net
income and
46
<PAGE> 48
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive income for the Company relates to foreign currency translation
adjustments. Comprehensive income for the years ended December 31, 1997, 1998,
and 1999 is disclosed in the Statement of Stockholders' Equity.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires that companies report separately, in the
financial statements, certain financial and descriptive information about
operating segment profit or loss, certain specific revenue and expense items,
and segment assets. Additionally, companies are required to report information
about the revenues derived from their products and service groups, about
geographic areas in which the Company earns revenues and holds assets, and about
major customers.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders' equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2000, is not
expected to have a material effect on the Company's consolidated financial
statements.
NOTE 2. ACQUISITION
On May 28, 1999, the Company completed a merger with Lyte Optronics, Inc.,
a Nevada corporation and all of its subsidiaries, including Alpha Photonics,
Inc., Lyte Optronics Ltd. (a United Kingdom company) and Advanced Semiconductor
(a Xiamen, Peoples Republic of China company). Lyte Optronics, Inc. and its
subsidiaries manufacture and distribute visible semiconductor laser diode chips,
high brightness visible light emitting diodes and laser pointers.
Under the terms of the merger agreement, the Company issued approximately
2,363,000 shares of our common stock in exchange for all the outstanding shares
of Lyte's common stock as well as the outstanding shares of Lyte's Series A
preferred stock. The Company also issued approximately 983,000 shares of Series
A preferred stock in exchange for all the outstanding shares of Lyte's Series B
preferred stock. In addition, the Company assumed and converted Lyte's options
and warrants representing 115,000 shares of the Company's common stock.
The merger has been accounted for as a pooling of interests; accordingly,
all prior period consolidated financial statements have been restated to include
the combined results of operations, financial position, and cash flows of Lyte
Optronics, Inc.
The Company incurred costs of approximately $2,810,000 associated with the
merger, which was charged to operations during the quarter ended June 30, 1999,
the period in which the merger was consummated.
See Note 9 for selected financial information by business segments.
47
<PAGE> 49
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials............................................. $ 9,928 $13,503
Work in process........................................... 13,171 16,151
Finished goods............................................ 2,201 5,816
------- -------
$25,300 $35,470
======= =======
Prepaid expenses:
Income taxes.............................................. $ 312 $ 4,013
Other..................................................... 2,959 4,932
------- -------
$ 3,271 $ 8,945
======= =======
Property, plant and equipment:
Land...................................................... $ 2,446 $ 2,447
Building.................................................. 17,429 18,507
Machinery and equipment................................... 23,544 31,058
Leasehold improvements.................................... 476 2,704
Construction in progress.................................. 3,144 1,008
------- -------
47,039 55,724
Less: Accumulated depreciation and amortization........... (9,415) (14,859)
------- -------
$37,624 $40,865
======= =======
Accrued liabilities:
Accrued compensation and other............................ $ 934 $ 1,019
Allowance for sales returns............................... 1,036 264
Others.................................................... 3,272 6,181
------- -------
$ 5,242 $ 7,464
======= =======
</TABLE>
NOTE 4. DEBT
In March 1998, the Company obtained a $15.0 million line of credit, or LOC
which expires in May 2000. The LOC is secured by the Company's business assets,
excluding equipment. Borrowings under the LOC bear interest at the bank's prime
interest rate plus .5%. The LOC is subject to certain financial covenants
regarding current financial ratios and cash flow requirements which have all
been met as of December 31, 1999. At December 31, 1998 and 1999, the balances
outstanding under the LOC were 0 and $8.8 million respectively.
On September 11, 1995, the Company obtained a bank loan of up to $4.5
million to finance the construction of a new commercial building in Fremont,
California. The loan, which was due on September 11, 1996, was refinanced with
two new loans:
1) On October 1, 1996, the Company obtained a loan for $3.5 million
from a commercial bank. The loan has an interest rate of 8.3% per annum,
matures in 2006 and is secured by the land and building. The loan was fully
repaid as of December 31, 1998.
2) On August 15, 1996, the Company obtained a $1.0 million debenture
loan from the Bay Area Employment Development Company guaranteed by the
U.S. Small Business Administration. The loan
48
<PAGE> 50
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1999, $0.9
million and $0.9 million was outstanding under this debenture loan,
respectively.
The Company obtained equipment loans from several different banks through
two financing companies to finance the purchase of new manufacturing equipment.
These loans have a maturity of five years with interest rates ranging from 6.0%
to 9.0% per annum. These loans are secured by the machinery and equipment
purchased with the loans. As of December 31, 1998 and 1999, $5.5 million and
$7.2 million was outstanding under these loans, respectively.
In December 1998, the Company completed the sale of $11.6 million bonds.
The bonds, which are secured by a letter of credit from a bank, have a term of
25 years, bear interest at 200 basis points below prime. Repayment of principal
and interest under the bonds is by installment payment on a quarterly basis. The
Company has an option to redeem in whole or in part of the bonds during the term
of the bonds. As of December 31, 1998 and 1999, $11.6 million and $11.1 million
was outstanding under these loans, respectively.
The Company obtained various notes from banks. The notes bearing interest
at rates of prime rate plus 0.5% to 0.75% were secured by assets of the Company.
As of December 31, 1998 and 1999, $3.3 million and $1.8 million was outstanding
under these loans, respectively.
In 1998, the Company also obtained a note from a financing institution in
connection with common stock issuance. As of December 31, 1998, the outstanding
balance of the note was $1.5 million, with a face value of $2.6 million, net of
$1.1 million of unamortized discount. In June 1999, the Company repaid the note.
The repayment resulted in an extraordinary loss in the amount of $508,000, net
of tax benefit of $311,000.
The aggregate future repayments of long-term debt outstanding at December
31, 1999 are $2.5 million in 2000, $2.8 million in 2001, $2.6 million in 2002,
$3.5 million in 2003, $865,000 in 2004 and $8.7 million thereafter.
Following the merger with Lyte, the Company repaid Lyte debt that had been
obtained at an unfavorable interest rate. The repayment resulted in an
extraordinary loss in the amount of $508,000, net of tax benefits.
