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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-24085
AXT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3031310
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4281 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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, 2000 as reported on the Nasdaq National Market, was approximately
$662,397,732. 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 January 31, 2001, 22,025,628 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 2001 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 -- OVERVIEW
We design, develop, manufacture and distribute high-performance compound
semiconductor substrates, as well as opto-electronic semiconductor devices, such
as high-brightness light emitting diodes, or HBLEDs, and vertical cavity surface
emitting lasers, or VCSELs. Our substrate products are used primarily in fiber
optic communications, wireless communications and lighting display applications.
We believe our proprietary vertical gradient freeze, or VGF, technique for
manufacturing compound semiconductor substrates provides significant benefits
over traditional methods and has enabled us to become a leading manufacturer of
compound semiconductor substrates. We pioneered the commercial use of VGF
technology to manufacture gallium arsenide, or GaAs, substrates and have used
VGF technology to manufacture substrates from other materials, such as indium
phosphide, or InP, and germanium, or Ge. Customers for our substrates include
Alpha Industries, Agilent Technologies, EMCORE, Nortel Networks, RF Micro
Devices, SDL and Sumitomo Chemical. Our acquisition of Lyte Optronics provided
us with expertise in epitaxial processes for manufacturing opto-electronic
semiconductor devices. We have used these capabilities to make blue, green and
cyan HBLEDs and VCSELs. Our opto-electronic semiconductor devices are used in a
wide range of applications, such as solid-state lighting and fiber optic
communications. We have recently undertaken an initiative to significantly
expand our substrate and device manufacturing capacity and to reduce the overall
cost structure of our manufacturing operations.
INDUSTRY BACKGROUND
Historically, most semiconductor devices were created on a single crystal
base material, or substrate, of silicon. Today, however, a growing number of
electronic and opto-electronic devices are being developed with requirements
that exceed the capabilities of silicon. Many of these devices address the
continually increasing demand to send, receive and display information on
high-speed wireless and wireline networks. This demand has created a growing
need for power-efficient high-performance systems that can operate at high
frequencies and can be produced cost-effectively in high volumes. These systems
enable the growth and development of a wide range of end-user applications. For
example, International Data Corporation, or IDC, expects the number of mobile
wireless devices for Internet access and other data transmission to grow from
10.0 million units in 1999 to more than 562.0 million units by 2004.
Other examples of applications for these systems include:
- fiber optic networks and optical systems within these networks;
- new voice and high-speed wireless data systems;
- infrared emitters and optical detectors in computer systems;
- solid-state lighting, including exterior and interior automobile
lighting; and
- satellite communications systems.
As a result of the limitations of silicon-based technologies, semiconductor
device manufacturers are increasingly using compound semiconductor substrates to
improve the performance of semiconductor devices and to enable these new
applications. This shift is occurring even though these compound semiconductor
substrates are more expensive. Compound semiconductor substrates are composed of
multiple elements that
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include a metal, such as gallium, aluminum or indium, and a non-metal, such as
arsenic, phosphorus or nitrogen. The resulting compounds include gallium
arsenide, indium phosphide and gallium nitride. Advantages of devices
manufactured on compound substrates over devices manufactured using silicon
substrates include:
- operation at higher speeds;
- lower power consumption;
- less noise and distortion; and
- opto-electronic properties that enable devices to emit and detect light.
The first step in producing a compound semiconductor substrate is to grow a
crystal of the materials. Historically, two processes have been used to grow
crystals: the Liquid Encapsulated Czochralski, or LEC, technique and the
Horizontal-Bridgeman, or HB, technique. We believe two trends are reducing the
appeal of these techniques: more semiconductor devices are being formed using an
epitaxial process and semiconductor device manufacturers are switching their
production lines to six-inch diameter substrates. The LEC and HB techniques each
have difficulties producing six-inch, high-quality, low-cost compound
semiconductor substrates for epitaxial processing. We introduced our VGF
technique in 1986 to respond to the limitations inherent in the LEC and HB
techniques.
Compound semiconductor substrates enable the development of a wide range of
electronic products including power amplifiers and radio frequency integrated
circuits used in wireless handsets. Compound substrates can also be used to
create opto-electronic products including HBLEDs and VCSELs used in solid state
lighting and fiber optic communications.
HBLEDs are solid-state compound semiconductor devices that emit light. The
global demand for HBLEDs is experiencing rapid growth because HBLEDs have a long
useful life, consume approximately 10% of the power consumed by incandescent or
halogen lighting and improve display visibility. Applications where HBLEDs are
increasingly used include wireless handset displays, automotive displays, full
color video displays, traffic lights and various consumer applications.
According to Strategies Unlimited, an independent industry analyst, the market
for HBLEDs is expected to grow from $1.2 billion in 2000 to approximately $3.3
billion by 2005.
VCSELs are semiconductor lasers that emit light in a cylindrical beam and
offer significant advantages over traditional laser diodes, including greater
control over beam size and wavelength, reduced manufacturing complexity and
packaging costs, lower power consumption and higher frequency performance.
Electronics and computing systems manufacturers are using VCSELs in a broad
range of end-market applications, including fiber optic switching and routing,
such as Gigabit Ethernet for communications networks and Fibre Channel for
storage area networks. According to ElectroniCast, an independent industry
analyst, the market for VCSELs is expected to grow from $262.0 million in 1999
to approximately $3.4 billion by 2004.
THE AXT ADVANTAGE
We are a leading developer and supplier of high-performance compound
semiconductor substrates and opto-electronic semiconductor devices, including
HBLEDs and VCSELs. There are four key causes of our success:
Our VGF technology is a competitive advantage. We pioneered the commercial
use of VGF technology to manufacture GaAs substrates and we believe that through
the use of VGF we have become the leading worldwide supplier of GaAs substrates.
Our VGF process produces substrates with high mechanical strength and physical
and chemical uniformity, as well as a low defect rate. The following changes in
our customers' technologies are increasing demand for substrates with these
features:
- Greater use of epitaxy rather than ion implantation. Many of the newest
generation of high-performance semiconductor devices for fiber optic and
wireless communications applications, including heterojunction bipolar
transistors, or HBTs, and pseudomorphic high electron mobility
transistors, or
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PHEMTs, are popular because they offer lower power consumption and better
device linearity than their predecessors. These devices are created using
epitaxial processed substrates. Our VGF substrates are more suitable for
these applications than are our competitors' products.
- Switch to six-inch diameter wafers. Many of our semiconductor device
manufacturing customers are switching their GaAs production lines to
six-inch diameter substrates in order to reduce unit costs and increase
capacity. Our VGF technique is better suited to developing six-inch
substrates than are competing methods.
- Introduction of InP substrates. Even GaAs cannot meet the requirements
for increasing system performance and network bandwidth of some
applications, including SONET OC-768 applications that operate at speeds
up to 40 gigabits per second. Manufacturers of these devices are turning
to InP substrates that can support these features. We have successfully
used our VGF technique to develop InP and we were among the first to
offer four-inch InP substrates.
In addition, VGF technology gives us further benefits.
- Customer technology independence. Our semiconductor device manufacturing
customers often compete among themselves. For example, several of our
customers compete for technological leadership in the wireless handset
market. These customers or end-users all require devices made on GaAs
substrates. We are, therefore, largely immune from the effects of such
competition and benefit from an overall need for faster, more power
efficient electronic and opto-electronic devices.
- Faster and less expensive capacity expansion. We build our own crystal
growing equipment rather than ordering it from third-party vendors. This
capability, coupled with the fact that our equipment is less expensive
and simpler to manufacture than LEC equipment, enables us to increase our
capacity faster and at lower cost than our competitors. This ability is
particularly beneficial in the current rapid growth environment for
six-inch GaAs and all InP substrates. Retaining the equipment
manufacturing process within AXT also helps protect our proprietary
technology.
Some customers specify VGF substrates. Our wafers are qualified with most
of the key suppliers of GaAs and InP semiconductor devices. The qualification
process, which is lengthy and must be repeated for each customer, can be a
barrier to entry for a new material or supplier. Furthermore, certain of our
customers now specify that they will only accept VGF-grown substrates for their
manufacturing processes. As the businesses of these customers grow, we are
well-positioned to grow with them as a key supplier.
Our low-cost manufacturing is an advantage. We use our technology and
economics of scale to be a low-cost manufacturer. Our expansion in China
provides us with a combination of lower costs for facilities, labor and
materials than we encounter in the United States and positions us to gain access
to low-cost raw materials supply sources. Furthermore, as we increase our
production capacity, we are able to spread fixed costs over a larger revenue
base, thereby leveraging our cost structure and achieving economies of scale.
We entered the opto-electronic semiconductor device market quickly through
our acquisition of Lyte Optronics. Our acquisition of Lyte Optronics provided us
with expertise in epitaxial processes for manufacturing high-volumes of
opto-electronic semiconductor devices. High-quality epitaxy is a key requirement
for most of today's advanced opto-electronic semiconductor devices, such as
HBLEDs and VCSELs. Since acquiring Lyte Optronics, we have developed
opto-electronic products that are among the more difficult to create using
epitaxy, including green HBLEDs and VCSELs. We have filed five patent
applications for our approach to fabricating HBLEDs. We believe that we can be
an important additional domestic source of these devices.
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THE AXT STRATEGY
Our goals are to strengthen our position as the leading developer and
supplier of high-performance compound semiconductor substrates and to develop a
leading position in the market for opto-electronic semiconductor devices. Key
elements of our strategy include:
Expand GaAs substrate manufacturing capacity and decrease manufacturing
cost structure. We are increasing our production capacity in order to increase
our share of the market for GaAs substrates. We believe that we can extend our
leadership position by increasing our manufacturing capacity more rapidly than
competitors and in a manner that enables us to further lower unit production
costs. Much of this capacity increase will be for production of our six-inch
diameter GaAs substrates. We further believe that expanding our manufacturing
operations in China will allow us to increase capacity more quickly and at lower
cost. Furthermore, this expansion will allow us to form strategic alliances with
suppliers of key raw materials.
Strengthen our leadership position in the InP market. We believe that there
will be rapid growth in demand for the next generation of high speed fiber optic
devices, such as devices used in SONET OC-768 applications. These products are
manufactured on InP substrates and we are positioning ourselves to be the
leading supplier of InP substrates by significantly expanding our production
capacity. Our sales of InP substrates during the year ended December 31, 2000
grew 373.8% compared to our sales of InP substrates during 1999.
Advance VGF technology leadership. We believe that our ability to produce
high-quality substrates using VGF technology continues to provide us with a
competitive advantage in the high growth compound semiconductor substrate
markets. We intend to continue our investment in research and development in
order to expand our leadership position in the commercial use of VGF technology.
For example, we intend to leverage our existing knowledge in growing six-inch
GaAs substrates to grow longer crystals, which will further reduce our costs. We
are also launching an effort to develop six-inch diameter InP substrates in
response to customer requests.
Enhance our opto-electronic semiconductor devices. We intend to further
penetrate the high growth HBLED and VCSEL markets through continued investment
in research and development and expansion of production capacity. We are
expanding our manufacturing capacity by adding metal-organic chemical vapor
deposition, or MOCVD, reactors and are modifying our epitaxial process to
improve device performance and yield. We have invested in the research and
infrastructure required to grow our own sapphire substrates, which are used in
producing blue, green and cyan LEDs. During the next year we expect to increase
our VCSEL sales and develop our chip fabrication capabilities, which will enable
us to develop one- and two-dimensional VCSEL arrays.
Leverage existing customer relationships. We currently sell our GaAs
substrates to more than 300 customers and believe that we are a qualified
provider to most of the significant users worldwide of GaAs substrates. We
intend to capitalize on our relationships with our customers in order to both
expand sales of GaAs substrates and sell other compound substrates, such as InP.
We also intend to establish alliances and joint development arrangements with
customers in emerging high growth markets to develop new products, increase
manufacturing efficiencies and more effectively serve our customers' needs.
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TECHNOLOGY
Our core technologies include our proprietary VGF technique used to produce
high quality crystals that are processed into compound substrates, and our
epitaxy technologies that enable us to manufacture blue, green and cyan HBLEDs
and VCSELs.
[VGF DIAGRAM]
Our VGF technique is designed to control the crystal-growth process with
minimal temperature variation and is the technique we use to produce our GaAs,
InP and Ge substrates. Unlike traditional techniques, our VGF technique places
the hot compound melt above the cool crystal, thereby reducing the turbulence of
the melt which results when the melt and crystal are inverted. The temperature
gradient between the melt and the crystal in the VGF technique is significantly
lower than in traditional techniques. These aspects of the VGF technique enable
us to grow crystals that have a relatively low defect density and high
uniformity. The crystal and the resulting substrate, are mechanically strong,
resulting in lower breakage rates during a customer's manufacturing process.
Since the temperature gradient is controlled electronically rather than by
physical movement, the sensitive crystal is not disturbed. In addition, the melt
and growing crystal are contained in a closed chamber, which isolates the
crystal from the outside environment to reduce potential contamination. This
substrate isolation allows for more precise control of the gallium-to-arsenic
ratio, resulting in better consistency and uniformity of the crystals.
Our VGF technique offers several benefits when compared to traditional
crystal growing technologies. The Liquid Encapsulated Czochralski, or LEC,
technique is the traditional method for producing semi-insulating GaAs
substrates for electronic applications. 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. Unlike the VGF technique, the LEC technique is designed so that
the hotter GaAs melt is located beneath the cooler crystal, resulting in greater
turbulence in the melt, and at a temperature gradient that is significantly
higher than the VGF technique. The turbulence and high temperature cause
LEC-grown crystals to have a higher dislocation density than VGF-grown crystals,
resulting in a higher rate of breakage during the device manufacturing process.
As an open process, the LEC technique also results in greater propensity for
contamination and difficulty controlling the ratio of gallium to
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arsenic. It requires large, complex electro-mechanical systems that are
expensive and require highly skilled personnel to operate.
