UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
(Mark One)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2002 | |
| or | ||
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________ |
Commission File Number 0-24085
AXT, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE (State or other jurisdiction of Incorporation or organization) |
94-3031310 (I.R.S. Employer Identification No.) |
4281 Technology Drive, Fremont, California 94538
(Address of principal executive offices) (Zip code)
(510) 683-5900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at September 30, 2002 | |
|
|
||
| Common Stock, $.001 par value | 22,495,094 |
1
AXT, INC.
TABLE OF CONTENTS
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| PART I. | FINANCIAL INFORMATION | |||||
| Item 1. | Financial Statements | |||||
| Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 | 3 | |||||
| Condensed Consolidated Income Statements for the three and nine months ended September 30, 2002 and 2001 | 4 | |||||
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 | 5 | |||||
| Notes To Condensed Consolidated Financial Statements | 6-13 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14-33 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34 | ||||
| Item 4. | Evaluation of Disclosure Controls and Procedures | 35 | ||||
| PART II. | OTHER INFORMATION | |||||
| Item 1. | Legal Proceedings | 35 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 35-36 | ||||
| Signatures | 37 | |||||
| Certifications | 37-39 | |||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AXT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| September 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
| (Unaudited) | |||||||||||
Assets: |
|||||||||||
Current assets |
|||||||||||
Cash and cash equivalents |
$ | 12,647 | $ | 37,538 | |||||||
Short-term investments |
4,591 | 25,673 | |||||||||
Accounts receivable |
11,868 | 15,684 | |||||||||
Inventories |
50,570 | 55,587 | |||||||||
Prepaid expenses and other current assets |
6,023 | 3,577 | |||||||||
Income tax receivable |
7,721 | — | |||||||||
Deferred income taxes |
— | 10,557 | |||||||||
Total current assets |
93,420 | 148,616 | |||||||||
Property, plant and equipment |
47,189 | 82,573 | |||||||||
Restricted deposits |
10,315 | — | |||||||||
Long-term investments |
6,906 | 6,552 | |||||||||
Other assets |
5,104 | 4,511 | |||||||||
Goodwill |
— | 1,107 | |||||||||
Total assets |
$ | 162,934 | $ | 243,359 | |||||||
Liabilities and Stockholders’ Equity: |
|||||||||||
Current liabilities |
|||||||||||
Accounts payable |
$ | 4,902 | $ | 2,943 | |||||||
Accrued liabilities |
10,025 | 13,362 | |||||||||
Income tax payable |
3,000 | 308 | |||||||||
Current portion of long-term debt |
957 | 2,336 | |||||||||
Current portion of capital lease obligation |
3,971 | 4,372 | |||||||||
Total current liabilities |
22,855 | 23,321 | |||||||||
Long-term debt, net of current portion |
10,236 | 14,342 | |||||||||
Long-term capital lease, net of current portion |
5,783 | 10,002 | |||||||||
Other long-term liabilities |
1,567 | 1,273 | |||||||||
Deferred income taxes |
— | 8,099 | |||||||||
Total liabilities |
40,441 | 57,037 | |||||||||
Stockholders’ equity: |
|||||||||||
Preferred stock, $.001 par value; 2,000 shares authorized; 883
shares issued and outstanding |
3,532 | 3,532 | |||||||||
Common stock, $.001 par value per share; 70,000 shares authorized;
22,495 and 22,383 shares issued and outstanding |
154,485 | 153,635 | |||||||||
Retained earnings |
(34,665 | ) | 28,984 | ||||||||
Other comprehensive income |
(859 | ) | 171 | ||||||||
Total stockholders’ equity |
122,493 | 186,322 | |||||||||
Total liabilities and stockholders’ equity |
$ | 162,934 | $ | 243,359 | |||||||
See accompanying notes to these unaudited condensed consolidated financial statements.
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AXT, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Revenue |
$ | 14,948 | $ | 22,783 | $ | 50,919 | $ | 104,159 | ||||||||||
Cost of revenue |
18,491 | 17,423 | 51,241 | 66,300 | ||||||||||||||
Gross profit (loss) |
(3,543 | ) | 5,360 | (322 | ) | 37,859 | ||||||||||||
Operating expenses: |
||||||||||||||||||
Selling, general and administrative |
4,993 | 5,826 | 14,853 | 17,105 | ||||||||||||||
Research and development |
1,308 | 1,701 | 3,756 | 6,834 | ||||||||||||||
Property, plant and equipment and goodwill impairment loss |
15,107 | — | 39,086 | — | ||||||||||||||
Total operating expenses |
21,408 | 7,527 | 57,695 | 23,939 | ||||||||||||||
Income (loss) from operations |
(24,951 | ) | (2,167 | ) | (58,017 | ) | 13,920 | |||||||||||
Interest expense |
364 | 493 | 1,114 | 1,637 | ||||||||||||||
Other (income)/expense |
(303 | ) | (488 | ) | 8,188 | (1,542 | ) | |||||||||||
Income (loss) before provision for income taxes |
(25,012 | ) | (2,172 | ) | (67,319 | ) | 13,825 | |||||||||||
Provision expense (benefit) for income taxes |
3,661 | (782 | ) | (3,670 | ) | 4,977 | ||||||||||||
Net income (loss) |
$ | (28,673 | ) | $ | (1,390 | ) | $ | (63,649 | ) | $ | 8,848 | |||||||
Basic income (loss) per share |
(1.28 | ) | (0.06 | ) | (2.84 | ) | 0.40 | |||||||||||
Diluted income (loss) per share |
(1.28 | ) | (0.06 | ) | (2.84 | ) | 0.39 | |||||||||||
Shares used in per share calculations: |
||||||||||||||||||
Basic |
22,478 | 22,333 | 22,443 | 22,246 | ||||||||||||||
Diluted |
22,478 | 22,333 | 22,443 | 22,931 | ||||||||||||||
See accompanying notes to these unaudited condensed consolidated financial statements.