NOTE 5. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $1,571 $ 3,774 $2,274
State............................................... 79 442 376
Foreign............................................. 84 51 247
------ ------- ------
Total current 1,734 4,267 2,897
Deferred:
Federal............................................. (808) (1,097) (663)
State............................................... (143) (194) (95)
------ ------- ------
Total deferred.............................. (951) (1,291) (758)
------ ------- ------
Total provision............................. $ 783 $ 2,976 $2,139
====== ======= ======
</TABLE>
49
<PAGE> 51
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the effective income tax rates and the
U.S. statutory federal income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefits............. 13.5% 2.6% 5.4%
Foreign sales corporation benefit........................... (5.6)% (3.2)% (4.8)%
Foreign income taxed at higher rate......................... 4.2% 0.8% 0.0%
Acquisition costs........................................... 0.0% 0.0% 33.9%
Other....................................................... 2.7% 6.9% 7.3%
---- ---- ----
Effective tax rate.......................................... 48.8% 41.1% 75.8%
==== ==== ====
</TABLE>
Deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not yet deductible.................. $1,635 $2,935
State taxes............................................... 137 98
Other..................................................... 772 724
Net operating loss........................................ 925 925
Credits................................................... -- 128
------ ------
3,469 4,810
Deferred tax liabilities:
Depreciation.............................................. (1,017) (1,600)
------ ------
Net deferred tax asset................................. $2,452 $3,210
====== ======
</TABLE>
NOTE 6. NET INCOME PER SHARE
Statement of Financial Accounting Standard No. 128 "Earnings per Share"
requires a reconciliation of the numerators and denominators of the basic and
diluted net income per share calculations as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ ------------------------
PER PER PER
NET SHARE NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS calculation............... $820 3,697 $0.22 $4,284 16,076 $0.27 $172 18,655 $0.01
Effect of dilutive securities
Common stock options.............. 72 249 1,116
Convertible preferred stock....... 9,829 -- --
Diluted EPS calculation............. 13,598 $0.06 16,325 $0.26 19,771 $ --
</TABLE>
NOTE 7. COMMON STOCK AND PREFERRED STOCK
In May 1998, the Company completed its initial public offering ("IPO") and
issued 2,875,000 shares of its common stock at $10.00 per share, including the
shares from an over-allotment option. The Company
50
<PAGE> 52
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
received cash of approximately $25,792,000 net of underwriting discounts,
commissions and IPO expenses. Upon the closing of the IPO, all outstanding
shares of the Company's then convertible preferred stock were automatically
converted into shares of common stock.
On May 28, 1999, the Company completed its acquisition of Lyte Optronics,
Inc. Under the terms of the acquisition, the Company issued approximately
2,363,000 shares of common stock and 983,000 shares of nonvoting preferred stock
with a 5 percent annual dividend rate and $4 million liquidation preference over
common stock, in exchange for all of the issued and outstanding shares of
capital stock of Lyte Optronics. Ten percent of the shares issuable to the Lyte
Optronics' shareholders will be held in escrow for up to one year to satisfy any
claims that the Company may bring under the agreement during that period.
NOTE 8. EMPLOYEE BENEFIT PLANS
Stock Option Plans
In 1993, the Company adopted the 1993 Stock Option Plan ("1993 Plan") which
provides for granting of incentive and non-qualified stock options to employees,
consultants, and directors of the Company. Under the 1993 Plan, 880,000 shares
of common stock have been reserved for issuance as of December 31, 1999. 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,
3,800,000 shares of common stock have been reserved for issuance as of December
31, 1999. 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.
51
<PAGE> 53
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the Company's stock option activity under the 1993
Plan and the 1997 Plan, and related weighted average exercise price within each
category for each of the years ended December 31, 1997, 1998, and 1999:
<TABLE>
<CAPTION>
SHARES OPTIONS WEIGHTED AVERAGE
AVAILABLE OUTSTANDING OPTION PRICE
---------- ----------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1996........................ 322,594 209,202 $ 1.59
Additional shares authorized...................... 1,367,000 -- --
Granted........................................... (1,246,951) 1,246,951 5.06
Exercised......................................... (84,825) 1.59
Cancelled......................................... 27,701 (27,701) 3.30
---------- --------- ------
Balance at December 31, 1997........................ 470,344 1,343,627 $ 4.78
Additional shares authorized...................... 1,500,000 -- --
Granted........................................... (320,599) 320,599 17.95
Exercised......................................... -- (71,407) 1.94
Cancelled......................................... 64,268 (64,268) 5.39
---------- --------- ------
Balance at December 31, 1998........................ 1,714,013 1,528,551 $ 5.45
Additional shares authorized...................... 1,000,000 -- --
Granted........................................... (1,547,360) 1,547,360 18.33
Exercised......................................... -- (200,679) 4.64
Cancelled......................................... 289,793 (289,793) 10.25
---------- --------- ------
Balance at December 31, 1999........................ 1,456,446 2,585,439 $12.68
========== ========= ======
</TABLE>
At December 31, 1997, 1998, and 1999, options for 461,089, 869,710 and
1,021,725 shares, respectively, were vested.
During the years ended December 31, 1997, 1998, and 1999, the Company
granted options for the purchase of 1,246,951 shares, 320,599 shares, and
1,547,360 shares, respectively, of common stock to employees at a weighted
average exercise price of $5.06 per share, $17.95 per share, and $18.33 per
share, respectively.
Management calculated deferred compensation of $322,000, $203,000, and $0
related to options granted during the years ended December 31, 1997, 1998, and
1999, respectively. Such deferred compensation is amortized over the vesting
period relating to these options of which approximately $102,000, $96,000, and
$110,000 was amortized during the years ended December 31, 1997, 1998, and 1999,
respectively.