Our VGF technique also offers advantages over the Horizontal-Bridgeman, or
HB, technique, for producing semi-conducting GaAs substrates for opto-electronic
applications. The HB technique holds the GaAs melt in a semi-cylindrical
container, causing crystals grown using the HB method to have a semi-circular,
or D-shaped, cross-section. Accordingly, more crystal material is discarded when
the D-shaped substrate is subsequently trimmed to a round shape. In addition,
crystals grown using the HB technique have a higher defect density than
VGF-grown crystals. The HB technique cannot be used cost-effectively to produce
substrates greater than three inches in diameter. The HB technique houses the
GaAs melt in a quartz container during the growth process, which can contaminate
the GaAs melt with silicon impurities, making it unsuitable for producing
semi-insulating GaAs substrates.
The following table provides a comparison of these three techniques:
VGF
--------------- HB LEC
ELECTRONIC AND --------------- --------------
SUBSTRATE APPLICATIONS OPTO-ELECTRONIC OPTO-ELECTRONIC ELECTRONIC
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Largest wafer size available........ 6" 3" 6"
Stress/defect levels................ Very Low Low High
Crystal purity...................... Good Poor Good
Applicability to multiple
materials......................... GaAs, InP, Ge GaAs GaAs, InP, GaP
Equipment and labor cost............ Very Low Low High
Amount of waste material............ Very Low High Low
Equipment flexibility............... Versatile Limited Limited
Equipment downtime.................. Minimal Moderate High
Number of competitors............... Few Many Many
VCSEL devices include single lasers as well as one- and two-dimensional
arrays of lasers. Array products are more highly valued than single lasers
because they provide greater bandwidth, but are harder to form because they
require epitaxial structures that possess very high uniformity in chemical
composition and low variation in thickness. These features are hard to achieve
because the epitaxial process used to make a VCSEL device places approximately
200 layers of epitaxial structure on a substrate, as compared to the less than
10 layers of material deposited on a substrate to make an HBLED. Our epitaxial
process, which includes proprietary in situ monitoring techniques, allows us to
manufacture highly reliable VCSEL wafers that demonstrate comparatively low
threshold currents and high output power and are sufficiently uniform to produce
one- and two-dimensional VCSEL devices. We employ both ion implantation and
oxidation processes to produce VCSEL devices from our wafers.
We create our opto-electronic semiconductor devices using MOCVD, which is
an epitaxial technique to synthesize compound semiconductor thin films onto
substrates. MOCVD reactors are available from multiple sources and wafers
fabricated using MOCVD generally possess a better combination of uniformity and
optical and electronic properties and are easier to produce cost-effectively in
high volumes than wafers manufactured by other methods, such as molecular beam
epitaxy, vapor phase epitaxy or liquid phase epitaxy. As a result, MOCVD
reactors have become the choice of the opto-electronic industry for fabricating
devices such as LEDs, VCSELs and laser diodes. We modify our MOCVD reactors to
improve their performance and use a proprietary growth recipe that controls
temperature, material impurity, defect density, material thickness and layer
composition while allowing for multiple wafer batch replication.
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PRODUCTS
We design, develop, manufacture and distribute high-performance
semiconductor substrates, as well as opto-electronic devices, such as HBLEDs and
VCSELs. The table below sets forth our products and selected applications:
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PRODUCT APPLICATIONS
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SUBSTRATES ELECTRONIC OPTO-ELECTRONIC
GaAs - Cellular phones - LEDs
- Direct broadcast television - Lasers
- High-performance transistors - Optical couplers
- Satellite communications - Displays
InP - Fiber optic communications - Fiber optic communications
- Satellite communications - Lasers
- High-performance transistors
- Automotive collision avoidance
radars
Ge - Satellite solar cells
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VISIBLE EMITTERS
Blue, green and cyan - Full color displays
HBLEDs - Lighting for the interior and exterior of automobiles
- Traffic signals
- Back lighting for cellular phones and instrument panels
- White light for general illumination
VCSELs - Fiber optic and wireless communications
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Substrates. We currently sell compound substrates manufactured from GaAs
and InP, as well as single-element substrates manufactured from Ge. We supply
GaAs substrates in two-, three-, four-, five- and six-inch diameters. We
manufacture InP substrates in two-, three- and four-inch diameters and Ge
substrates in four-inch diameters. We are developing and intend to initiate
production of sapphire substrates.
Visible Emitters. We sell blue, green and cyan HBLED products in wafer and
chip form. We began selling blue HBLED products in the first quarter of 2000 and
have recently begun shipping green and cyan HBLEDs. We introduced our first
VSCEL product in August 2000.
CUSTOMERS
We sell our compound semiconductor substrates worldwide to leading
semiconductor device manufacturers. Our top substrate customers include:
Agilent Technologies
Alpha Industries
Alpha Photonics
EMCORE
Epistar
Eptaxial Products
Epitronics
Kopin
Motorola
Nortel Networks
Osram
Picogiga
Precision Opto Wafer
Quantum Epitaxial Designs
RF Micro Devices
SDL
Spectrolab
Sumitomo Chemical
TRW Space & Defense
Visual Photonics Epitaxy
We sell our HBLED products primarily to customers that incorporate them
into lighting products. Our HBLED customers include Harvatek and King Brite.
MANUFACTURING
We believe that our success is partially due to our manufacturing
efficiency and high product yields and we continually emphasize quality and
process control throughout our manufacturing operations. We perform
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our substrate manufacturing operations at our facilities in Fremont, California
and Beijing, China. As part of our plan to reduce manufacturing costs, we are
shifting many of our labor-intensive processes to our facilities in China, where
costs, including labor costs, are generally lower. We intend to transfer the
majority of our substrate manufacturing operations to China by the end of 2001.
We believe that our capital investment and subsequent operating costs are lower
for our manufacturing facilities in China relative to the U.S. Many of our
manufacturing operations are fully automated and computer monitored or
controlled, enhancing reliability and yield. We use proprietary equipment in our
substrate manufacturing operations to protect our intellectual property and
control the timing and pace of capacity additions. By assembling our own
equipment, we can quickly increase capacity without incurring delays caused by
ordering additional equipment or converting older equipment to new technologies.
Our epitaxial wafer production is located in El Monte, California. Our Fremont
and Beijing substrate facilities are ISO 9002 certified, and we are working
toward ISO certification for our other manufacturing facilities.
We depend on a single or limited number of suppliers for certain critical
materials used in the production of our substrates. We generally purchase these
materials through standard purchase orders and not pursuant to long-term supply
contracts. Although we seek to maintain sufficient inventory levels of certain
materials to guard against interruptions in supply and to meet our near term
needs, and have to date been able to obtain sufficient supplies of materials in
a timely manner, there may be shortages of certain key materials, such as
gallium. Accordingly, to help ensure continued supply of materials, we have
formed strategic alliances with suppliers of key raw materials required to
manufacture our products. We believe that these alliances will be advantageous
in procuring materials to support our continued growth.
We use MOCVD equipment to manufacture our opto-electronic devices. We are
installing several new MOCVD reactors and expect that these additional machines
will meet our needs for the foreseeable future. The substrate materials and raw
wafers used in our visible emitter products are purchased from our substrate
division and other sources.
SALES AND MARKETING
Each of our divisions is responsible for its own sales and marketing
activities, and each maintains its own sales and marketing personnel. In
addition, each of our divisions advertises in trade publications, distributes
promotional materials, publishes technical articles, conducts marketing programs
and participates in industry trade shows and conferences in order to raise
market awareness of our products.
Substrates. We sell our substrate products through our direct sales force
in the U.S. and through independent sales representatives in France, Japan,
South Korea, Taiwan and the United Kingdom. Our direct sales force consists of
sales engineers who are knowledgeable in the manufacture and use of compound and
single-element substrates. 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 them with ongoing technical support
improves customer satisfaction and will provide us with a competitive advantage
in selling other substrates to our customers. The substrate division has
launched a program with selected customers in which we will guarantee that high
volumes of six-inch GaAs and other substrates will be delivered on specific
dates and the customer will make a prepayment for part of the value of its
order. We intend to allow several major customers to participate in this
program.
Visible Emitters. We sell our HBLED products primarily through independent
sales representatives to lamp package manufacturers in Taiwan and China. We
intend to expand sales of these products in the U.S. and Europe primarily using
our direct sales force. We sell our VCSEL devices through our direct sales force
and through independent sales representatives.
RESEARCH AND DEVELOPMENT
To maintain and improve our competitive position, we focus our research and
development efforts on designing new proprietary processes and products,
improving the performance of existing products and reducing manufacturing costs.
We have assembled a multi-disciplinary team of highly skilled scientists,
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engineers and technicians to meet our research and development objectives. As a
result of our ongoing research and development activities, we believe that we
offer superior quality products. For example, some customers now qualify
substrates manufactured using our VGF technique as the only acceptable material
in their design specifications.
Our current substrate research and development activities focus on
continued development and enhancement of six-inch GaAs crystals, including
improved yield, greater substrate strength and increased crystal length. We
continue to develop other compound substrates, such as InP and a low boron
version of our standard GaAs substrates and are initiating research into
development of six-inch InP products. We are developing and intend to initiate
production of sapphire substrates.
We are focusing on all three major stages of LED development: epitaxy,
wafer fabrication and die fabrication. Our goal is to improve brightness and
yield, create specific colors and enhance uniformity of product, both within and
across production runs. Specific colors are created by controlling the indium
content of the epitaxial layers, which we achieve, in part, from modifications
that we make to our MOCVD reactors. The wafer and die fabrication experience we
gained in our Lyte Optronics laser diode operation has helped us develop similar
techniques for LEDs.
We began research in 1999 to develop VCSEL devices with uniform epitaxy
structures on three-inch wafers and announced VCSEL wafer products in August
2000. We continue to improve their performance characteristics and intend to
develop one- and two-dimensional array VCSEL chips.
We have historically funded a significant portion of our research and
development efforts through contracts with the U.S. government and customer
funded research projects, although we do not have any projects underway
currently. Under our contracts, we retain rights to the VGF and wafer
fabrication technology that we have developed. The U.S. government retains the
rights to utilize the technologies we develop for government purposes only.
During the period from 1997 to 1999 these contracts amounted to $5.7 million.
Currently, our research and development is internally funded.
COMPETITION
The semiconductor industry is characterized by rapid technological change
and price erosion, as well as intense foreign and domestic competition. We
believe we currently have a leading position in the existing markets for
compound semiconductor substrates primarily as a result of our expertise in VGF
technology. However, we believe we face actual and potential competition from a
number of established domestic and international companies.
We believe that the primary competitive factors in the markets in which our
products compete are:
- quality;
- price;
- performance;
- meeting customer specifications;
- customer support and satisfaction; and
- customer investment in 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 use of intellectual property laws
and general economic conditions.
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Our primary competition in the market for compound semiconductor substrates
includes Freiberger, Hitachi Cable, Japan Energy, Litton Airtron and Sumitomo
Electric. In addition, we also face competition from compound semiconductor
device manufacturers that produce substrates for their own internal use, and
from companies such as IBM that are actively developing alternative compound
semiconductor materials.
Our primary competition in the market for LED products include Cree,
LumiLED, Nichia Chemicals, Toyoda Gosei and United Epitaxy. In general, LED
manufacturers in Taiwan and China have a competitive pricing advantage due to
low overhead and small research and development investments. Cree, Nichia
Chemicals, Sony and Toyoda Gosei have significant patent portfolios that other
competitors, including us, must either design around or license.
We compete with Agilent, EMCORE and Honeywell in the market for VCSEL
devices.
PROTECTION OF OUR INTELLECTUAL PROPERTY
Our success and the competitive position of our VGF technique depend on our
ability to maintain trade secrets and other intellectual property protections.
We rely on a combination of patents, copyrights, trademark and trade secret
laws, non-disclosure agreements and other intellectual property protection
methods to protect our proprietary technology. We believe that, due to the rapid
pace of technological innovation in the markets for our products, our ability to
establish and maintain a position of technology leadership depends as much on
the skills of our development personnel as upon the legal protections afforded
our existing technologies. 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. However, reliance on trade secrets
is only an effective business practice insofar as trade secrets remain
undisclosed and a proprietary product or process is not reverse engineered or
independently developed.
To date, we have been issued four U.S. patents which relate to our VGF
products and processes. We have five U.S. patent applications pending which
relate to our LED or laser diode technology, and have patent applications
pending in Europe, Canada, China, Japan and Korea which are based on one of our
U.S. patents that relates to our VGF processes. We have no issued foreign
patents.
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 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.
We are cooperating with the California Occupational Safety and Health
Administration, or Cal-OSHA, in an investigation regarding impermissible levels
of potentially hazardous materials in certain areas of our manufacturing
facility in Fremont, California. In May 2000, Cal-OSHA levied a fine against us
in the amount of $313,655 for alleged health and safety violations. We are
appealing the citations, and have put in place engineering, administrative and
personnel protective equipment programs to address this issue. To our knowledge,
no accidents or injuries resulted from this matter.
EMPLOYEES
As of December 31, 2000, we had 1,359 full-time employees, of whom 1,117
were principally engaged in manufacturing, 176 in sales and administration and
66 in research and development. Of these employees, 826 are located in the U.S.,
531 in China and 2 in Japan. Our success is in part dependent on our ability to
attract and retain highly skilled workers. Our employees are not represented by
a union and we have never experienced a work stoppage. We consider our relations
with our employees to be good.