4
AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2002 | 2001 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss): |
$ | (63,649 | ) | $ | 8,848 | |||||||
Adjustments to reconcile net income (loss) to cash provided by (used in)
operations: |
||||||||||||
Depreciation |
7,498 | 6,187 | ||||||||||
Deferred income taxes |
3,259 | — | ||||||||||
Amortization |
299 | 266 | ||||||||||
Stock compensation |
— | 83 | ||||||||||
Impairment write-down on marketable equity securities |
9,160 | — | ||||||||||
Non-cash (gain)\loss on marketable equity securities |
(251 | ) | — | |||||||||
Loss on disposal of property, plant and equipment |
323 | — | ||||||||||
Impairment loss on property, plant and equipment and goodwill |
39,086 | — | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
3,816 | 4,624 | ||||||||||
Inventories |
5,017 | (6,692 | ) | |||||||||
Prepaid expenses |
(2,341 | ) | (228 | ) | ||||||||
Other assets |
(125 | ) | (120 | ) | ||||||||
Accounts payable |
1,959 | (1,532 | ) | |||||||||
Accrued liabilities |
(3,336 | ) | 3,256 | |||||||||
Income taxes |
(5,031 | ) | — | |||||||||
Other long-term liabilities |
294 | 64 | ||||||||||
Net cash (used in) provided by operating activities |
(4,022 | ) | 14,756 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchases of property, plant and equipment |
(10,412 | ) | (24,321 | ) | ||||||||
Purchases of marketable securities |
(16,366 | ) | (22,748 | ) | ||||||||
Proceeds from sale of marketable securities |
15,570 | 1,034 | ||||||||||
Net cash used in investing activities |
(11,208 | ) | (46,035 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from (payments of): |
||||||||||||
Issuance of common stock |
850 | 4,612 | ||||||||||
Capital leases borrowings |
— | 3,143 | ||||||||||
Capital leases payments |
(4,620 | ) | (3,231 | ) | ||||||||
Short-term debt payments |
— | (966 | ) | |||||||||
Long-term debt borrowings |
637 | — | ||||||||||
Long-term debt payments |
(6,699 | ) | (2,171 | ) | ||||||||
Net cash (used in) provided by financing activities |
(9,832 | ) | 1,387 | |||||||||
Effect of exchange rate changes |
171 | 130 | ||||||||||
Net decrease in cash and cash equivalents |
(24,891 | ) | (29,762 | ) | ||||||||
Cash and cash equivalents at the beginning of the period |
37,538 | 68,585 | ||||||||||
Cash and cash equivalents at the end of the period |
$ | 12,647 | $ | 38,823 | ||||||||
Non cash activity: |
||||||||||||
Purchase of property, plant and equipment through financing |
$ | 577 | $ | 2,170 | ||||||||
See accompanying notes to these unaudited condensed consolidated financial statements.
5
AXT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying condensed consolidated balance sheets as of September 30, 2002 and December 31, 2001, the condensed consolidated income statements for the three and nine months ended September 30, 2002 and 2001, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001 have been prepared by AXT, Inc. (“AXT” or the “Company”) and are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT and its subsidiaries for all periods presented.
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ materially from those estimates.
The results of operations are not necessarily indicative of the results to be expected in the future or for the full fiscal year. It is recommended that these condensed consolidated financial statements be read in conjunction with the Company’s consolidated financial statements and the notes thereto included in its 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2002.
Certain reclassifications have been made to the prior years consolidated financial statements to conform to current period presentation.