52
<PAGE> 54
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to stock options outstanding under the 1993 Plan and
the 1997 Plan at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES: OUTSTANDING LIFE PRICE
- ---------------- ----------- ----------- --------
<S> <C> <C> <C>
$ 1.20 - $ 1.90 5,850 0.83 $ 1.90
$ 5.00 - $ 5.00 762,934 7.64 5.00
$ 5.50 - $ 7.50 265,190 7.90 6.50
$ 7.63 - $ 9.13 344,004 7.35 8.79
$10.04 - $17.44 182,161 9.07 12.89
$17.75 - $21.19 755,200 9.51 20.73
$22.69 - $24.96 270,100 9.63 22.98
--------- ---- ------
2,585,439 8.47 $12.68
========= ==== ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS VESTED
-------------------------
WEIGHTED
AVERAGE
RANGE OF NUMBER EXERCISE
EXERCISE PRICES: VESTED PRICE
- ---------------- ------- --------
<S> <C> <C>
$1.20 - $17.44 601,202 $5.56
</TABLE>
Certain Pro Forma Disclosures
In October 1995, SFAS 123 established a fair value based method of
accounting for employee stock options. The weighted average grant-date fair
value of options granted during the years ended December 31, 1997, 1998 and 1999
(no options were granted during the year ended December 31, 1996) was $0.49,
$4.57 and $13.09, respectively. Had compensation cost for the Company's options
been determined based on the fair value at the grant dates, as prescribed in
SFAS 123, the Company's pro forma net income and net income per share would have
been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
----- ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported............................................... $ 820 $4,284 $ 172
Pro forma net income...................................... $ 760 $3,936 $(2,747)
Net income per share:
As reported:
Basic.................................................. $0.22 $ 0.27 $ 0.01
Diluted................................................ $0.06 $ 0.26 $ --
Pro forma net income:
Basic.................................................. $0.21 $ 0.24 $ (0.15)
Diluted................................................ $0.06 $ 0.24 $ (0.14)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997, 1998, and
1999; dividend yield of 0.0% for all periods; risk-free interest rates of 6.1%,
53
<PAGE> 55
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5.2%, and 5.6% for options granted during the years ended December 31, 1997,
1998, and 1999 respectively; expected lives of 4.5, 5.0, and 5.0 years for
options granted during the years ended December 31, 1997, 1998, and 1999
respectively; and volatility of 0%, 75%, and 96% for the years ended December
31, 1997, 1998, and 1999, respectively.
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.
Employee Stock Purchase Plan
In May 1997, the Company's board of directors approved an Employee Stock
Purchase Plan (the "1997 Purchase Plan"). Under this plan, employees of the
Company were allowed to purchase a certain number of shares of common stock by
December 31, 1997. A total of 67,000 shares were purchased as of December 31,
1997.
In February 1998, the Company's board of directors approved a 1998 Employee
Stock Purchase Plan (the "1998 Purchase Plan") and reserved a total of 250,000
shares of the Company's common stock for issuance thereunder. The Company's
shareholders approved the 1998 Purchase Plan in March 1998. A total of 86,000
shares were purchased as of December 31, 1999. The 1998 Purchase Plan permits
eligible employees to acquire shares of the Company's common stock through
payroll deductions. The common stock purchase price is determined as 85% of the
lower of the market price of the common stock at the purchase date or the date
of offer to the employee.
Retirement Savings Plan
The Company has a 401(k) Savings Plan (the "Savings Plan") which qualifies
as a thrift plan under Section 401(k) of the Internal Revenue Code. All
full-time U.S. employees are eligible to participate in the Savings Plan after
one year from the date of hire. Participants may contribute up to 6.0% of their
earnings to the Savings Plan with a discretionary matching amount provided by
the Company.
The Company's contributions to the Savings Plan for the years ended
December 31, 1997, 1998, and 1999 were $87,000, $101,000, and $146,000
respectively.
NOTE 9. SEGMENT AND FOREIGN OPERATIONS INFORMATION
The Company has three reportable segments: 1) Substrates 2) Visible
Emitters and 3) Consumer Products.
54
<PAGE> 56
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected financial information by business segment for the years ended
December 31, 1997, 1998, and 1999, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997(3) 1998(2) 1999(1)
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Subtrates
Net revenues from external customers...................... $25,335 $43,177 $56,732
Operating income (loss)................................... 5,860 10,416 12,275
Identifiable assets....................................... 31,395 75,805 88,579
Depreciation expense...................................... 1,164 2,048 3,616
Capital expenditures...................................... 4,856 16,385 5,572
Visible emitters
Net revenues from external customers...................... -- 5,897 18,640
Operating income (loss)................................... -- 1,132 (2,775)
Identifiable assets....................................... -- 18,917 23,423
Depreciation expense...................................... -- 686 1,671
Capital expenditures...................................... -- 633 4,096
Consumer Products
Net revenues from external customers...................... 17,978 12,240 6,149
Operating income (loss)................................... (3,407) (3,405) (5,260)
Identifiable assets....................................... 6,401 7,561 3,760
Depreciation expense...................................... 177 225 329
Capital expenditures...................................... 371 157 --
Total
Net revenues from external customers...................... 43,313 61,314 81,521
Operating income (loss)................................... 2,453 8,143 4,240
Identifiable assets....................................... 37,014 102,283 115,762
Depreciation expense...................................... 1,341 2,959 5,616
Capital expenditures...................................... 5,227 17,175 8,857
</TABLE>
The Company sells its substrates in the United States and in other parts of
the world. Also, the Company has operations in Japan and China. Revenues by
geographic location based on the country of the customer were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997(3) 1998(2) 1999(1)
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
United States............................................. $30,676 $41,902 $42,531
Europe.................................................... 5,452 4,469 8,290
Canada.................................................... 1,034 1,356 3,221
Japan Asia Pacific and other.............................. 6,151 13,587 28,479
------- ------- -------
Consolidated.............................................. $43,313 $61,314 $81,521
======= ======= =======
</TABLE>
55
<PAGE> 57
AMERICAN XTAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1997, 1998, and 1999, the Company
purchased $1,540,000, $3,681,000, and $3,559,000, respectively, of raw materials
and manufactured quartz from a supplier which is owned by a family member of an
officer.
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
From time to time the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date will
not have a material adverse effect on the Company's financial position or
results of operations.
The Company leases certain office space, manufacturing facilities, and
property and equipment under long-term operating leases expiring at various
dates through December, 2006. Total rent expense under these operating leases
was approximately $398,000 in 1999.
Included in property and equipment is approximately $5,167,000 of equipment
which is leased under non-cancellable leases accounted for as capital leases.
These leases expire at various dates through 2004.
Total minimum lease payments under the above leases as of December 31,
1999, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- ------
<S> <C> <C> <C>
YEAR ENDING DECEMBER 31,
2000...................................................... $ 1,523 $ 381 $1,904
2001...................................................... 1,493 328 1,821
2002...................................................... 1,497 293 1,790
2003...................................................... 1,315 186 1,501
2004...................................................... 371 82 453
Thereafter................................................ -- -- --
------- ------ ------
6,199 $1,270 $7,469
====== ======
Less amounts representing interest at 8.25 to 22.8 per
cent...................................................... (1,413)
-------
4,786
Less short-term portion..................................... (1,180)
-------
Long-term portion........................................... $ 3,606
=======
</TABLE>
NOTE 12. FOREIGN EXCHANGE CONTRACTS AND TRANSACTION LOSSES
The Company uses short-term forward exchange contracts for hedging purposes
to reduce the effects of adverse foreign exchange rate movements. During the
year ended December 31, 1999, the Company bought foreign exchange contracts to
hedge against certain trade accounts receivable in Japanese yen. These contracts
are accounted for using hedge accounting, under which the change in the fair
value of the forward contracts is recognized as part of the related foreign
currency transactions as they occur. As of December 31, 1999, the Company's
outstanding commitments with respect to the foreign exchange contracts, which
were commitments to sell Japanese yen, had a total value of approximately
$1,900,000.