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EXECUTIVE OFFICERS AND DIRECTORS
As of December 31, 2000, our executive officers and directors were as
follows:
NAME AGE POSITION
---- --- --------
Morris S. Young, Ph.D. .............. 56 Chairman of the Board of Directors, President and
Chief Executive Officer
Donald L. Tatzin..................... 49 Senior Vice President, Chief Financial Officer and
Director
Davis Zhang.......................... 44 President, Substrate Division
Xiao Gordon Liu, Ph.D. .............. 37 Senior Vice President, Marketing and Sales, and
Engineering and Development
Heng Liu, Ph.D. ..................... 40 President, LED Division
Bingwen Liang, Ph.D. ................ 39 President, VCSEL Division
Jesse Chen........................... 42 Director
B.J. Moore........................... 64 Director
David C. Chang, Ph.D................. 59 Director
Morris S. Young, Ph.D. co-founded AXT in 1986 and has served as chairman of
our board of directors since February 1998 and president and chief executive
officer, as well as a director, since 1989. From 1985 to 1989, Dr. Young was a
physicist at Lawrence Livermore National Laboratory. Dr. Young holds a bachelor
of science degree in metallurgical engineering from Chengkung University,
Taiwan, a master of science degree in metallurgy from Syracuse University and a
Ph.D. in metallurgy from Polytechnic University.
Donald L. Tatzin has served as a director since February 1998 and as chief
financial officer since August 2000. From April 2000 to August 2000, Mr. Tatzin
served as our interim chief financial officer. From 1993 to 1998, Mr. Tatzin
served as executive vice president of Showboat, a gaming company. In addition,
Mr. Tatzin served as a director for Sydney Harbour Casino, an Australian gaming
company, from April 1995 to October 1996 and as its chief executive officer from
April 1996 to October 1996. From 1976 to 1993, Mr. Tatzin was a director and
consultant with Arthur D. Little. Mr. Tatzin holds a bachelor of science degree
in economics and a bachelor of science and masters degrees in city planning from
the Massachusetts Institute of Technology and a master of science degree in
economics from Australian National University.
Davis Zhang co-founded AXT in 1986 and served as senior vice president,
production from January 1994 until August 1999, and as president of the
substrate division since August 1999. From 1987 to 1993, Mr. Zhang served as our
senior production manager. Mr. Zhang holds a bachelor of science degree in
mechanical engineering from Northern Communication University, Beijing, China.
Xiao Gordon Liu, Ph.D. joined us in June 1995 as senior engineer and was
promoted to vice president, engineering and development in November 1998 and to
senior vice president, marketing and sales, and engineering and development in
August 2000. Prior to joining us, Dr. Liu was a postdoctoral fellow and
associate specialist at University of California at Berkeley and a research
associate at the University of Lund, Sweden. Dr. Liu holds a Ph.D. in physics
from the University of Lund, Sweden and has published more than 30 scientific
papers.
Heng Liu, Ph.D. joined us in September 1999 as director of LED epitaxy and
was promoted to president of the newly formed LED division in March 2000. From
September 1994 to September 1999, Dr. Liu worked at the opto-electronics
division of Hewlett-Packard Company as a research and development engineer. Dr.
Liu holds an undergraduate degree from National Chiao-Tung University in Taiwan,
a masters degree in physics from University of Oregon and a Ph.D. in engineering
from North Carolina State University.
Bingwen Liang, Ph.D. joined us in January 2000 as director of advanced
technologies and was subsequently promoted to president of the VCSEL division.
From November 1999 to January 2000, Dr. Liang was research and development
manager of the III-V materials group in the fiber-optic communication division
of Agilent Technologies. From July 1993 to November 1999, Dr. Liang was a
research and development manager for Hewlett-Packard Company. Dr. Liang has a
Ph.D. in applied physics from the University of California at San Diego and has
published more than 45 scientific papers.
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Jesse Chen has served as a director 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, 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
bachelor of science degree in aeronautical engineering from Chenkung University,
Taiwan and a master of science degree in electrical engineering from Loyola
Marymount University.
B.J. Moore has served as a director 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 boards of
directors for Adaptec, 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
bachelor of science degree and a master of science degree in electrical
engineering from the University of Tennessee.
David C. Chang, Ph.D. has served as a director since December 14, 2000,
filling the Board position vacated by Theodore Young, who resigned from the
Board in August 2000. Dr. Chang is an internationally recognized scholar in the
field of electromagnetics, he has served as president of Polytechnic University
in New York since 1994. Previously, Dr. Chang was dean of the College of
Engineering and Applied Sciences at Arizona State University for two years.
Formerly a professor of electrical and computer engineering at the University of
Colorado, Dr. Chang served as director of the NSF/Industry Corporate Research
Center for Microwave and Millimeter-Wave Computer Aided Design from 1981 to
1989. Dr. Chang holds a master of science degree and a Ph.D. in applied physics
from Harvard University and a bachelor of science degree in electrical
engineering from National Cheung-Kung University in Taiwan.
BOARD COMPOSITION
Our board of directors currently consists of five members. Our certificate
of incorporation and bylaws provide that the terms of office of the members of
the board of directors are divided into three classes: class I, whose term will
expire at the annual meeting of stockholders to be held in 2002, class II, whose
term will expire at the annual meeting of stockholders to be held in 2003, and
class III, whose term will expire at the annual meeting of stockholders to be
held in 2001. The class I directors are Morris S. Young and David C. Chang, the
class II directors are Jesse Chen and Donald L. Tatzin and the class III
director is B.J. Moore.
At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following their election. As a result, only one class of directors will be
elected at each annual meeting of stockholders, with the other classes
continuing for the remainder of their terms. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors. This classification of the board of
directors may delay or prevent changes in our control or management. In
addition, our bylaws provide that the authorized number of directors may only be
changed by a resolution of the board of directors.
BOARD COMMITTEES
The audit committee of our board of directors recommends or will recommend
the appointment of our independent auditors, reviews our internal accounting
procedures and financial statements and consults with and reviews the services
provided by our independent auditors, including the results and scope of their
audit. The audit committee currently consists of Messrs. Chen, Moore and Chang.
The compensation committee of our board of directors reviews and recommends
to the board the compensation and benefits of all of our executive officers,
administers our stock option plans and establishes and reviews general policies
relating to compensation and benefits of our employees. The compensation
committee currently consists of Messrs. Chen, Moore and Chang.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1999, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000, and in which any director,
executive officer or holder of more than 5% of any class of our voting
securities or members of that person's immediate family had or will have a
direct or indirect material interest other than the transactions described
below.
Equipment & Materials, a California corporation engaged in international
trading and quartzware fabrication, supplies us with various raw materials from
China and has manufactured quartzware for us. Christina X. Li, the sole
shareholder and president of Equipment & Materials, is the wife of Davis Zhang,
the president of our substrate division. Purchases from Equipment & Materials
were approximately $8.9 million for the year ended December 31, 2000, $3.6
million for 1999 and $3.7 million for 1998. A balance of $318,000 due to
Equipment & Materials was included in accounts payable at December 31, 2000.
In August 2000, we entered into a business transfer and acquisition
agreement with Demeter Technologies, Inc., a Delaware corporation founded by
Theodore S. Young, the former president of our fiber optic division and a former
member of our board of directors, and Robert Shih, the former chief technology
officer of our visible emitter division. Under this agreement, we have agreed to
transfer certain non-core rights to Demeter relating to our research and
development activities in the field of fiber optics. We have entered into
non-compete agreements with Messrs. Shih and Young that prohibit them from
certain activities, including the manufacture of certain VCSEL devices. We have
leased to Demeter a portion of our owned facility in El Monte, California,
subleased a portion of our rented facility in El Monte, California, leased
certain equipment, including an MOCVD machine, and sold certain inventory
relating to fiber optics. In exchange, Demeter has granted to us 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 which we exercised in November 2000.
ITEM 2. PROPERTIES
Our principal properties are as follows:
SQUARE
LOCATION FEET PROPERTY DESCRIPTION
-------- ------ --------------------
Fremont, CA................................... 58,000 Production and Administration
Fremont, CA................................... 80,000 Production
Fremont, CA................................... 20,292 Administration
Fremont, CA................................... 9,280 Warehouse
Monterey Park, CA............................. 22,000 Production and Administration
Torrance, CA.................................. 6,674 Administration
Torrance, CA.................................. 15,027 Production
El Monte, CA.................................. 26,652 Production
El Monte, CA.................................. 6,281 Production
Beijing, China................................ 31,000 Production and Administration
Beijing, China................................ 31,000 Production
Beijing, China................................ 32,000 Production
Xiamen, China................................. 14,000 Production
All of the properties listed above are owned except for 20,292 square feet
in Fremont, the lease for which expires May 2005, 9,280 square feet in Fremont,
the lease for which expires in June 2005, 6,281 square feet in El Monte, the
lease for which expires in December 2006, the two Torrance properties, the
leases for which expire in May 2003, and the property in Xiamen, China, the
lease for which expires in 2001. 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.
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ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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 2000
First Quarter ended March 31, 2000..................... $45.750 $14.500
Second Quarter ended June 30, 2000..................... $46.000 $21.250
Third Quarter ended September 30, 2000................. $44.375 $31.125
Fourth Quarter ended December 31, 2000................. $41.688 $24.500
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, 2000, there were 131 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
The following selected consolidated financial data should be read in
conjunction with, and are referenced to, our consolidated financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue..................................................... $121,503 $75,372 $49,074 $25,335 $16,227
Cost of revenue, including restructuring cost of $1,844 in
2000...................................................... 73,684 50,026 29,003 15,227 10,065
-------- ------- ------- ------- -------
Gross profit................................................ 47,819 25,346 20,071 10,108 6,162
Operating expenses:
Selling, general, and administrative...................... 18,041 10,474 6,019 2,959 2,033
Research and development.................................. 8,769 2,566 2,504 1,289 592
Restructuring costs....................................... 6,409 -- -- -- --
Acquisition costs......................................... -- 2,810 -- -- --
-------- ------- ------- ------- -------
Total operating expenses............................ 33,219 15,850 8,523 4,248 2,625
-------- ------- ------- ------- -------
Income from operations...................................... 14,600 9,496 11,548 5,860 3,537
Interest expense............................................ 3,616 2,201 875 570 170
Other (income) and expense.................................. (28,432) (1,423) (715) 34 72
-------- ------- ------- ------- -------
Income from continuing operations before provision for
income taxes.............................................. 39,416 8,718 11,388 5,256 3,295
Provision for income taxes.................................. 14,978 4,380 4,668 1,216 1,249
-------- ------- ------- ------- -------
Income from continuing operations........................... 24,438 4,338 6,720 4,040 2,046
Discontinued operations:
Income (loss) from discontinued operations, net of tax
benefits................................................ (1,487) (3,658) (2,436) (3,220) 305
Loss on disposal, net of tax benefits..................... (1,341) -- -- -- --
Extraordinary item, net of tax benefits..................... -- (508) -- -- --
-------- ------- ------- ------- -------
Net income.................................................. $ 21,610 $ 172 $ 4,284 $ 820 $ 2,351
======== ======= ======= ======= =======
Basic income (loss) per share:
Income from continuing operations......................... $ 1.24 $ 0.23 $ 0.42 $ 1.09 $ 0.57
Income (loss) from discontinued operations................ (0.14) (0.19) (0.15) (0.87) 0.08
Extraordinary item........................................ -- (0.03) -- -- --
Net income................................................ 1.10 0.01 0.27 0.22 0.65
Diluted income (loss) per share:
Income from continuing operations......................... $ 1.16 $ 0.22 $ 0.41 $ 0.30 $ 0.16
Income (loss) from discontinued operations................ (0.13) (0.18) (0.15) (0.24) 0.02
Extraordinary item........................................ -- (0.03) -- -- --
Net income................................................ 1.03 0.01 0.26 0.06 0.19
Shares used in per share calculations:
Basic..................................................... 19,677 18,655 16,076 3,697 3,595
Diluted................................................... 21,059 19,771 16,325 13,598 12,524
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 68,585 $ 6,062 $ 16,438 $ 3,199 $ 1,171
Working capital............................................. 140,387 40,462 41,644 12,612 6,866
Total assets................................................ 250,220 115,762 102,983 37,796 23,178
Long-term capital lease, net of current portion............. 7,278 6,853 3,854 -- --
Long-term debt, net of current portion...................... 15,123 15,254 18,416 7,728 5,833
Stockholders' equity........................................ 185,347 62,459 61,164 17,387 10,237
Income statement data from our substrate division and discontinued consumer
products division is included in all periods presented. Income statement data
from our visible emitter division is included from the time of the acquisition
of the visible emitter business on September 29, 1998. All periods have been
restated to reflect the accounting for discontinued operations. As a result, the
discontinued consumer products division has been eliminated from continuing
operations in the income statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this Form 10-K. In addition to historical information, the
discussion in this Form 10-K contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by these forward-looking statements due to factors, including but
not limited to those set forth under "Risk Factors" and elsewhere in this Form
10-K.
OVERVIEW
We were founded in 1986 to commercialize and enhance our proprietary VGF
technique for producing high-performance compound semiconductor substrates. We
currently operate two divisions: our substrate division and our visible emitter
division. We made our first substrate sales in 1990 and our substrate division
currently sells GaAs and InP substrates to manufacturers of semiconductor
devices for use in applications such as fiber optic and wireless
telecommunications, LEDs and lasers. We also sell germanium substrates for use
in satellite solar cells. We acquired Lyte Optronics, Inc., on May 28, 1999, and
currently operate part of Lyte's historical business as our visible emitter
division. The visible emitter division manufactures HBLEDs, VCSELs and laser
diodes for the illumination markets, including full-color displays, automobile
lighting and traffic signals, as well as fiber optic communications. We
previously operated Lyte's other historical business as the consumer products
division which was discontinued in December 2000. This division had focused on
the design and manufacture of laser-pointing and alignment products for the
consumer, commercial and industrial markets.
We have been profitable on an annual basis since 1990. Our total revenue
from continuing operations was $121.5 million for 2000, $75.4 million for 1999
and $49.1 million for 1998. Our income from continuing operations was $24.4
million for 2000, $4.3 million for 1999 and $6.7 million for 1998.
In the third quarter of 2000, we raised approximately $96.0 million from
the sale of common stock in a private offering and a registered public offering.