Note 2. Gain on Demeter Warrants
In August 2000, the Company entered into a business transfer and acquisition agreement with Demeter Technologies, Inc., a Delaware corporation founded by Theodore S. Young, the former president of the Company’s fiber optic division and a former member of the Company’s board of directors, and Robert Shih, the former chief technology officer of the Company’s opto-electronics division. Under this agreement, the Company agreed to transfer certain non-core rights to Demeter relating to research and development activities in the field of fiber optics. The Company entered into non-competition agreements with Messrs. Shih and Young that prohibit them from certain activities, including the manufacture of certain VCSEL devices. The Company leased to Demeter a portion of its owned facility in El Monte, California, subleased a portion of its rented facility in El Monte, California, leased certain equipment, including an MOCVD machine, and sold certain inventory relating to fiber optics to Demeter. In exchange, Demeter granted to the Company a warrant to purchase up to 4.5 million shares of its Series A convertible preferred stock at a price of $0.5714 per share. Demeter was purchased by Finisar Corporation and as a result, AXT converted its Demeter warrant for approximately 1.1 million shares of Finisar Corporation common stock on November 21, 2000. On November 21, 2000, a gain of $27.3 million was recorded in other income as a result of the transaction. On December 10, 2001, the Company received approximately 86,000 additional shares of common stock of Finisar Corporation that had been held in escrow in accordance with the terms of the acquisition agreement between Demeter and Finisar. A gain of $1.1 million was recorded in other income as a result of receiving these additional shares. On December 31, 2001, the Company wrote its investment in Finisar Corporation down to current market value, in accordance with SFAS 115, resulting in a realized loss of $16.7 million recorded in other income and expense. On February 4, 2002, the Company received approximately 24,000 additional shares of common stock of Finisar Corporation that had been held in escrow in accordance with the terms of the acquisition agreement between Demeter and Finisar. A gain of $251,000 was recorded in other income as a result of receiving these additional shares. The investment in Finisar Corporation common stock is accounted for as available for sale and
6
classified as a short-term investment. On June 30, 2002, the Company wrote its investment in Finisar Corporation down to current market value, in accordance with SFAS 115, resulting in a realized loss of $9.2 million recorded in other income and expense.
Note 3. Long-Lived Asset Impairment
In the second quarter of 2002, the Company completed an impairment review of certain manufacturing assets used in the substrate and opto-electronics divisions. The review was undertaken due to the recent history of operating losses, declines in the demand for our products due to macro economic conditions and excess capacity resulting in part from the relocation of certain manufacturing operations in the Company’s substrate division to China.
Upon completion of the review, the Company determined that the carrying value of the manufacturing assets was not expected to be recoverable and accordingly recorded an impairment charge in order to write-down the related assets to their estimated fair value. The Company determined the amount of the impairment charge by estimating the net present value of expected future cash flows to be generated by the assets. Based on this analysis, the Company recorded non-cash impairment charges of $14.1 million in the substrate segment and $9.9 million in the opto-electronics segment for the laser diode operating unit.
In the third quarter of 2002, the Company completed an impairment review of certain manufacturing assets in the opto-electronics division. The review was undertaken due to the unexpected operating losses incurred in the third quarter, declines in product demand due to the Company’s inability to manufacture high volumes of its LED products to the Company’s customers’ requirements, and the need for the Company to reduce its current level of production to conserve cash.
Upon completion of the review, the Company determined that the carrying value of the manufacturing assets was not expected to be recoverable and accordingly recorded an impairment charge in order to write-down the related assets to their estimated fair value. The Company determined the amount of the impairment charge by estimating the net present value of expected future cash flows to be generated by the assets. Based on this analysis, the Company recorded a non-cash impairment charge of $14.0 million.
Note 4. Goodwill Impairment
The Company adopted the provisions of SFAS 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. Under the transition provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002 based upon the Company’s analysis at that time. However, during the quarter ended September 30, 2002, circumstances developed that indicated that the goodwill was likely impaired and the Company performed an impairment analysis as of September 30, 2002. This analysis resulted in a $1.1 million impairment of goodwill. The circumstances that led to the impairment included a net loss for the quarter and a significant drop in the Company’s market capitalization.
Note 5. Investments
The Company classifies all of its investment securities as available-for-sale securities as prescribed by Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and does not hold any debt securities with the positive intent and ability to hold to maturity, or trading securities bought and held principally for the purpose of selling in the near term. All investments considered to be strategic in nature are carried at fair value, which is determined based on quoted market prices, with net unrealized gains and losses included in comprehensive income, net of tax. The components of investments at September 30, 2002 are summarized below (in thousands):
7
| Aggregate | Unrealized | |||||||||||
| Available for sale | Cost | Fair value | Gain/(loss) | |||||||||
Money market |
$ | 6,434 | $ | 6,434 | $ | — | ||||||
Corporate bonds |
17,321 | 17,476 | 155 | |||||||||
Government agency bonds |
3,502 | 3,526 | 24 | |||||||||
Corporate equity securities |
2,782 | 810 | (1,972 | ) | ||||||||
| $ | 30,039 | $ | 28,246 | $ | (1,793 | ) | ||||||
Recorded as: |
||||||||||||
Cash equivalents |
$ | 6,434 | ||||||||||