During the years ended December 31, 1997, 1998, and 1999, the Company
incurred a foreign transaction exchange loss of $186,000, a loss of $24,000, and
a gain of $652,000 respectively.
56
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ MORRIS S. YOUNG
------------------------------------
Morris S. Young
President and Chief Executive
Officer
(Principal Executive Officer)
Date: April 14, 2000
57
<PAGE> 59
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Morris S. Young and Guy D. Atwood,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution, each with power to act alone, to sign and execute on
behalf of the undersigned any and all amendments to this Report on Form 10-K,
and to perform any acts necessary in order to file the same, with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requested and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or their or his or her substitutes, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MORRIS S. YOUNG President, Chief Executive Officer, and April 14, 2000
- --------------------------------------------------- Chairman of the Board (Principal
Morris S. Young Executive Officer)
/s/ GUY D. ATWOOD Vice President, Chief Financial Officer April 14, 2000
- --------------------------------------------------- (Principal Financial and Accounting
Guy D. Atwood Officer)
/s/ THEODORE S. YOUNG Senior Vice President, Marketing, April 14, 2000
- --------------------------------------------------- Director
Theodore S. Young
/s/ Director April 14, 2000
- ---------------------------------------------------
Donald L. Tatzin
/s/ Director April 14, 2000
- ---------------------------------------------------
Jesse Chen
/s/ Director April 14, 2000
- ---------------------------------------------------
B.J. Moore
</TABLE>
58
<PAGE> 60
AMERICAN XTAL TECHNOLOGY, INC.
EXHIBITS TO FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1(1) Agreement and Plan of Merger between American Xtal
Technology, a California corporation, and American Xtal
Technology Delaware Corporation, a Delaware corporation.
2.2(4) Agreement and Plan of Reorganization by and among American
Xtal Technology, Inc., Monterey Acquisition Corp., Lyte
Optronics, Inc. and certain stockholders of Lyte Optronics,
Inc. dated May 27, 1999.
2.3(4) Certificate of Merger dated May 27, 1999, filed with the
Secretary of State of the State of Delaware on May 28, 1999.
2.4(4) Articles of Merger dated May 27, 1999, filed with the
Secretary of State of Nevada on May 28, 1999.
3.1(3) Restated Certificate of Incorporation of American Xtal
Technology, Inc.
3.2(4) Certificate of Designation, Preferences and Rights of Series
A Preferred Stock, as filed with the Secretary of State of
the state of Delaware on May 27, 1999 (which is incorporated
herein by reference to Exhibit 2.1 to the registrant's form
8-K dated May 28, 1999).
3.3(1) By Laws of American Xtal Technology, Inc.
4.0(4) Rights Agreement
4.1 Registration rights agreement by and among American Xtal
Technology, Inc., Lyte Optronics, Inc. and certain
stockholders of Lyte Optronics Inc. dated May 27, 1999.
10.1(1) Form of Indemnification Agreement for directors and
officers.
10.2(1) 1993 Stock Option Plan and forms of agreements thereunder.
10.3(1) 1997 Stock Option Plan and forms of agreements thereunder.
10.4(1) 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5(1) 1998 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.6(1) Loan Agreement between U.S. Bank National Association and us
dated March 4, 1998.
10.7(2) Purchase and Sale Agreement by and between Limar Realty
Corp. #23 and us dated April 1998.
10.8(3) Loan Agreement between U.S. Bank National Association and us
dated September 18, 1998.
10.9(3) Letter of Credit and Reimbursement Agreement between U.S.
Bank National Association and us dated December 1, 1998.
10.10(3) Bond Purchase Contract between Dain Rauscher Incorporated
and us dated December 1, 1998.
10.11(3) Remarketing Agreement between Dain Rauscher Incorporated and
us dated December 1, 1998.
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers
LLP.
23.2 Consent of Independent Accountants -- Arthur Andersen LLP.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) As filed with the SEC in our Registration Statement on Form S-1 on March 17,
1998.
(2) As filed with the SEC in our Registration Statement on Amendment No. 2 to
Form S-1 on May 11, 1998.
(3) As filed with the SEC in our Annual Report on Form 10-K for the year ended
December 31, 1998 on March 31, 1999.
(4) As filed with the SEC in our Form 8-K on June 14, 1999.
59
<PAGE> 1
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("AGREEMENT") is made as of May 27, 1999
by and among American Xtal Technology, Inc., a Delaware corporation ("AXT"),
Lyte Optronics, Inc., a Nevada corporation ("LYTE OPTRONICS") and Keith Halsey
and Robert Shih as representatives of the shareholders of Lyte Optronics
(collectively, "SHAREHOLDERS' REPRESENTATIVE").
1. DEFINITIONS. As used in this Agreement:
(a) "AFFILIATE" means each person or party who may be deemed to be an
"affiliate" for purposes of paragraphs (c) and (d) of Rule 145 of the SEC,
although nothing contained herein shall be construed as an admission by such
person or party that such person or party is in fact an affiliate of AXT for
such purposes.
(b) "CLOSING DATE" shall mean the Closing Date as defined in the
Merger Agreement.
(c) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(d) "FORM S-3" means such form under the Securities Act as in effect
on the date hereof or any registration form under the Securities Act
subsequently adopted by the SEC which similarly permits inclusion or
incorporation of substantial information by reference to other documents filed
by AXT with the SEC.
(e) "HOLDER" means: (i) a shareholder of Lyte Optronics to whom
shares of Registrable Securities are issued pursuant to the Merger Agreement,
for so long as such holder continues to hold such shares, or (ii) a transferee
of Registrable Securities by a Holder, to whom registration rights under this
Agreement are assigned pursuant to Section 6 of this Agreement and who becomes a
Holder (within the meaning of this Agreement) of Registrable Securities.
(f) "MERGER AGREEMENT" means that certain Agreement and Plan of
Reorganization dated as of May 27, 1999 by and among AXT, Lyte Optronics
Acquisition Corporation, and Lyte Optronics.
(g) "NASD" means the National Association of Securities Dealers.