Several non-recurring events occurred that had a substantial impact on our
performance and financial results for the quarter and year-ended December 31,
2000. First, we realized a $27.3 million non-cash gain as a result of Finisar
Corporation's acquisition of Demeter Technologies, a company in which we held
warrants to purchase preferred stock. This gain is included in other income.
Second, on December 14, 2000, the Board of Directors approved our plan to
discontinue our unprofitable consumer products division. As a result of
discontinuing the consumer products division, we incurred a pre-tax loss on
disposal of $2.2 million. The results of operations of the consumer products
division have been segregated from continuing operations and are reported
separately as discontinued operations in the income statements. Third, we are
exiting our unprofitable 650nm laser diode product line at the visible emitter
division. As a result of exiting this product line, we incurred a restructuring
charge of $8.2 million, of which $1.8 million has been classified as cost of
goods sold and $6.4 million has been classified as operating expense.
Our five largest customers accounted for 26.1% of our total revenue from
continuing operations in 2000, 24.8% in 1999 and 34.9% in 1998. No customer
accounted for more than 10.0% of our total revenue in 2000, 1999 or 1998.
We expect to expand substantially our production capacity for compound
substrates as well as blue, green and cyan HBLEDs. Most of the expansion for
substrates will occur at our facilities in China and the remainder of our
substrate expansion and all of our visible emitter expansion will occur at our
California facilities. We estimate that our capital expenditures for this
expansion during the next 12 months will be approximately $41.0 million.
In connection with our acquisition of Lyte Optronics and its subsidiaries,
we issued approximately 2,023,000 shares of common stock and 883,000 shares of
preferred stock, with a 5.0% annual dividend rate and $4 per share liquidation
preference over common stock, as adjusted for claims made against shares held in
escrow, in exchange for all of the issued and outstanding shares of capital
stock of Lyte Optronics. The
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acquisition 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.
We recognize revenue upon shipment of products to our customers provided
that we have received a signed purchase order, the price is fixed, title has
transferred, collection of resulting receivables is probable, product returns
are reasonably estimable, there are no customer acceptance requirements and
there are no remaining significant obligations. We provide for future returns
based on historical experience at the time revenue is recognized. Except for
sales in Japan and some sales in Taiwan, which in both cases are denominated in
Japanese yen, we denominate and collect our international sales in U.S. dollars.
Each of our divisions is responsible for its own sales and marketing
activities, and each maintains its own sales and marketing personnel. We sell
our substrate products through our direct sales force in the U.S. and through
independent sales representatives in France, Japan, South Korea, Taiwan and the
United Kingdom. We sell our HBLED and VCSEL products through our direct sales
force and through independent sales representatives.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Revenue..................................................... 100.0% 100.0% 100.0%
Cost of revenue............................................. 60.6% 66.4% 59.1%
----- ----- -----
Gross profit................................................ 39.4% 33.6% 40.9%
Operating expenses:
Selling, general, and administrative...................... 14.8% 13.9% 12.3%
Research and development.................................. 7.2% 3.4% 5.1%
Restructuring costs....................................... 5.3% 0.0% 0.0%
Acquisition costs......................................... 0.0% 3.7% 0.0%
----- ----- -----
Total operating expenses.......................... 27.3% 21.0% 17.4%
----- ----- -----
Income from operations...................................... 12.1% 12.6% 23.5%
Interest expense............................................ 3.0% 2.9% 1.8%
Other (income) and expense.................................. -23.4% -1.9% -1.5%
----- ----- -----
Income from continuing operations before provision for
income taxes.............................................. 32.5% 11.6% 23.2%
Provision for income taxes.................................. 12.3% 5.8% 9.5%
----- ----- -----
Income from continuing operations........................... 20.2% 5.8% 13.7%
Discontinued operations:
Loss from discontinued operations, net of tax benefits.... -1.2% -4.9% -5.0%
Loss on disposal, net of tax benefits..................... -1.1% 0.0% 0.0%
Extraordinary item, net of tax benefits..................... 0.0% -0.7% 0.0%
----- ----- -----
Net income.................................................. 17.9% 0.2% 8.7%
===== ===== =====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue from continuing operations. Revenue increased $46.1 million, or
61.2%, to $121.5 million in 2000 compared to $75.4 million in 1999. Revenue from
our substrate division which represents 93.3% of total revenue for the year
ended 2000, increased $56.6 million, or 99.8%, to $113.4 million compared to
$56.7 million in 1999. Total GaAs substrate revenue increased $52.0 million, or
113.3%, to $97.9 million in 2000 compared to $45.9 million in 1999. Sales of 5"
and 6" GaAs subtrates increased $19.2 million, or 3,308.8%, to $19.8 million in
2000 compared to $581,000 in 1999. InP substrate revenue increased $11.1
million, or 373.8%, to $14.0 million in 2000 compared to $3.0 million in 1999.
The increase in GaAs and
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InP substrate sales was a result of increased sales volume to existing and new
customers due in part to strong growth in the fiber optic and wireless handset
markets. Revenue from our visible emitter division which represents 6.7% of
total revenue for 2000, decreased $10.5 million, or 56.4%, to $8.1 million in
2000, compared to $18.6 million in 1999. The decrease was a result of lower
laser diode sales volume and a decrease in prices.
International revenue decreased to 48.2% of total revenue in 2000 compared
to 51.6% of total revenue in 1999.
Gross margin. Gross margin increased to 39.4% of revenue in 2000 compared
to 33.6% in 1999. The gross margin at the substrate division increased to 45.9%
of revenue in 2000 compared to 41.0% in 1999. The increase was primarily due to
higher sales volume and the realization of lower labor and manufacturing costs
as a result of expanding our wafer production capacity in China. The gross
margin at the visible emitter division decreased to negative 51.6% of revenue
for 2000 compared to 11.1% for 1999. The decrease was primarily due to increased
costs associated with the start-up of blue HBLED and VCSEL product production,
lower laser diode sales prices and volume and a restructuring charge to
write-off obsolete laser diode inventory as part of our plan to exit the
unprofitable 650nm laser diode product line.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $7.6 million, or 72.2%, to $18.0 million in
2000 compared to $10.5 million in 1999. The increase in selling, general and
administrative expenses was primarily due to increases in personnel and related
expenses required to support current and future increases in sales volume. As a
percentage of total revenue, selling, general and administrative expenses were
14.8% in 2000 compared to 13.9% in 1999.
Research and development expenses. Research and development expenses
increased $6.2 million, or 241.7%, to $8.8 million in 2000 compared to $2.6
million in 1999. The increase was primarily the result of increases in personnel
and related expenses and materials to support HBLED and VCSEL research and
development at the visible emitter division. As a percentage of total revenue,
research and development expenses were 7.2% in 2000 compared to 3.4% in 1999.
Restructuring costs. On December 14, 2000, the Company's Board of Directors
approved management's plan to exit its unprofitable 650nm laser diode product
line within its visible emitter division. As a result, during the fourth quarter
of 2000, the Company recorded a pre-tax restructuring charge of $8.2 million.
The restructuring charge includes $1.8 million to write-off laser diode
inventory, which has been classified as a component of cost of goods sold. The
restructuring charge also includes $3.4 million to write-off net assets included
in property, plant and equipment. These assets consist of laser diode processing
equipment that could not be utilized for HBLED or VCSEL processing. These assets
have been taken out of service and will be sold or discarded. The restructuring
charge also includes $848,000 to write-down a portion of goodwill attributable
to the laser diode product line. The restructuring charge also includes $2.1
million for incremental costs and contractual obligations for such items as
leasehold termination payments and other facility exit costs incurred as a
direct result of this plan.
Interest expense. Interest expense increased $1.4 million, or 64.3%, to
$3.6 million in 2000 compared to $2.2 million in 1999. The increase was
primarily due to using short-term debt to finance the short-term liquidity needs
resulting from our increased sales volume as well as the addition of certain
capital leases to finance equipment purchases.
Other income and expense. Other income and expense increased $27.0 million
to $28.4 million in 2000 compared to $1.4 million in 1999. The increase was
primarily the result of a $27.3 million non-cash gain on Demeter Technology
warrants that were exchanged for Finisar Corporation common stock as a result of
Finisar Corporation's acquisition of Demeter Technology.
Provision for income taxes. The effective tax rate was 38.0% in 2000. In
1999, the effective tax rate was 38% adjusted for the non-deductible acquisition
costs of approximately $2.8 million.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue from continuing operations. Revenue increased 53.6%, or $26.2
million to $75.4 million in 1999 from $49.1 million in 1998. The increase in
revenue resulted primarily from a $15.7 million increase in sales of GaAs and
InP substrates to existing and new customers offset by a $2.2 million decrease
in Ge and contract revenues at the substrate division and 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.
Revenue from the substrate division was 75.3% of total revenue and revenue
from the visible emitter division was 24.7% of total revenue in 1999 compared to
revenue from the substrate division of 88.0% of total revenue and revenue from
the visible emitter division of 12.0% of total revenue in 1998.
International revenue increased to 51.6% of total revenue, or $38.9 million
in 1999, compared to 38.5% or $18.9 million in 1998. The increase in
international revenue resulted primarily from a $7.3 million increase in
substrate sales to new and existing customers and a $11.7 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.
Gross margin. Gross margin decreased to 33.6% in 1999 compared to 40.9% in
1998. The gross margin for substrates decreased slightly to 41.0% from 41.5%,
primarily due to a decline in sales prices. The gross margin on products sold by
the visible emitter division was 11.1% in 1999 compared to 36.2% in 1998. 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 32.0% in 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 74.0%, or $4.4 million, to $10.5 million in
1999 from $6.0 million in 1998. 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. Selling, general and administrative expenses as
a percentage of total revenue increased to 13.9% in 1999 from 12.3% in 1998.
Research and development expenses. Research and development expenses
increased 2.5%, or $62,000, to $2.6 million in 1999 from $2.5 million in 1998.
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.
Research and development expenses as a percentage of total revenue decreased to
3.4% of total revenue for 1999 compared to 5.1% of revenue for 1998. This
decrease was primarily due to an increase in total revenue.
Acquisition cost. As a result of the acquisition of Lyte Optronics in May
1999, we incurred a number of one-time expenses which totaled approximately $2.8
million. These expenses included fees paid to our investment bankers,
accountants, attorneys and other outside consultants and related transaction
expenses.
Interest expense. Interest expense increased 151.5%, or $1.3 million to
$2.2 million in 1999 compared to $875,000 in 1998. This increase was primarily
the result of the inclusion of the visible emitter division for a full year in
1999 compared to only the fourth quarter in 1998, which resulted in increased
borrowing on a line of credit.
Other income and expense. Other income and expense increased 99.0%, or
$708,000 to $1.4 million in 1999 from $715,000 in 1998. The increase was
primarily the result of foreign exchange gains.
Provision for income taxes. The income tax rate, excluding the effect of
non-deductible acquisition costs of approximately $2.8 million in 1999,
decreased to 38.0% of income before provision for income taxes in 1999 from
41.1% in 1998.
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
prepaid as part of the transaction.
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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, 2000. 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
---------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
Revenue................................. $ 38,167 $33,132 $27,939 $22,265 $20,926 $18,919 $19,197 $16,330
Cost of revenue......................... 25,072 18,435 16,883 13,294 12,994 11,775 12,026 13,231
-------- ------- ------- ------- ------- ------- ------- -------
Gross profit............................ 13,095 14,697 11,056 8,971 7,932 7,144 7,171 3,099
Operating expenses:
Selling, general and administrative... 5,414 5,134 4,286 3,207 3,317 2,150 2,327 2,680
Research and development.............. 1,793 3,267 1,800 1,909 723 528 759 556
Restructuring costs................... 6,409 -- -- -- -- -- -- --
Acquisition costs..................... -- -- -- -- -- -- 2,810 --
-------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 13,616 8,401 6,086 5,116 4,040 2,678 5,896 3,236
-------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........... (521) 6,296 4,970 3,855 3,892 4,466 1,275 (137)
Interest expense........................ 936 762 1,149 769 604 701 518 378
Other (income) and expense.............. (27,964) 16 (298) (186) (300) (85) (182) (856)
-------- ------- ------- ------- ------- ------- ------- -------
Income from continuing operations before
provision for income taxes............ 26,507 5,518 4,119 3,272 3,588 3,850 939 341
Provision for income taxes.............. 10,062 2,097 1,575 1,244 1,363 1,463 1,425 129
-------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations............................ 16,445 3,421 2,544 2,028 2,225 2,387 (486) 212
Discontinued operations:
Loss from discontinued operations, net
of tax benefits..................... (721) (519) (191) (56) (662) (750) (1,049) (1,197)
Loss on disposal, net of tax
benefits............................ (1,341) -- -- -- -- -- -- --
Extraordinary item, net of tax
benefits.............................. -- -- -- -- -- -- (508) --
-------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... $ 14,383 $ 2,902 $ 2,353 $ 1,972 $ 1,563 $ 1,637 $(2,043) $ (985)
======== ======= ======= ======= ======= ======= ======= =======
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- -------- --------
Revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......................... 65.7% 55.6% 60.4% 59.7% 62.1% 62.2% 62.6% 81.0%
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............................ 34.3% 44.4% 39.6% 40.3% 37.9% 37.8% 37.4% 19.0%
Operating expenses:
Selling, general and administrative... 14.2% 15.5% 15.3% 14.4% 15.9% 11.4% 12.1% 16.4%
Research and development.............. 4.7% 9.9% 6.4% 8.6% 3.5% 2.8% 4.0% 3.4%
Restructuring costs................... 16.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Acquisition costs..................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 14.6% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses........ 35.7% 25.4% 21.8% 23.0% 19.3% 14.2% 30.7% 19.8%
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations........... -1.4% 19.0% 17.8% 17.3% 18.6% 23.6% 6.6% -0.8%
Interest expense........................ 2.4% 2.3% 4.1% 3.5% 2.9% 3.7% 2.7% 2.3%
Other (income) and expense.............. -73.3% 0.0% -1.1% -0.8% -1.4% -0.4% -0.9% -5.2%
----- ----- ----- ----- ----- ----- ----- -----
Income from continuing operations before
provision for income taxes............ 69.5% 16.7% 14.7% 14.7% 17.1% 20.3% 4.9% 2.1%
Provision for income taxes.............. 26.4% 6.3% 5.6% 5.6% 6.5% 7.7% 7.4% 0.8%
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations............................ 43.1% 10.3% 9.1% 9.1% 10.6% 12.6% -2.5% 1.3%
Discontinued operations:
Loss from discontinued operations, net
of tax benefits..................... -1.9% -1.6% -0.7% -0.3% -3.2% -4.0% -5.5% -7.3%
Loss on disposal, net of tax
benefits............................ -3.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Extraordinary item, net of tax
benefits.............................. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -2.6% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....................... 37.7% 8.8% 8.4% 8.9% 7.5% 8.7% -10.6% -6.0%
===== ===== ===== ===== ===== ===== ===== =====
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $62.5 million to $68.6 million at
December 31, 2000 compared to $6.1 million at December 31, 1999. The increase
primarily resulted from $84.9 million provided by financing activities, offset
by $26.1 million used in investing activities.
