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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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)
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.
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The table below sets forth our products, their available sizes and selected
applications:
SUBSTRATE MATERIAL DIAMETER (IN INCHES) APPLICATIONS
- ------------------ -------------------- -------------------------------------------------
GaAs semi-insulating 2,3,4,6 - Cellular phones
- Direct broadcast television
- High-performance transistors
- Satellite communications
GaAs semi-conducting 2,3,4 - LEDs
- Lasers
- Optical couplers
- Displays
InP semi-insulating 2,3,4 - 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
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
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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.
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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.
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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.
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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
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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
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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:
NAME AGE POSITION
---- --- --------
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
- ---------------
(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.
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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.
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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.
SQUARE FEET
---------------
LOCATION PROPERTY DESCRIPTION OWNED LEASED
- -------- ----------------------------- ------ ------
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
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.
HIGH LOW
------- -------
Fiscal 1998
January 1, 1998 through May 19, 1998...................... Not Applicable
May 20, 1998 through June 30, 1998........................ $15.000 $10.125
Third Quarter ended September 30, 1998.................... $15.500 $ 7.000
Fourth Quarter ended December 31, 1998.................... $10.813 $ 6.000
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
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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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995(3) 1996(3) 1997(3) 1998(2) 1999(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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
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(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.
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YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995(2) 1996(2) 1997(2) 1998(1) 1999(1)
------- ------- ------- -------- --------
(IN THOUSANDS)
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
- ---------------
(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
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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.
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The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
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%
===== ===== =====
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
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
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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.
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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.
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)
-------- -------- --------- -------- -------- -------- --------- --------
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
======= ======= ======= ======= ======= ======= ======= =======
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)
-------- -------- --------- -------- -------- -------- -------- --------
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%
===== ===== ===== ===== ===== ===== ===== =====
- ---------------
(1) Includes Substrates, Visible Emitters and Consumer Products
(2) Includes Substrates and Consumer Products only
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The following table sets forth the restatement of the first three quarters
of 1999 related to adjustments of account balances at Lyte Optronics, Inc.
(IN THOUSANDS)
--------------------------------------------------------------------
Q1 Q1 Q2 Q2 Q3 Q3
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- --------
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
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 quart