(h) "REGISTRABLE SECURITIES" means (i) for each Holder, the shares of
AXT Common Stock issued to such Holder pursuant to the Merger Agreement,
together with all other shares of AXT Common Stock issued in respect thereof (by
way of stock split, dividend, recapitalization, share exchange or otherwise),
and (ii) for all Holders, the sum of the Registrable Securities held by them.
Registrable Securities shall not include any shares of AXT Common Stock
transferred by a Holder pursuant to SECTION 8 hereof to any person who does not
agree to be bound by the terms of this Agreement.
(i) "SEC" means the Securities and Exchange Commission.
<PAGE> 2
(j) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(k) "AXT COMMON STOCK" means common stock, per value $0.01 per share
of AXT.
The term "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.
Capitalized terms used and not otherwise defined in this Agreement have the
respective meanings assigned in the Merger Agreement.
2. REGISTRATION.
(a) Requests for Registration. A majority in interest of the Holders
shall be entitled to make up to two (2) requests that AXT register the
Registrable Securities pursuant to the Securities Act, subject in each case to
the following limitations: (i) no request for registration of any Registrable
Securities shall be made unless and until not less than six (6) months have
elapsed after the Closing Date; (ii) no request for registration of any
Registrable Securities shall be made if a request for registration of the same
Registrable Securities has theretofore been made pursuant to this Agreement and
AXT has caused the securities covered by such request to be registered; and
(iii) AXT shall not be obligated to effect such registration if the Holders,
together with the holders of any other securities of AXT entitled to inclusion
in such registration, propose to sell Registrable Securities at an aggregate
price to the public (before deduction of any underwriters' discounts or
commissions) of less than $1,000,000. All requests for registration shall be in
writing, signed by the requesting Holders, and delivered to AXT at the address
specified in the Merger Agreement for notices. If a request for registration is
made, AXT shall give notice of such request to all other Holders at their
respective address as reflected in the books and records of AXT, and each such
other Holder shall have the right to request that such other Holder's
Registrable Securities be included in the registration, and (subject to the
limitations set forth elsewhere in this Agreement) such other Holder's
Registrable Securities shall be included in such registration to the extent that
notice of such other Holder's request is received by AXT within ten (10) days
after notice of the original registration request is given by AXT to such other
Holders. Upon receipt of a registration request in accordance with this SECTION
2(a), AXT shall use reasonable efforts to cause the applicable Registrable
Securities to be registered under the Securities Act so as to permit the resale
thereof, and in connection therewith AXT shall use reasonable efforts to prepare
and file with the SEC and shall use reasonable efforts to cause to become
effective promptly thereafter a registration statement on Form S-3 (or any
successor form to Form S-3) (a "DEMAND REGISTRATION STATEMENT"). Subject to the
provisions of SECTION 2(d), AXT shall use commercially reasonable efforts to
keep such Demand Registration Statement continuously effective for up to one
hundred eighty (180) days or until such earlier date as of which all of the
Registrable Securities included in the registration statement shall have been
disposed of in the manner described in the registration statement.
Notwithstanding the foregoing, if for any reason the effectiveness of such
Demand Registration Statement is postponed or suspended then the foregoing
period shall be extended, if required to complete the disposition of such
Registrable Securities, by up to the aggregate number of days of
2
<PAGE> 3
such postponement or suspension. For purpose of the preceding sentence, the
registration shall not be deemed to have been effective (i) unless the
registration statement with respect thereto has become effective, or (ii) if
after such registration has become effective such registration or the related
offer, sale, or distribution of Registrable Securities thereunder is prohibited
by any stop order, injunction or any other order or requirement of the
Commission or other governmental agency for any reason not attributable to the
Holders, or (iii) if the conditions to closing specified in the underwriting
agreement, if any, entered into in connection with such registration are not
satisfied or waived, in each case other than as a result of action or inaction
of the Holders. AXT shall have complied with its obligations under this
Agreement, and Holders' right to demand registration pursuant to this SECTION 2
(a) shall be deemed to have been satisfied upon the earlier of (x) the date as
of which all of the Registrable Securities included in the Demand Registration
Statement shall have been disposed of pursuant to the Demand Registration
Statement, or (y) the date as of which such Demand Registration shall have been
effective for an aggregate period of one hundred eighty (180) days, provided
that no stop order or similar order is thereafter entered. Notwithstanding
anything to the contrary herein, AXT shall not be required to effect more than
two (2) registrations of Registrable Securities pursuant to this SECTION 2(a).
(b) Piggyback Registration. If at any time AXT proposes to prepare
and file a registration statement (other than a Demand Registration Statement)
under the Securities Act with the SEC covering equity securities of AXT, it will
give written notice of its intention to do so (the "PIGGYBACK NOTICE"), at least
thirty (30) days prior to the filing of any such registration statement, to the
Holders; provided, however, that AXT shall not be required to give such 30 day
advance notice of its intention to file a registration statement if the Board of
Directors determines in good faith that it is not in the Company's best interest
to provide advance notice of a proposed registration statement, and provided,
further, that in such circumstance AXT shall give written notice not later than
the date of filing the registration statement and the date of such written
notice shall be deemed the date of the Piggyback Notice. Upon the written
request of a Holder (a "REQUESTING HOLDER"), made within ten (10) days after the
date of the Piggyback Notice, that AXT include any of the Requesting Holder's
Registrable Securities in such proposed registration statement, AXT shall use
reasonable efforts to cause such registration statement (a "PIGGYBACK
REGISTRATION STATEMENT") to be declared effective under the Securities Act by
the SEC so as to permit the public sale of the Requesting Holder's Registrable
Securities pursuant thereto. Notwithstanding the provisions of this SECTION
2(b), AXT shall have the right, at any time after it shall have given a
Piggyback Notice pursuant to this SECTION 2(b) (irrespective of whether any
written request for inclusion of Registrable Securities shall have already been
made), to elect not to file any Piggyback Registration Statement or to withdraw
the same after the filing but prior to the effective date thereof. If the
registration pursuant to this SECTION 2(b) shall be underwritten in whole or in
part, the right of any Holder to have its Registrable Shares included in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting upon the same terms and conditions as the other holders of AXT
Common Stock otherwise being sold through the underwriters. As a condition
precedent to the inclusion of such Registrable Securities in such underwriting,
each Holder acknowledges and understands that it may be required to (i) provide
information and make representations and warranties to the underwriters
concerning such Holder's ownership and intended means of distribution of such
Holder's Registrable Securities
3
<PAGE> 4
and such other matters as may be required by law, (ii) indemnify the
underwriters to the extent as any other similarly situated holders including
shares in such underwriting, and (iii) enter into holdback and other agreements
at the request of the underwriters. If the managing underwriter for such
underwriting advises AXT that marketing factors require limitation of the number
of shares to be underwritten, the underwriters and AXT may limit the number of
Registrable Shares to be included in the registration and underwriting, or may
exclude Registrable Securities entirely from such registration and underwriting,
in accordance with the following priorities:
(i) First there shall be included in the registration and
underwriting any securities sought to be newly issued by AXT;
(ii) Second, if after according priority to the securities
described in clause (i) above, additional shares are to be included in the
registration and underwriting in accordance with the advice of the underwriter,
then the additional shares to be registered and sold shall be allocated pro rata
among the selling Holders of Registrable Securities and all other selling
shareholders that AXT has agreed may include shares in such registration.