Net cash provided by operating activities of $3.7 million for the year
ended December 31, 2000 was comprised primarily of net income adjusted for
non-cash items of $13.7 million, and by $4.2 million used in working capital and
other activities. Net cash used in working capital and other activities resulted
primarily from increases in accounts receivable and inventory, offset by
increases in accrued liabilities, deferred income taxes and prepaid expenses.
Net cash used in investing activities of $26.1 million primarily reflects
purchases of property and equipment to increase crystal growth and wafer
processing capacity at the substrate division and to increase HBLED and VCSEL
epitaxy growth and wafer processing capacity at the visible emitter division. We
also invested $1.6 million in a joint venture in China to provide certain
materials.
We are currently constructing an additional 32,000 square foot building in
Beijing, China to expand substrate wafer processing capacity and a 27,000 square
foot building in El Monte, California to expand HBLED and VCSEL production. We
are also constructing improvements to our existing production facilities in
Fremont, California to increase crystal growth and wafer processing capacity. We
expect to invest approximately $41.0 million in additional facilities and
equipment over the next 12 months.
Net cash provided by financing activities of $84.9 million consisted of
proceeds of $96.0 million from the sale of common stock and $6.0 million from
new real estate loans, offset by payments of $9.9 million to reduce our
short-term borrowings, $3.3 million to retire old real estate loans and
principal and interest payments on long-term debt and $3.9 million for capital
lease payments.
We currently have a $20.0 million line of credit with a commercial bank
bearing interest at 1.75% above LIBOR that was 6.4% at December 31, 2000. This
line of credit is secured by all of our assets, other than equipment, and
expires on May 31, 2002. At December 31, 2000, there was no balance outstanding
under the line of credit.
We generally finance equipment purchases through secured equipment loans
and capital leases over five-year terms at interest rates ranging from 6.0% to
9.0% per annum. Some of our manufacturing facilities have been financed by
long-term borrowings, which were refinanced by taxable variable rate revenue
bonds in 1998. These bonds mature in 2023 and bear interest at 2.0% below the
prime rate. The bonds are traded in the public market. Repayment of principal
and interest under the bonds is supported by a letter of credit from our bank
and is paid on a quarterly basis. We have the option to redeem the bonds in
whole or in part during their term. At December 31, 2000, $10.6 million was
outstanding under these bonds.
We anticipate that the combination of existing working capital and the
borrowings available under our current credit agreements will be sufficient to
fund working capital and capital expenditure requirements for the next 12
months. However, our future capital requirements will be dependent on many
factors including the rate of revenue growth, our profitability, the timing and
extent of spending to support research and development programs, the expansion
of our manufacturing facilities, the expansion of our selling and marketing and
administrative activities and market acceptance of our products. We may need to
obtain additional equity and debt financing in the future, which may not be
available on acceptable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities. In June
2000, SFAS 133 was amended by SFAS 138. We will implement SFAS 133 beginning in
2001. We do not expect that adopting the provisions of SFAS 133 will have a
material effect on our financial position or results of operations.
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We have adopted the provisions of Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition," which did not and does not have a material effect on
the financial position or results of operations of the Company.
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RISKS RELATED TO OUR BUSINESS
UNPREDICTABLE FLUCTUATIONS IN OUR OPERATING RESULTS COULD DISAPPOINT ANALYSTS OR
OUR INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
We may not be able to sustain our historical growth rate, and we may
experience significant fluctuations in our revenue and earnings in the future.
Our quarterly and annual revenue and operating results have varied significantly
in the past and may vary significantly in the future due to a number of factors,
including:
- fluctuations in demand for our products;
- expansion of our manufacturing capacity;
- expansion of our operations in China;
- limited availability and increased cost of raw materials;
- integration of Lyte Optronics and its business, operations and facilities
with our operations;
- the volume and timing of orders from our customers;
- fluctuation of our manufacturing yields;
- decreases in the prices of our competitors' products;
- costs incurred in connection with any future acquisitions of businesses
or technologies;
- increases in our expenses, including expenses for research and
development; and
- our ability to develop, manufacture and deliver high quality products in
a timely and cost-effective manner.
Due to these factors, we believe that period-to-period comparisons of our
operating results may not be a meaningful indicator of our future performance.
It is possible that in some future quarter, our operating results may be below
the expectations of securities analysts or investors. If this occurs, the price
of our common stock would likely decline.
IF WE FAIL TO EXPAND OUR MANUFACTURING CAPACITY, WE MAY NOT BE ABLE TO MEET
DEMAND FOR OUR PRODUCTS, LOWER OUR COSTS OR INCREASE REVENUE.
In order to increase production, we must build new facilities, expand our
existing facilities and purchase additional manufacturing equipment. If we do
not expand our manufacturing capacity, we will be unable to increase production,
adversely impacting our ability to reduce unit costs, margins and improve our
operating results.
We are currently constructing additional capacity and facilities in
California and China. Our expansion activities subject us to a number of risks,
including:
- unforeseen environmental or engineering problems;
- unavailability or late delivery of production equipment;
- delays in completing new facilities;
- delays in bringing production equipment on-line;
- work stoppages or delays;
- unanticipated cost increases; and
- restrictions imposed by requirements of local, state or federal
regulatory agencies.
If any of these risks occurs, construction may be costlier than anticipated
and completion could be delayed, which could hurt our ability to expand capacity
and increase our sales. In addition, if we experience delays in expanding our
manufacturing capacity, we might not be able to timely meet customer
requirements,
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and we could lose future sales. We are also making substantial investments in
equipment and facilities as part of our capacity expansion. To offset the
additional fixed operating expenses, we must increase our revenue by increasing
production and improving yields. If demand for our products does not grow or if
our yields do not improve as anticipated, we may be unable to offset these costs
against increased revenue, which would adversely impact our operating results.
WE HAVE LIMITED EXPERIENCE WITH SOME OF OUR NEW PRODUCTS, AND WE MAY NOT BE ABLE
TO ACHIEVE ANTICIPATED SALES OF THESE PRODUCTS.
To date, we have limited experience producing and selling our HBLED and
VCSEL products, and we may be unable to successfully market and sell these
products. To market and sell our HBLED and VCSEL products, we will have to
develop additional distribution channels. In addition, we must apply our
proprietary VGF technique to new substrate products and successfully introduce
and market new opto-electronic semiconductor devices, including LED and VCSEL
products.
IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS TO RESPOND TO RAPIDLY CHANGING
CUSTOMER REQUIREMENTS, OUR ABILITY TO GENERATE SALES AND OBTAIN NEW CUSTOMERS
MAY SUFFER.
Our success depends on our ability to offer new products that incorporate
leading technology and respond to technological advances. In addition, our new
products must meet customer needs and compete effectively on quality, price and
performance. The life cycles of our products are difficult to predict because
the markets for our products are characterized by rapid technological change,
changing customer needs and evolving industry standards. If our competitors
introduce products employing new technologies, our existing products could
become obsolete and unmarketable. If we fail to offer new products, we may not
generate sufficient revenue to offset our development costs and other expenses
or meet our customers' requirements. Other companies, including IBM, are
actively developing substrate materials that could be used to manufacture
devices that could provide the same high-performance, low-power capabilities as
GaAs-based devices at competitive prices. If these substrate materials are
successfully developed and semiconductor device manufacturers adopt them, demand
for our GaAs substrates could decline and our revenue could suffer.
The development of new products can be a highly complex process, and we may
experience delays in developing and introducing new products. Any significant
delays could cause us to fail to timely introduce and gain market acceptance of
new products. Further, the costs involved in researching, developing and
engineering new products could be greater than anticipated.
OUR OPERATING RESULTS DEPEND IN LARGE PART ON FURTHER CUSTOMER ACCEPTANCE OF OUR
EXISTING SUBSTRATE PRODUCTS AND ON OUR ABILITY TO DEVELOP NEW PRODUCTS BASED ON
OUR CORE VGF TECHNOLOGY.
A majority of GaAs substrates are manufactured from crystals grown using
the traditional Liquid Encapsulated Czochralski, or LEC, or
Horizontal-Bridgeman, or HB, techniques. In order to expand sales of our
products, we must continue to promote our VGF technique as a preferred process
for producing substrates, and we must offer products with superior prices and
performance on a timely basis and in sufficient volumes. If we fail to gain
increased market acceptance of our VGF technique, we may not achieve anticipated
revenue growth.
INTENSE COMPETITION IN THE MARKETS FOR OUR PRODUCTS COULD PREVENT US FROM
INCREASING REVENUE AND SUSTAINING PROFITABILITY.
The markets for our products are intensely competitive. We face competition
for our substrate products from other manufacturers of substrates, such as
Freiberger, Hitachi Cable, Japan Energy, Litton Airtron and Sumitomo Electric
and from semiconductor device manufacturers that produce substrates for their
own use, and from companies, such as IBM, that are actively developing
alternative materials to GaAs. We believe that at least one of our competitors
has recently begun shipping GaAs substrates manufactured using a technique
similar to our VGF technique. Other competitors may develop and begin using
similar technology. If we are unable to compete effectively, our revenue may not
increase and we may not continue to be profitable. We
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face many competitors that have a number of significant advantages over us,
particularly in our compound semiconductor device products, including:
- greater experience in the business;
- more manufacturing experience;
- broader name recognition; and
- significantly greater financial, technical and marketing resources.
Our competitors could develop new or enhanced products that are more
effective than the products that we have developed or may develop. For example,
some competitors in the HBLED market offer devices that are brighter than our
HBLEDs. Some of our competitors may also develop technologies that enable the
production of commercial products with characteristics similar to or better than
ours, but at a lower cost.
We expect the intensity of competition to increase in the future.
Competitive pressures could reduce our market share, require us to reduce the
prices of our products, affect our ability to recover costs or result in reduced
gross margins.
IF WE HAVE LOW PRODUCT YIELDS, THE SHIPMENT OF OUR PRODUCTS MAY BE DELAYED AND
OUR OPERATING RESULTS MAY BE ADVERSELY IMPACTED.
Our products are manufactured using complex technologies, and the number of
usable substrates and devices we can produce can fluctuate as a result of many
factors, including:
- impurities in the materials used;
- contamination of the manufacturing environment;
- substrate breakage;
- equipment failure, power outages or variations in the manufacturing
process; and
- performance of personnel involved in the manufacturing process.
Because many of our manufacturing costs are fixed, our revenue could
decline if our yields decrease. We have experienced product shipment delays and
difficulties in achieving acceptable yields on both new and older products, and
delays and poor yields have adversely affected our operating results. We may
experience similar problems in the future and we cannot predict when they may
occur or their severity. In addition, many of our manufacturing processes are
new and are still being refined, which can result in lower yields, particularly
as we focus on producing higher diameter substrates and new opto-electronic
semiconductor devices. For example, we recently began manufacturing six-inch
GaAs wafers and have also made substantial investments in equipment and
facilities to manufacture blue, green and cyan HBLEDs. If we are unable to
produce adequate quantities of our high-brightness LEDs and VCSELs, we may not
be able to meet customer demand and our revenue may decrease.
DEMAND FOR OUR PRODUCTS MAY DECREASE IF OUR CUSTOMERS EXPERIENCE DIFFICULTY
MANUFACTURING, MARKETING OR SELLING THEIR PRODUCTS.
Our products are used as components in our customers' products.
Accordingly, demand for our products is subject to factors affecting the ability
of our customers to successfully introduce and market their products, including:
- the competition our customers face in their particular industries;
- the technical, manufacturing, sales and marketing and management
capabilities of our customers;
- the financial and other resources of our customers; and
- the inability of our customers to sell their products if they infringe
third party intellectual property rights.
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If demand for the products offered by our customers decreases, our
customers may reduce purchases of our products.
WE PURCHASE CRITICAL RAW MATERIALS FROM SINGLE OR LIMITED SOURCES, AND COULD
LOSE SALES IF THESE SOURCES FAIL TO FILL OUR NEEDS.
We depend on a limited number of suppliers for certain raw materials,
components and equipment used in manufacturing our products, including key
materials such as gallium, arsenic and quartz. We generally purchase these
materials through standard purchase orders and not pursuant to long-term supply
contracts and none of our suppliers guarantees supply of raw materials to us. If
we lose any of our key suppliers, our manufacturing efforts could be
significantly hampered and we could be prevented from timely producing and
delivering products to our customers. We have experienced delays obtaining
critical raw materials, including gallium, due to shortages of these materials.