If application of the priorities set forth above should result in some
but not all of the Registrable Securities sought to be included by Holders in
the registration and underwriting being so included, AXT shall advise all
Holders of any such limitation, and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders exercising their registration rights and all other
selling shareholders in proportion, as nearly as practicable, to the respective
amounts of outstanding shares of common stock of AXT held by each such selling
shareholder to the total number of outstanding shares of AXT common stock. If
any Holder disapproves of the terms of any such underwriting, it may elect to
withdraw therefrom by written notice to AXT and the underwriter. Any Registrable
Securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration.
(c) Information. Each Holder shall provide all information and
materials to AXT, and take all action, as may be required in order to permit AXT
to comply with all applicable requirements of law and of the SEC and to obtain
any desired acceleration of the effective date of any Demand Registration
Statement or Piggyback Registration Statement. The provision of such information
and materials by Holders is a condition precedent to the obligations of AXT
pursuant to this Agreement.
(d) Certain Limitations.
(i) For each Holder who is an "insider" of AXT or who may be
deemed to be an Affiliate of AXT, AXT shall keep effective each Demand
Registration Statement filed pursuant to SECTION 2(a) and each Piggyback
Registration Statement which includes Registrable Securities of a Requesting
Holder pursuant to SECTION 2(b) during such periods as directors, officers and
Affiliates of AXT are permitted to purchase and sell AXT Common Stock pursuant
to the insider trading policies of AXT (subject to the right of AXT to suspend
use of a prospectus pursuant to SECTION 3(b)) and, notwithstanding the
provisions of
4
<PAGE> 5
SECTION 3(a)(i) and any other provision of this Agreement to the contrary, shall
not be required to keep any such registration statement effective at any other
time. By making a registration request or selling any Registrable Securities
pursuant to any such registration statement, each such Holder who is an insider
or Affiliate of AXT agrees that the right of such Holder to resell Registrable
Securities pursuant to any such registration statement hereunder shall be
suspended, unless otherwise agreed by AXT, whenever AXT "insiders" (as defined
in the AXT insider trading policy furnished to such Holders and any amendments
thereto hereafter furnished to such Holders) are restricted from trading capital
stock of AXT (a "RESTRICTED PERIOD"). Unless otherwise specified by AXT by
written notice to such Holders who are insiders or Affiliates of AXT, the term
"RESTRICTED PERIOD" shall include the period commencing at the opening of
trading on the first day of the third month of each fiscal quarter of AXT and
expiring at the close of trading on the second full trading day following
release of AXT financial results for such fiscal quarter (or, in the case of the
fourth quarter of each year, for the fiscal year). If a Restricted Period shall
commence or shall expire or terminate on any other date, AXT shall provide
advance written notice of such commencement and prompt written notice of such
expiration or termination.
(ii) Notwithstanding any other provision of this Agreement, AXT
shall be entitled to postpone the declaration of effectiveness of any Demand
Registration Statement filed pursuant to SECTION 2(a) and any Piggyback
Registration Statement filed pursuant to SECTION 2(b) for a reasonable period of
time, but not in excess of ninety (90) calendar days after the date the SEC has
informed AXT that the registration statement will not be reviewed or that the
SEC has no further comments with regard to the registration statement, if the
chief executive officer of AXT, acting in good faith, determines that there
exists material nonpublic information about AXT which the Board of Directors of
AXT does not wish to disclose in a registration statement which information
would otherwise be required by the Securities Act to be disclosed in any Demand
Registration Statement filed pursuant to SECTION 2(a) or any Piggyback
Registration Statement which includes Registrable Securities of a Holder
pursuant to SECTION 2(b).
(iii) With respect to any Demand Registration Statement filed
pursuant to SECTION 2(a) and any Piggyback Registration Statement which includes
securities of a Requesting Holding pursuant to SECTION 2(b) or any
post-effective amendment, when the same has become effective; AXT shall notify
each Holder (i) of any request by the SEC or any other federal or state
governmental authority during the period of effectiveness of the registration
statement for amendments or supplements to the registration statement or related
prospectus or for additional information relating to the registration statement,
(ii) of the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose, (iii) of the
receipt by AXT of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose, or (iv) of the happening of any event which makes
any statement made in the registration statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or which requires the making of any changes in the
registration statement or prospectus so that, in the case of the registration
statement, it will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and that in the case of the prospectus, it
will not contain an untrue statement of a
5
<PAGE> 6
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. In such event, AXT may suspend use of the prospectus on
written notice to each Holder, in which case each Holder shall not dispose of
Registrable Securities covered by the registration statement or prospectus until
copies of a supplemented or amended prospectus are distributed to the Holders or
until the Holders are advised in writing by AXT that the use of the applicable
prospectus may be resumed. AXT shall use its commercially reasonable efforts to
ensure that the use of the prospectus may be resumed as soon as practicable. AXT
shall use its commercially reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of the registration statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of any
of the securities for sale in any jurisdiction, at the earliest practicable
moment. AXT shall, upon the occurrence of any event contemplated by clause (iv),
prepare a supplement or post-effective amendment to the registration statement
or a supplement to the related prospectus or any document incorporated therein
by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
such prospectus will not contain an untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
3. SELLING PROCEDURES. Any sale of Registrable Securities pursuant to the
registration statement filed and declared effective in accordance with SECTION
2(a) hereof shall be subject to the following conditions and procedures:
(a) Stockholder Notice. The selling Holder shall provide written
notice ("STOCKHOLDER NOTICE") to AXT no less than five (5) business days prior
to such Holder's intended sale. Within three (3) business days of receipt of the
Stockholder Notice, AXT will inform such Holder in writing if the registration
statement and final prospectus then on file with the SEC is current and
otherwise complies with the Securities Act such that sales may be made
thereunder. After receipt of notice from AXT that the registration statement is
current and complies with the Securities Act, such Holder shall then have ten
(10) business days to sell the Registrable Securities proposed to be sold,
unless the notice from AXT specifies that no sale may be made until the date of
intended sale as specified in the Stockholder Notice, in which case such Holder
must wait until the date of the intended sale to make such sale and such Holder
shall have ten (10) business days thereafter to made such sale. After such ten
(10) day period, the Holder shall once again comply with the procedures set
forth in this SECTION 3(a) prior to any further sales.
(b) Updating the Prospectus. If AXT informs the selling Holder that
the registration statement or final prospectus then on file with the SEC is not
current or otherwise does not comply with the Securities Act, AXT shall use
commercially reasonable efforts to promptly provide to the selling Holder a
current prospectus that complies with the Securities Act on or before the date
of the intended sale of the Registrable Securities as disclosed in the
Stockholder Notice; provided, however, that AXT shall have the right to delay
the preparation of
6
<PAGE> 7
a current prospectus that complies with the Securities Act for up to sixty (60)
days without explanation to the Holder, in which case the time of such
suspension shall be added to the minimum of 180 days of effectiveness of the
registration statement set forth in SECTIONS 2(a) and 4(a).
(c) Blackout Periods. In addition to the restrictions set forth in
SECTION 2(d) above, Holders who become employees of AXT agree to be bound by
AXT's Insider Trading Policy as such may be in effect from time to time for so
long as such Holders remain employees of AXT and are subject to such policy.
4. OBLIGATIONS OF AXT.
(a) Subject in each case to the limitations of SECTION 2 (including
SECTION 2(d)) above, AXT shall (i) use all reasonable efforts to cause such
registration statement to become effective promptly after filing and to keep
each such registration statement effective until the Termination Date (as
hereinafter defined); (ii) prepare and file with the SEC such amendments and
supplements to such registration statements and the prospectuses used in
connection therewith as may be necessary, and to comply with the provisions of
the Securities Act with respect to the sale or other disposition of all
securities proposed to be registered in each such registration statement until
the Termination Date (as hereinafter defined); (iii) furnish to each Holder such
number of copies of any prospectus (including any preliminary prospectus and any
amended or supplemented prospectus) in conformity with the requirements of the
Securities Act, and such other documents, as each Holder may reasonably request
in order to effect the offering and sale of the shares of the Registrable
Securities to be offered and sold, but only while AXT shall be required under
the provisions hereof to cause such registration statement to remain current;
and (iv) use reasonable efforts to register or qualify the shares of the
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as each Holder shall
reasonably request (provided that AXT shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such jurisdiction where it has not
been qualified). For purposes of this SECTION 4(a), "TERMINATION DATE" with
respect to a given registration statement filed pursuant to SECTION 2(a) or
SECTION 2(b) means the earlier of (i) the first anniversary of the Closing Date,
(ii) such time as all of the Registrable Securities then held by such Holder can
be sold by such Holder in a three-month period in accordance with Rule 144 under
the Securities Act, (iii) the date on which all of the Registrable Securities
have been resold pursuant to Rule 144 or an effective registration statement,
and (iv) the date on which the registration statement has been effective for an
aggregate of one hundred eighty (180) days.
(b) In connection with any offering of shares of Registrable
Securities registered pursuant to this Agreement, AXT shall (i) furnish each
Holder, at AXT's expense, with unlegended certificates representing ownership of
the shares of Registrable Securities being sold in such denominations as each
Holder shall request and (ii) instruct the transfer agent and registrar of the
Registrable Securities to release any stop transfer orders with respect to the
shares of Registrable Securities being sold.
7
<PAGE> 8
5. EXPENSES. AXT shall pay all of the out-of-pocket costs expenses
incurred in connection with a registration of Registrable Securities pursuant
SECTION 2(a) or SECTION 2(b) to this Agreement , including all SEC, NASD and
blue sky registration and filing fees, printing expenses, transfer agents' and
registrars' fees, and the reasonable fees and disbursements of AXT's outside
counsel and independent accountants, but not including underwriting discounts
and commissions on the Registrable Securities and fees and costs of separate
counsel for the Holders. Underwriting fees and commissions on the Registrable
Securities and any fees and costs of separate counsel retained by the Holders
shall be borne pro rata among the participating Holders on the basis of the
number of shares registered.
6. INDEMNIFICATION. In the event of any offering registered pursuant to
this Agreement:
(a) Indemnification by AXT. AXT will indemnify each Holder and its
directors, officers, legal counsel and independent accountants, and each person
controlling a Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, or any amendment or
supplement thereto, incident to any offering registered pursuant to this
Agreement, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they are made, not misleading,
or any violation by AXT of any rule or regulation promulgated under the
Securities Act, or state securities laws applicable to AXT in connection with
any such registration, and subject to SECTION 6(c) of this Agreement, will
reimburse each such Holder, and each person controlling such Holder, for any
legal and any other out-of-pocket expenses reasonably incurred in connection
with investigating, preparing or defending any such claim, loss, damage,
liability or action, provided that AXT will not be liable to the extent that any
such claim, loss, damage, or liability arises out of or is based in any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to AXT by such Holder
or controlling person for use therein.
(b) Indemnification by Holders. Each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify AXT, each
of its directors and officers and its legal counsel and independent accountants,
each underwriter, if any, of AXT's securities covered by such a registration
statement, each person who controls AXT or such underwriter within the meaning
of Section 15 of the Securities Act, and each other such Holder, and such
Holder's legal counsel and independent accountants, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse AXT, such Holders,
such directors, officers, legal counsel, independent accountants,
8
<PAGE> 9
underwriters or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to AXT by such Holder for use therein; provided, however, that the
obligations of such Holders hereunder shall be several and not joint and shall
be limited to an amount equal to the respective net proceeds before expenses and
commissions to each such Holder of Registrable Securities sold as contemplated
herein.
(c) Defending Claims. Each party entitled to indemnification under
this SECTION 6 (the "INDEMNIFIED PARTY") shall give notice to the party required
to provide indemnification (the "INDEMNIFYING PARTY") promptly after such
Indemnified Party receives written notice of any claim as to which indemnity may
be sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, except to the
extent, but only to the extent, that the Indemnifying Party's ability to defend
against such claim or litigation is impaired as a result of such failure to give
notice. Notwithstanding the foregoing sentence, the Indemnified Party may retain
its own counsel to conduct the defense of any such claim or litigation, and
shall be entitled to be reimbursed by the Indemnifying Party for expenses
incurred by the Indemnified Party in defense of such claim or litigation, in the
event that the Indemnifying Party does not assume the defense of such claim or
litigation within sixty days after the Indemnifying Party receives notice
thereof from the Indemnified Party. Further, an Indemnifying Party shall be
liable for amounts paid in settlement of any such claim or litigation only if
the Indemnifying Party consents in writing to such settlement (which consent
shall not be reasonably withheld). No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party a release from all liability in respect to such claim
or litigation.