We may experience delays due to shortages of materials and may be unable to
obtain an adequate supply of materials. These shortages and delays could result
in higher materials costs and cause us to delay or reduce production of our
products. If we have to delay or reduce production, we could fail to meet
customer delivery schedules, and our revenue and operating results could suffer.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE MAY BE SUBJECT TO
SIGNIFICANT FINES OR CESSATION OF OUR OPERATIONS.
We are subject to federal, state and local environmental laws and
regulations. These laws, rules and regulations govern the use, storage,
discharge and disposal of hazardous chemicals during manufacturing, research and
development and sales demonstrations. If we fail to comply with applicable
regulations, we could be subject to substantial liability for clean-up efforts,
personal injury and fines or suspension or cessation of our operations. We are
cooperating with the California Occupational Safety and Health Administration,
or Cal-OSHA, in an investigation primarily regarding impermissible levels of
potentially hazardous materials in certain areas of our manufacturing facility
in Fremont, California. In May 2000, Cal-OSHA levied a fine against us in the
amount of $313,655 for alleged health and safety violations. We are appealing
the citations, and have put in place engineering, administrative and personnel
protective equipment programs to address these issues, but we may have to pay
this fine. Our ability to expand or continue to operate our present locations
could be restricted or we could be required to acquire costly remediation
equipment or incur other significant expenses. In addition, existing or future
changes in laws or regulations may require us to incur significant expenditures
or liabilities, or may restrict our operations.
THE LOSS OF ONE OR MORE OF OUR KEY SUBSTRATE CUSTOMERS WOULD SIGNIFICANTLY HURT
OUR OPERATING RESULTS.
A small number of substrate customers have historically accounted for a
substantial portion of our total revenue. Our five largest customers accounted
for 26.1% of our total revenue from continuing operations in 2000, 24.8% in 1999
and 34.9% in 1998. No customer accounted for more than 10.0% of our total
revenue in 2000, 1999 and 1998. Our substrate revenue accounted for 93.3% of our
total revenue from continuing operations in 2000, 75.3% in 1999 and 88.0% in
1998. We expect that a significant portion of our future revenue will continue
to be derived from a limited number of substrate customers. Our customers are
not obligated to purchase a specified quantity of our products or to provide us
with binding forecasts of product purchases. In addition, our customers may
reduce, delay or cancel orders at any time without any significant penalty. If
we lose a major customer or if a customer cancels, reduces or delays orders, our
revenue would decline. In addition, customers that have accounted for
significant revenue in the past may not continue to generate revenue for us in
any future period.
DEFECTS IN OUR PRODUCTS COULD DIMINISH DEMAND FOR OUR PRODUCTS.
Our products are complex and may contain defects. In the past we have
experienced quality control problems with some of our LED and consumer products,
which caused customers to return products to us. If we continue to experience
quality control problems, or experience these problems in our other products,
customers may cancel or reduce orders or purchase products from our competitors.
Defects in our products
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could cause us to incur higher manufacturing costs and suffer product returns
and additional service expenses, all of which could adversely impact our
operating results.
We are also developing new products and product enhancements, including
substrates and compound semiconductor device products. If our new products
contain defects when released, our customers may be dissatisfied and we may
suffer negative publicity or customer claims against us, lose sales or
experience delays in market acceptance of our new products.
CYCLICALITY IN THE SEMICONDUCTOR INDUSTRY COULD CAUSE OUR OPERATING RESULTS TO
FLUCTUATE SIGNIFICANTLY.
Our business depends in significant part upon manufacturers of
semiconductor devices, as well as the current and anticipated market demand for
such devices and the products using such devices. The semiconductor industry is
highly cyclical. The industry has in the past, and will likely in the future,
experience periods of oversupply that result in significantly reduced demand for
semiconductor devices and components, including our products. When these periods
occur, our operating results and financial condition are adversely affected.
OUR SUBSTRATE AND OPTO-ELECTRONIC SEMICONDUCTOR DEVICE PRODUCTS HAVE A LONG
SALES CYCLE THAT MAKES IT DIFFICULT TO PLAN OUR EXPENSES AND FORECAST OUR
RESULTS.
Customers typically place orders with us for our substrate and
opto-electronic semiconductor device products three months to a year or more
after our initial contact with them. The sale of our products may be subject to
delays due to our customers' lengthy internal budgeting, approval and evaluation
processes. During this time, we may incur substantial expenses and expend sales,
marketing and management efforts while the customers evaluate our products.
These expenditures may not result in sales of our products. If we do not achieve
anticipated sales in a period as expected, we may experience an unplanned
shortfall in our revenue. As a result, we may not be able to cover expenses,
causing our operating results to vary. In addition, if a customer decides not to
incorporate our products into its initial design, we may not have another
opportunity to sell products to this customer for many months or even years. We
anticipate that sales of any future substrate and opto-electronic semiconductor
device products under development will also have lengthy sales cycles and will,
therefore, be subject to risks substantially similar to those inherent in the
lengthy sales cycle of our current substrate and opto-electronic semiconductor
device products.
IF WE FAIL TO MANAGE OUR POTENTIAL GROWTH, OUR OPERATIONS MAY BE DISRUPTED.
We have experienced a period of rapid growth and expansion that has
strained our management and other resources, and we expect this rapid growth to
continue. Our acquisition of Lyte Optronics, together with expansion of our
manufacturing capacity, has placed and continues to place a significant strain
on our operations and management resources. If we fail to manage our growth
effectively, our operations may be disrupted. To manage our growth effectively,
we must implement additional and improved management information systems,
further develop our operating, administrative, financial and accounting systems
and controls, add experienced senior level managers, and maintain close
coordination among our executive, engineering, accounting, marketing, sales and
operations organizations.
We will spend substantial sums to support our growth and may incur
additional unexpected costs. Our systems, procedures or controls may not be
adequate to support our operations, and we may be unable to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development and
administrative support. If we cannot attract qualified people or manage growth
effectively, our business and operating results could be adversely affected.
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30
ANY FUTURE ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
DISTRACT MANAGEMENT ATTENTION.
As part of our strategy, we may consider acquisitions of, or significant
investments in, businesses that offer products, services and technologies
complementary to ours, such as our acquisition of Lyte Optronics in May 1999.
Acquisitions entail numerous risks, including:
- we may have difficulty assimilating the operations, products and
personnel of the acquired businesses;
- our ongoing business may be disrupted;
- we may incur unanticipated costs;
- our management may be unable to manage the financial and strategic
position of acquired or developed products, services and technologies;
- we may be unable to maintain uniform standards, controls and procedures
and policies; and
- our relationships with employees and customers may be impaired as a
result of any integration.
For example, we incurred substantial costs in connection with our
acquisition of Lyte Optronics, including the assumption of approximately $10.0
million of debt, much of which has been repaid or renegotiated, resulting in a
decline of cash available. We incurred one-time charges and merger-related
expenses of $2.8 million and an extraordinary item of $508,000 relating to the
early extinguishment of debt in the quarter ended June 30, 1999 as a result of
the acquisition.
To the extent that we issue shares of our stock or other rights to purchase
stock in connection with any future acquisitions, dilution to our existing
stockholders will result and our earnings per share may suffer. Any future
acquisitions may not generate additional revenue or provide any benefit to our
business.
IF ANY OF OUR FACILITIES IS DAMAGED, WE MAY NOT BE ABLE TO MANUFACTURE OUR
PRODUCTS.
The ongoing operation of our manufacturing and production facilities in
California and China is critical to our ability to meet demand for our products.
If we are not able to use all or a significant portion of our facilities for
prolonged periods for any reason, we will not be able to manufacture products
for our customers. For example, a natural disaster, fire or explosion caused by
our use of combustible chemicals and high temperatures during our manufacturing
processes would render some or all of our facilities inoperable for an
indefinite period of time. Actions outside of our control, such as earthquakes,
could also damage our facilities, rendering them inoperable. All of our crystal
growth is currently performed at our Fremont, California facilities, which are
located very near to an active seismic fault line. If we are unable to operate
our facilities and manufacture our products, we will lose customers and revenue
and our business will be harmed.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE OUR
OBJECTIVES.
Our success depends upon the continued service of Morris S. Young, Ph.D.,
our president, chairman of the board and chief executive officer, as well as
other key management and technical personnel. We do not have long-term
employment contracts with, or key person life insurance on, any of our key
personnel. In addition, we have only recently hired our chief financial officer,
and need to retain senior marketing personnel, particularly for our new
opto-electronic semiconductor device products.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. The competition for these
employees is intense, especially in Silicon Valley, and we cannot assure you
that we will be successful in attracting and retaining new personnel. The loss
of the services of any of our key personnel, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers, could make it difficult for us to manage our business
and meet key objectives, including the timely introduction of new products.
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31
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE VALUABLE
ASSETS OR INCUR COSTLY LITIGATION.
We rely on a combination of patents, copyrights, trademark and trade secret
laws, non-disclosure agreements and other intellectual property protection
methods to protect our proprietary technology. However, we believe that, due to
the rapid pace of technological innovation in the markets for our products, our
ability to establish and maintain a position of technology leadership also
depends on the skills of our development personnel.
Despite our efforts to protect our intellectual property, a third party
could develop products or processes similar to ours. Our means of protecting our
proprietary rights may not be adequate and our competitors may independently
develop similar technology, duplicate our products or design around our patents.
We believe that at least one of our competitors has begun to ship GaAs
substrates produced using a process similar to our VGF technique. Our
competitors may also develop and patent improvements to the VGF, LED and VCSEL
technologies upon which we rely, and thus may limit any exclusivity we enjoy by
virtue of our patents.
It is possible that pending or future United States or foreign patent
applications made by us will not be approved, that our issued patents will not
protect our intellectual property, or that third parties will challenge the
ownership rights or the validity of our patents. In addition, the laws of some
foreign countries may not protect our proprietary rights to as great an extent
as do the laws of the United States and it may be more difficult to monitor the
use of our intellectual property. Our competitors may be able to legitimately
ascertain non-patented proprietary technology embedded in our systems. If this
occurs, we may not be able to prevent the development of technology
substantially similar to ours.
We may have to resort to costly litigation to enforce our intellectual
property rights, to protect our trade secrets or know-how or to determine their
scope, validity or enforceability. Enforcing or defending our proprietary
technology is expensive, could cause us to divert resources and may not prove
successful. Our protective measures may prove inadequate to protect our
proprietary rights, and if we fail to enforce or protect our rights, we could
lose valuable assets.
WE MIGHT FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT MAY BE COSTLY TO
RESOLVE AND COULD DIVERT MANAGEMENT ATTENTION.
Other companies may hold or obtain patents on inventions or may otherwise
claim proprietary rights to technology necessary to our business. The markets in
which we compete are comprised of competitors who in some cases hold substantial
patent portfolios covering aspects of products that could be similar to ours. We
could become subject to claims that we are infringing patent, trademark,
copyright or other proprietary rights of others. Litigation to determine the
validity of alleged claims could be time-consuming and result in significant
expense to us and divert the efforts of our technical and management personnel,
whether or not the litigation is ultimately determined in our favor. If a
lawsuit is decided against us, we could be subject to significant liabilities,
requiring us to seek costly licenses or preventing us from manufacturing and
selling our products. We may not be able to obtain required licensing agreements
on terms acceptable to us or at all.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM INTERNATIONAL SALES, AND OUR
ABILITY TO SUSTAIN AND INCREASE OUR INTERNATIONAL SALES INVOLVES SIGNIFICANT
RISKS.
Our revenue growth depends in part on the expansion of our international
sales and operations. International sales represented 48.2% of our total revenue
from continuing operations for 2000, 51.6% for 1999 and 38.5% for 1998. We
expect that sales to customers outside the U.S. will continue to represent a
significant portion of our revenue.
Our dependence on international sales involves a number of risks,
including:
- changes in tariffs, import restrictions and other trade barriers;
- unexpected changes in regulatory requirements;
- longer periods to collect accounts receivable;
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32
- changes in export license requirements;
- political and economic instability;
- unexpected changes in diplomatic and trade relationships; and
- foreign exchange rate fluctuations.
Our sales are denominated in U.S. dollars, except for sales to our Japanese
and some Taiwanese customers, which are denominated in Japanese yen. Thus,
increases in the value of the U.S. dollar could increase the price of our
products in non-U.S. markets and make our products more expensive than
competitors' products in these markets. Also, denominating some sales in
Japanese yen subjects us to fluctuations in the exchange rates between the U.S.
dollar and the Japanese yen. The functional currencies of our Japanese and
Chinese subsidiaries are the local currencies. We incur transaction gains or
losses resulting from consolidation of expenses incurred in local currencies for
these subsidiaries, as well as in translation of the assets and liabilities of
these assets at each balance sheet date. If we do not effectively manage the
risks associated with international sales, our revenue and financial condition
could be adversely affected.
IF OUR EXPANSION IN CHINA IS MORE COSTLY THAN WE EXPECT, OUR OPERATING RESULTS
WILL SUFFER.
As part of our planned expansion of our manufacturing capacity, we are
building new facilities and expanding existing facilities in China. If we are
unable to build and expand our Chinese facilities in a timely manner, we may not
be able to increase production of our products and increase revenue as planned.
If our expansion in China proves more costly than we anticipate or we incur
greater ongoing costs than we expect, our operating results would be adversely
affected. If we do not realize expected cost savings once our expansion is
complete in China, our margins may be negatively impacted and our operating
results may suffer.
CHANGES IN CHINA'S POLITICAL, SOCIAL AND ECONOMIC ENVIRONMENT MAY AFFECT OUR
FINANCIAL PERFORMANCE.
Our financial performance may be affected by changes in China's political,
social and economic environment. The role of the Chinese central and local
governments in the Chinese economy is significant. Chinese policies toward
economic liberalization, and laws and policies affecting technology companies,
foreign investment, currency exchange rates and other matters could change,
resulting in greater restrictions on our ability to do business and operate our
manufacturing facilities in China. Any imposition of surcharges or any increase
in Chinese tax rates could hurt our operating results. The Chinese government
could revoke, terminate or suspend our license for national security and similar
reasons without compensation to us. If the government of China were to take any
of these actions, we would be prevented from conducting all or part of our
business. Any failure on our part to comply with governmental regulations could
result in the loss of our ability to manufacture our products in China.