(d) Contribution. If the indemnification provided for in this Section
3 from the Indemnifying Party is unavailable to an Indemnified Party hereunder
in respect of any claim, loss, damage or liability referred to herein, then the
Indemnifying Party, to the extent such indemnification is unavailable, in lieu
of indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such claims, losses, damages or
liabilities in such proportion as is appropriate to reflect the relative benefit
to or fault of the Indemnifying Party and Indemnified Parties in connection with
the actions that resulted in such claims, losses, damages and liabilities. The
relative benefit of such Indemnifying Party and Indemnified Parties shall be
determined by reference to, among other things, the gross proceeds received by
each such party from the sale of Registrable Securities in the manner
contemplated
9
<PAGE> 10
hereby. The relative fault of such Indemnifying Party and Indemnified Parties
shall be determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact, has been made by, or
relates to information supplied by, such Indemnifying Party or Indemnified
Parties, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or payable by a
party as a result of the claims, losses, damages or liabilities referred to
above shall be deemed to include any legal fees or expenses reasonably incurred
by such party in connection with any investigation or proceeding. The parties
hereto agree that it would not be just and equitable if contribution pursuant to
this paragraph were determined by pro rata allocation or by any other method of
allocation that does not take account of the equitable considerations referred
to above in this paragraph. No party guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any party.
(e) Survival. The obligations of AXT and each Holder under this
SECTION 6 shall survive the completion of any offering of Registrable Securities
registered pursuant to this Agreement and otherwise.
7. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause AXT to register
Registrable Securities pursuant to this Agreement may be assigned by a Holder to
a transferee of Registrable Securities only if: (a) AXT is furnished with
written notice of the name and address of such transferee and the Registrable
Securities with respect to which such registration rights are being assigned and
a copy of a duly executed written instrument in form reasonably satisfactory to
AXT pursuant to which such transferee assumes all of the obligations and
liabilities of its transferor hereunder and agrees itself to be bound hereby;
and (b) immediately following such transfer, the disposition of such Registrable
Securities by the transferee is restricted under the Securities Act. AXT shall
not be liable for failure to include such assignee's securities in any offering
hereunder unless AXT receives such written notice and agreement sufficiently in
advance of the effectiveness of the registration statement so as to permit such
inclusion without significant prejudice to the rights of AXT or of the other
Holders of Registrable Securities.
8. AMENDMENT OF REGISTRATION RIGHTS. This Agreement, and the registration
rights granted hereunder, may be amended or modified only by an instrument in
writing executed by or on behalf of AXT and Holders holding a majority of the
Registrable Securities then outstanding.
9. TERMINATION. The registration rights set forth in this Agreement shall
terminate with respect to a Holder (and the shares held by such Holder shall
cease to constitute Registrable Securities) upon the earlier of (i) the second
anniversary of the Closing Date, (ii) such time as all of the Registrable
Securities then held by such Holder can be sold by such Holder in a three-month
period in accordance with Rule 144 under the Securities Act, and (iii) the date
on which all of the Registrable Securities have been resold pursuant to Rule 144
or an effective registration statement.
10. MARKET STAND-OFF. The Holders hereby agree that, except as to any
Registrable Securities included in the registration pursuant hereto, they shall
not, to the extent requested by
10
<PAGE> 11
AXT and an underwriter of AXT Common Stock, sell or otherwise transfer or
dispose of any Registrable Securities for one hundred eighty (180) days
following the effective date of a registration statement of AXT filed under the
Securities Act, provided that all officers and directors and holders of 5% or
more of the outstanding shares of Common Stock of AXT enter into similar
agreements. In order to enforce the foregoing, AXT may impose stop-transfer
instructions with respect to the Registrable Securities of the Holders (and the
shares or securities of every other person subject to the foregoing
restrictions) until the end of such period.
11. OBLIGATIONS OF HOLDERS. By exercising any rights hereunder, each
Holder shall be deemed to assume all obligations of a Holder hereunder as though
such Holder were a signatory hereto. AXT may require Holders to execute an
instrument whereby such Holders expressly assume all obligations under this
Agreement of Holders as a condition precedent to any obligations of AXT
hereunder.
12. REPORTS UNDER THE 1934 ACT. For two years following the Closing Date,
with a view to making available to the Holders the benefits of SEC Rule 144
promulgated under the Securities Act and any other rule or regulation of the SEC
that may at any time permit a Holder to sell securities of AXT to the public
without registration, AXT agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of AXT under the Securities Act and the Exchange Act;
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by AXT as to its
compliance with the reporting requirements of SEC Rule 144 , the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of AXT and such other reports and documents so filed by AXT, and (iii) such
other information as may be reasonably requested in availing any Holder of any
rule or regulation of the SEC which permits the selling of any such securities
without registration.
11
<PAGE> 12
IN WITNESS WHEREOF, this Agreement has been executed by the parties or
their representatives thereunto duly authorized as of the date first written
above.
AMERICAN XTAL TECHNOLOGY, INC.
By: /s/ Morris S. Young
--------------------------
Name: Morris S. Young
Title: Chief Executive Officer and President
LYTE OPTRONICS, INC.
/s/ Keith Halsey
------------------------------
Name: Keith Halsey
Title: Chief Executive Officer
SHAREHOLDERS' REPRESENTATIVE
By: /s/ Keith Halsey
--------------------------
Keith Halsey
/s/ Robert Shih
--------------------------
Robert Shih
[Signature Page to Registration Rights Agreement]
12
<PAGE> 1
EXHIBIT 21.1
EXHIBIT 21.1 -- LIST OF SUBSIDIARIES
American Xtal Technology Japan Co. LTD
Beijing Tongmei Xtal Technology Co., LTD
Alpha Photonics (Barbados), Inc.
Advanced Semiconductors Corp. Ltd.
Lyte Optronics, Ltd.
Bestal International Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-67297) of American Xtal Technology, Inc. of our
report dated March 20, 2000 relating to the financial statements, which appears
in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
April 13, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-67297.
ARTHUR ANDERSEN LLP
Los Angeles, California
April 13, 2000
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