China has from time to time experienced instances of civil unrest and
hostilities. Confrontations have occurred between the military and civilians.
Events of this nature could influence the Chinese economy, result in
nationalization of foreign-owned operations such as ours, and could negatively
affect our ability to operate our facilities in China.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our stock price has fluctuated significantly since we began trading on the
Nasdaq National Market. For the 12 months ended December 31, 2000, the high and
low closing sales prices of our common stock were $46.00 and $14.50. A number of
factors could cause the price of our common stock to continue to fluctuate
substantially, including:
- actual or anticipated fluctuations in our quarterly or annual operating
results;
- changes in expectations about our future financial performance or changes
in financial estimates of securities analysts;
- announcements of technological innovations by us or our competitors;
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33
- new product introduction by us or our competitors;
- large customer orders or order cancellations; and
- the operating and stock price performance of comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.
WE MAY NEED ADDITIONAL CAPITAL TO FUND EXPANSION OF OUR MANUFACTURING CAPACITY
AND OUR FUTURE OPERATIONS, WHICH MAY NOT BE AVAILABLE.
We may need additional capital to fund expansion of our manufacturing and
production capacity and our future operations or acquisitions. If we raise
additional capital through the sale of equity or debt securities, the issuance
of such securities could result in dilution to existing stockholders. These
securities could have rights, preferences and privileges that are senior to
those of holders of our common stock. For example, in December 1998 we issued
debt securities for the purchase and improvement of our facilities in Fremont,
California.
If we require additional capital in the future, it might not be available
on acceptable terms, or at all. If we are unable to obtain additional capital
when needed, we may be required to reduce the scope of our planned expansion of
our manufacturing capacity or of our product development and marketing efforts,
which could adversely affect our business and operating results.
PROVISIONS IN OUR CHARTER, BYLAWS OR DELAWARE LAW MAY DELAY OR PREVENT A CHANGE
IN CONTROL OF OUR COMPANY.
Provisions in our amended and restated certificate of incorporation and
bylaws may have the effect of delaying or preventing a merger, acquisition or
change of control of us, or changes in our management. These provisions include:
- the division of our board of directors into three separate classes, each
with three year terms;
- the right of our board to elect a director to fill a space created by a
board vacancy or the expansion of the board;
- the ability of our board to alter our bylaws;
- the ability of our board to authorize the issuance of up to 2,000,000
shares of blank check preferred stock; and
- the requirement that only our board or the holders of at least 10% of our
outstanding shares may call a special meeting of our stockholders.
Furthermore, because we are incorporated in Delaware, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions prohibit large stockholders, in particular those owning 15% or more
of the outstanding voting stock, from consummating a merger or combination with
a corporation unless:
- 66 2/3% of the shares of voting stock not owned by these large
stockholders approve the merger or combination, or
- the board of directors approves the merger or combination or the
transaction which resulted in the large stockholder owning 15% or more of
our outstanding voting stock.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Since our Japanese and some Taiwanese invoices are denominated in Japanese
yen, doing business in Japan subjects us to fluctuations in exchange rates
between the U.S. dollar and the Japanese yen. We incurred a foreign transaction
exchange loss of $552,000 in 2000, a gain of $652,000 in 1999, and a loss of
$24,000 in 1998. We purchase foreign exchange contracts to hedge against certain
trade accounts receivable in Japanese
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yen. The outstanding commitments with respect to such foreign exchange contracts
had a total contract value of approximately $500,000 as of December 31, 2000.
Many of the contracts were entered into six months prior to the due date and the
dates coincide with the receivable terms on customer invoices. By matching the
receivable collection date and contract due date, we attempt to economically
minimize the impact of foreign exchange fluctuations.
The fair market value of long-term fixed and variable interest rate debt is
subject to interest rate risk. The effect of an immediate 10% change in interest
rates would not have a material impact on our future operating results or cash
flows.
Marketable securities are valued at fair market value at December 31, 2000.
There is no assurance that we will realize this value when we sell these
securities in the future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data required by
this item are set forth at the pages indicated at Item 14 (a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
The SEC allows us to include information required in this report by
referring to other documents or reports we have already or will soon be filing.
This is called "Incorporation by Reference." We intend to file our definitive
proxy statement pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference
to information set forth in our definitive 2001 proxy statement under the
section entitled "Election of Directors" and in Part I of this report under the
section entitled "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by
reference to information set forth in the definitive 2001 Proxy Statement under
the heading "Executive Compensation and Other matters."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to information set forth in our definitive 2001 proxy statement under the
section entitled "Executive Compensation and Other matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to information set forth in our definitive 2001 proxy statement under the
section entitled "Security Ownership of Certain Beneficial Owners and
Management."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------
Report of Independent Accountants -- PricewaterhouseCoopers
LLP....................................................... 36
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... 37
Consolidated Balance Sheets................................. 38
Consolidated Income Statements.............................. 39
Consolidated Statement of Stockholders' Equity.............. 40
Consolidated Statements of Cash Flows....................... 41
Notes to Consolidated Financial Statements.................. 42 - 57
(2) Financial Statement Schedules
All schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission of
the schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
(3) Exhibits
See Index to Exhibits on page 59 hereof. The exhibits listed in the
accompanying Index to Exhibits are filed as part of, or incorporated by
reference into, this report on Form 10-K.
(b) Reports on Form 8-K.
None
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of AXT, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of AXT, Inc. and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of Lyte Optronics, Inc. on May 28, 1999 in a
transaction accounted for as a pooling of interests, as described in Note 5 to
the consolidated financial statements. We did not audit the balance sheet, the
results of operations and cash flows of Lyte Optronics, Inc. for the year ended
December 31, 1998, which statements reflect total assets of $25,435,000 as of
December 31, 1998 and total revenues of $18,137,000 for the year ended December
31, 1998. Those statements were audited by other auditors whose report thereon
has been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for Lyte Optronics, Inc., is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 9, 2001
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Lyte Optronics, Inc.:
We have audited the consolidated balance sheet of Lyte Optronics, Inc. (a
Nevada corporation) and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' investment and cash flows
for the year ended December 31, 1998 (not presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lyte Optronics, Inc. and
Subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 27, 1999
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39
AXT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 68,585 $ 6,062
Marketable securities..................................... 30,852 --
Accounts receivable....................................... 27,773 17,561
Inventories............................................... 51,846 35,470
Prepaid expenses and other current assets................. 3,603 8,945
Deferred income taxes..................................... -- 3,210
-------- --------
Total current assets.............................. 182,659 71,248
Property, plant and equipment............................... 63,401 40,865
Other assets................................................ 3,312 1,405
Goodwill.................................................... 848 2,244
-------- --------
Total assets...................................... $250,220 $115,762
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowing................................. $ 1,353 $ 11,298
Accounts payable.......................................... 10,009 8,294
Accrued liabilities....................................... 16,651 7,464
Deferred income taxes..................................... 3,847 --
Current portion of long-term debt......................... 4,355 1,568
Current portion of capital lease obligation............... 6,057 2,162
-------- --------
Total current liabilities......................... 42,272 30,786
Long-term debt, net of current portion...................... 15,123 15,254
Long-term capital lease, net of current portion............. 7,278 6,853
Other long-term liabilities................................. 200 410
-------- --------
Total liabilities................................. 64,873 53,303
-------- --------
Commitments and Contingencies (Note 15)
Stockholders' equity:
Preferred stock, $.001 par value; 2,000 shares authorized;
883 and 981 shares issued and outstanding.............. 3,532 3,990
Common stock, $.001 par value; 40,000 shares authorized;
21,952 and 18,659 shares issued and outstanding........ 145,748 46,340
Deferred compensation..................................... (107) (217)
Retained earnings......................................... 33,980 12,370
Other comprehensive income................................ 2,194 (24)
-------- --------
Total stockholders' equity........................ 185,347 62,459
-------- --------
Total liabilities and stockholders' equity........ $250,220 $115,762
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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AXT, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Revenue..................................................... $121,503 $75,372 $49,074
Cost of revenue, including restructuring costs of $1,844 in
2000...................................................... 73,684 50,026 29,003
-------- ------- -------
Gross profit................................................ 47,819 25,346 20,071
Operating expenses:
Selling, general and administrative....................... 18,041 10,474 6,019
Research and development.................................. 8,769 2,566 2,504
Restructuring costs....................................... 6,409 -- --
Acquisition costs......................................... -- 2,810 --
-------- ------- -------
Total operating expenses.......................... 33,219 15,850 8,523
-------- ------- -------
Income from operations...................................... 14,600 9,496 11,548
Interest expense............................................ 3,616 2,201 875
Other (income) and expense.................................. (28,432) (1,423) (715)
-------- ------- -------
Income from continuing operations before provision for
income taxes.............................................. 39,416 8,718 11,388
Provision for income taxes.................................. 14,978 4,380 4,668
-------- ------- -------
Income from continuing operations........................... 24,438 4,338 6,720
Discontinued operations:
Loss from discontinued operations, net of tax benefits of
$912, $2,241 and $1,692................................ (1,487) (3,658) (2,436)
Loss on disposal, net of tax benefits of $822............. (1,341) -- --
Extraordinary item, net of tax benefits of $311............. -- (508) --
-------- ------- -------
Net income.................................................. $ 21,610 $ 172 $ 4,284
======== ======= =======
Basic income (loss) per share:
Income from continuing operations......................... $ 1.24 $ 0.23 $ 0.42
Loss from discontinued operations......................... (0.14) (0.19) (0.15)
Extraordinary item........................................ -- (0.03) --
Net income................................................ 1.10 0.01 0.27
Diluted income (loss) per share:
Income from continuing operations......................... $ 1.16 $ 0.22 $ 0.41
Loss from discontinued operations......................... (0.13) (0.18) (0.15)
Extraordinary item........................................ -- (0.03) --
Net income................................................ 1.03 0.01 0.26
Shares used in per share calculations:
Basic..................................................... 19,677 18,655 16,076
Diluted................................................... 21,059 19,771 16,325
The accompanying notes are an integral part of these consolidated financial
statements.
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AXT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK OTHER
----------------- ----------------- DEFERRED RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS INCOME TOTAL
------- ------- ------ -------- ------------ -------- ------------- --------
BALANCE AT DECEMBER 31,
1997........................ 10,129 $ 8,553 3,800 $ 1,337 $(220) $ 7,914 $ (197) $ 17,387
Common stock options
exercised................... 71 138 138
Issuance of common stock...... 123 724 724
Issuance of common stock and
Series A preferred stock in
connection with the
acquisition of Alpha
Photonics, Inc.............. 981 4,000 1,267 7,500 11,500
Issuance of common stock as
settlement of trade
payables.................... 4 25 25
Reacquisition and retirement
of common stock............. (61)
Issuance of common stock in
connection with financing... 185 994 994
Conversion of Series C
convertible preferred stock
to common stock............. (10,129) (8,553) 10,129 8,553 --
Issuance of common stock upon
initial public offering..... 2,875 25,792 25,792
Deferred compensation......... 203 (203) --
Amortization of deferred
compensation................ 96 96
Comprehensive income
Net income.................. 4,284 4,284
Currency translation
adjustment................ 224 224
------- ------- ------ -------- ----- ------- ------ --------
BALANCE AT DECEMBER 31,
1998........................ 981 $ 4,000 18,393 $ 45,266 $(327) $12,198 $ 27 $ 61,164
Common stock options
exercised................... 201 648 648
Repurchase of shares of common
stock in connection with the
early extinguishment of
debt........................ (21) (211) (211)
Acquisition costs paid by
shareholders................ (10) (139) (149)
Issuance of Employee Stock
Purchase Plan stock......... 86 776 776
Amortization of deferred
compensation................ 110 110
Comprehensive income
Net income.................. 172 172
Currency translation
adjustment................ (51) (51)
------- ------- ------ -------- ----- ------- ------ --------
BALANCE AT DECEMBER 31,
1999........................ 981 $ 3,990 18,659 $ 46,340 $(217) $12,370 $ (24) $ 62,459
Common stock options
exercised................... 711 6,038 6,038
Issuance of Employee Stock
Purchase Plan stock......... 63 648 648
Reacquisition and retirement
of common stock and Series A
preferred stock in
connection with merger of
Lyte Optronics.............. (98) (458) (225) 458 --
Issuance of common stock in
private placement........... 234 8,507 8,507
Issuance of common stock in
follow on public offering... 2,510 80,812 80,812
Income tax benefit from stock
option exercises............ 2,945 2,945
Amortization of deferred
compensation................ 110 110
Comprehensive income.......... --
Net income.................. 21,610 21,610
Unrealized gain on
marketable securities..... 2,185 2,185
Currency translation
adjustment................ 33 33
------- ------- ------ -------- ----- ------- ------ --------
BALANCE AT DECEMBER 31,
2000........................ 883 $ 3,532 21,952 $145,748 $(107) $33,980 $2,194 $185,347
======= ======= ====== ======== ===== ======= ====== ========
COMPREHENSIVE
INCOME
-------------
BALANCE AT DECEMBER 31,
1997........................ $ 727
Common stock options
exercised...................
Issuance of common stock......
Issuance of common stock and
Series A preferred stock in
connection with the
acquisition of Alpha
Photonics, Inc..............
Issuance of common stock as
settlement of trade
payables....................
Reacquisition and retirement
of common stock.............
Issuance of common stock in
connection with financing...
Conversion of Series C
convertible preferred stock
to common stock.............
Issuance of common stock upon
initial public offering.....
Deferred compensation.........
Amortization of deferred
compensation................
Comprehensive income
Net income.................. 4,284
Currency translation
adjustment................ 224
-------
BALANCE AT DECEMBER 31,
1998........................ $ 4,508
Common stock options
exercised...................
Repurchase of shares of common
stock in connection with the
early extinguishment of
debt........................
Acquisition costs paid by
shareholders................
Issuance of Employee Stock
Purchase Plan stock.........
Amortization of deferred
compensation................
Comprehensive income
Net income.................. 172
Currency translation
adjustment................ (51)
-------
BALANCE AT DECEMBER 31,
1999........................ $ 121
Common stock options
exercised...................
Issuance of Employee Stock
Purchase Plan stock.........
Reacquisition and retirement
of common stock and Series A
preferred stock in
connection with merger of
Lyte Optronics..............
Issuance of common stock in
private placement...........
Issuance of common stock in
follow on public offering...
Income tax benefit from stock
option exercises............
Amortization of deferred
compensation................
Comprehensive income..........
Net income.................. 21,610
Unrealized gain on
marketable securities..... 2,185
Currency translation
adjustment................ 33
-------
BALANCE AT DECEMBER 31,
2000........................ $23,828
=======
The accompanying notes are an integral part of these consolidated financial
statements.
40
42
AXT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 21,610 $ 172 $ 4,284
Adjustments to reconcile net income to cash provided by
(used in) operations:
Depreciation........................................... 6,854 5,444 2,959
Deferred income taxes.................................. 5,718 (758) (1,126)
Amortization of goodwill............................... 548 599 149
Stock compensation..................................... 110 110 96
Stock option tax benefits.............................. 2,945
Non cash restructuring costs........................... 6,249 -- --
Non cash gain on marketable securities................. (27,328) -- --
Gain on sale of property, plant and equipment.......... (183) -- --
Changes in assets and liabilities:
Accounts receivable.................................. (10,212) (4,433) (4,192)
Inventories.......................................... (18,220) (10,170) (11,074)
Prepaid expenses..................................... 5,282 (5,674) (1,610)
Other assets......................................... (369) 522 (243)
Accounts payable..................................... 1,715 444 1,540
Accrued liabilities.................................. 9,187 2,222 533
Other long-term liabilities.......................... (210) (194) 110
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... 3,696 (11,716) (8,574)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (26,278) (2,758) (14,899)
Investment in China joint venture......................... (1,599) -- --
Proceeds from sale of property plant and equipment........ 1,805 -- --
-------- -------- --------
Net cash used in investing activities............. (26,072) (2,758) (14,899)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of):
Issuance of common stock............................... 96,005 1,064 27,648
Capital lease payments................................. (3,850) (1,958) (263)
Short-term bank borrowings............................. (9,945) 9,370 (2,320)
Long-term debt borrowings.............................. 6,000 -- 17,002
Long-term debt payments................................ (3,344) (4,327) (5,574)
-------- -------- --------
Net cash provided by financing activities......... 84,866 4,149 36,493
-------- -------- --------
Effect of exchange rate changes............................. 33 (51) 219
-------- -------- --------
Net increase in cash and cash equivalents................... 62,523 (10,376) 13,239
Cash and cash equivalents at the beginning of the period.... 6,062 16,438 3,199
-------- -------- --------
Cash and cash equivalents at the end of the period.......... $ 68,585 $ 6,062 $ 16,438
======== ======== ========
NON CASH ACTIVITY:
Purchases of property, plant and equipment through capital
leases................................................. $ 8,170 $ 5,927 $ 1,737
Exchange of Finisar shares for Demeter shares............. $ 27,328 $ -- $ --
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 3,597 $ 2,288 $ 1,481
Income taxes paid......................................... $ 4,645 $ 6,268 $ 4,338
The accompanying notes are an integral part of these consolidated financial
statements.
41
43
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF ACCOUNTING POLICIES
The Company
AXT, Inc. designs, develops, manufactures, and distributes high-performance
compound semiconductor substrates, as well as opto-electronic semiconductor
devices, such as high-brightness light-emitting diodes, or HBLEDs, and vertical
cavity surface emitting lasers, or VCSELs.
AXT expanded its markets in 1999 through the acquisition of Lyte Optronics,
Inc., (see Note 5). Lyte Optronics operates as the visible emitter division,
which focuses on manufacturing HBLEDs and VCSELs and the consumer products
division, which focuses on designing and marketing laser-pointing,
laser-alignment and LED products. The consumer products division has been
discontinued (see Note 3).
The Company officially changed its name from American Xtal Technology, Inc.
to AXT, Inc. on July 7, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in business entities in which AXT
does not have control, but has the ability to exercise significant influence
over operating and financial policies (generally 20 - 50% ownership), are
accounted for by the equity method.
Foreign Currency Translation
The functional currencies of the Company's Japanese and Chinese
subsidiaries are the local currencies. Transaction gains and losses resulting
from transactions denominated in currencies other than the U.S. dollar for the
Company or in the local currencies for the subsidiaries are included in other
income for the periods presented.
The assets and liabilities of the subsidiaries are translated at the rates
of exchange on the balance sheet date. Revenue and expense items are translated
at the average rate of exchange for the period. Gains and losses from foreign
currency translation are included in other comprehensive income in stockholders'
equity.
Revenue Recognition
The Company recognizes revenue upon the shipment of its products to the
customer provided that the Company has received a signed purchase order, the
price is fixed, title has transferred, collection of resulting receivables is
probable, product returns are reasonably estimable, there are no customer
acceptance requirements and there are no remaining significant obligations. The
Company provides for future returns based on historical experience at the time
revenue is recognized.
Fair Value of Financial Instruments
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair value due to their
42
44
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
short maturities. The reported amounts of short-term bank borrowing, loans
payable and capital lease obligations approximate fair value due to the market
interest rates which these debts bear.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade accounts receivable. The
Company invests primarily in money market accounts and commercial paper
instruments. Cash equivalents are maintained with high quality institutions and
their composition and maturities are regularly monitored by management.
The Company performs ongoing credit evaluations of its customers' financial
condition, and limits the amount of credit extended when deemed necessary, but
generally does not require collateral.
No customer represented greater than 10% of product revenues for the years
ended December 31, 2000, 1999, and 1998.
No customer accounted for 10% or more of the trade accounts receivable
balance as of December 31, 2000 and 1999.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company classifies all of its marketable securities as
available-for-sale securities as prescribed in Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Marketable securities consist of equity securities that are stated at market
value, with unrealized gains and losses reflected, net of tax, as other
comprehensive income in shareholders' equity. Realized gains and losses on
marketable securities are included in earnings and are derived using the
specific identification method for determining cost of securities. All
securities are considered to be available-for-sale and are classified as current
assets.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed using the straight-line method over the estimated economic
lives of the assets, which vary from three to ten years. Leasehold improvements
are amortized over the shorter of the estimated useful life or the term of the
lease.
Goodwill
Goodwill, the excess of cost over the fair value of net assets acquired, is
being amortized over 5 years.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," the Company reviews long-lived assets
43
45
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
based upon a gross cash flow basis and will reserve for impairment whenever
events or changes in circumstances indicate the carrying amount of the assets
may not be fully recoverable.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations thereof. Accordingly, compensation costs for stock options is
measured as the excess, if any, of the market price of the Company's stock at
the date of grant over the stock option exercise price. In addition, the Company
complies with the disclosure provisions of Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation."
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company accounts for deferred income taxes using the liability method,
under which the expected future tax consequences of timing differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets when management estimates, based on available
objective evidence, that it is more likely than not that the benefit will not be
realized for the deferred tax assets.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company during
a period from transactions and other events and circumstances excluding
transactions resulting from investment by owners and distribution to owners. The
difference between net income and comprehensive income for the Company relates
to foreign currency translation adjustments and unrealized gains and losses on
marketable securities. Comprehensive income for the years ended December 31,
2000, 1999 and 1998 is disclosed in the "Consolidated Statement of Stockholders'
Equity."
Basic and Diluted Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing the income (loss)
available to holders of common stock for the period by the weighted average
number of shares of common stock outstanding during the period. The calculation
of diluted income (loss) per share excludes potential common stock if the effect
of such stock is antidilutive. Potential common stock consists of common shares
issuable upon the exercise of stock options.
Reclassifications
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to current period presentation.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 established accounting and reporting standards for
derivative instruments including certain derivative instruments embedded in
other contracts and for hedging activities. In June 2000, SFAS 133 was amended
by SFAS 138. The Company will implement SFAS 133 beginning in 2001. Adopting the
provisions of SFAS 133 is not expected to have a material effect on the
Company's financial position or results of operations.
44
46
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We have adopted the provisions of Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition," which did not and does not have a material effect on
the financial position or results of operations of the Company.
NOTE 2. GAIN ON DEMETER WARRANTS
The Company received approximately 1.1 million shares of Finisar
Corporation common stock as a result of Finisar Corporations acquisition of
Demeter Technologies. AXT held a warrant in Demeter that it received in exchange
for certain leases and transferred technology. A gain of $27.3 million was
recorded in other income as a result of the transaction. The investment in the
Finisar Corporation shares is classified as a marketable security (see Note 6).
The Company may receive up to an additional 118,000 shares that are currently
held in escrow. These shares will be released from escrow on November 31, 2001
subject to claims of indemnification.
NOTE 3. DISCONTINUED OPERATIONS
On December 14, 2000, the Company's Board of Directors approved
management's plan to exit the Company's unprofitable consumer products business.
The Company expects to complete the plan by June 30, 2001. Certain assets of the
consumer products division will be sold, transferred to other divisions or
discarded. At December 31, 2000, the Company had a remaining balance of $1.1
million in accrued liabilities for anticipated expenses of asset disposal and
operating losses through the estimated date of disposal.
Certain information with respect to discontinued operations is summarized
below (in thousands):
JANUARY 1,
2000
THROUGH
DECEMBER 14, YEAR ENDED YEAR ENDED
2000 1999 1998
------------ ---------- ----------
Revenue................................................. $ 4,832 $ 6,149 $12,240
Cost of revenue......................................... 4,311 7,343 9,946
------- ------- -------
Gross profit............................................ 521 (1,194) 2,294
Operating expenses:
Selling, general and administrative................... 2,899 3,543 5,519
Research and development.............................. 160 520 180
------- ------- -------
Total operating expenses........................... 3,059 4,063 5,699
Loss from operations.................................... (2,538) (5,257) (3,405)
Interest expense........................................ 0 526 606
Other (income) expense.................................. (139) 116 117
------- ------- -------
Loss before provision for income taxes.................. (2,399) (5,899) (4,128)
Income tax benefit...................................... (912) (2,241) (1,692)
------- ------- -------
Loss from discontinued operations....................... $(1,487) $(3,658) $(2,436)
======= ======= =======
The charge in 2000 for loss on disposal of the consumer products business
includes the following (in thousands):
Carrying value of net assets in excess of anticipated
proceeds.................................................. $1,060
Expenses of asset disposal and anticipated operating loss
for the period December 15, 2000 through the estimated
date of disposal.......................................... 1,103
------
Loss on disposal before taxes............................... 2,163
Income tax benefit.......................................... (822)
------
Loss on disposal............................................ $1,341
======
45
47
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. RESTRUCTURING COSTS
On December 14, 2000, the Company's Board of Directors approved
management's plan to exit its unprofitable 650nm laser diode product line within
its visible emitter division. As a result, during the fourth quarter of 2000,
the Company recorded a pre-tax restructuring charge of $8.2 million. The
restructuring charge includes $1.8 million to write-off laser diode inventory,
which has been classified as a component of cost of goods sold. The
restructuring charge also includes $3.4 million to write-off net assets included
in property, plant and equipment. These assets consist of laser diode processing
equipment that could not be utilized for HBLED or VCSEL processing. These assets
have been taken out of service and will be sold or discarded. The restructuring
charge also includes $848,000 to write-down a portion of goodwill attributable
to the laser diode product line. The restructuring charge also includes $2.1
million for incremental costs and contractual obligations for such items as
leasehold termination payments and other facility exit costs incurred as a
direct result of this plan.
Certain information with respect to restructuring costs is summarized below
(in thousands):
UTILIZED
---------------- BALANCE
RESERVE CASH NON-CASH DECEMBER 31, 2000
------- ---- -------- -----------------
Inventory write-off.............................. $1,844 $-- $1,844 $ --
Property, plant and equipment write-off.......... 3,436 -- 3,436 --
Goodwill write-off............................... 848 -- 848 --
Incremental restructuring costs.................. 2,124 12 121 1,991
------ --- ------ ------
$8,252 $12 $6,249 $1,991
====== === ====== ======
The fair value of assets determined to be impaired in accordance with the
guidance for assets to be held and used in SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
were the result of management estimates. The above noted exit costs were
determined in accordance with EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." The
restructuring actions, as outlined by the plan, are intended to be executed to
completion by July 31, 2001.
NOTE 5. ACQUISITION
Merger of the Company with Lyte Optronics, Inc.
On May 28, 1999, the Company completed a merger with Lyte Optronics, Inc.,
or Lyte, a Nevada corporation and all of its subsidiaries, including Alpha
Photonics, Inc., Lyte Optronics Ltd. (a United Kingdom company) and Advanced
Semiconductor (a Xiamen, China company). Lyte and its subsidiaries manufacture
and distribute semiconductor laser diode chips, high-brightness LEDs and laser
pointers.
Under the terms of the merger agreement, the Company issued approximately
2,023,000 shares of its common stock in exchange for all the outstanding shares
of Lyte's common stock as well as the outstanding shares of Lyte's Series A
preferred stock. The Company also issued approximately 883,000 shares of Series
A preferred stock in exchange for all the outstanding shares of Lyte's Series B
preferred stock. In addition, the Company assumed and converted Lyte's options
and warrants representing approximately 115,000 shares of the Company's common
stock.
The merger has been accounted for as a pooling of interests; accordingly,
all prior period consolidated financial statements have been restated to include
the combined results of operations, financial position and cash flows of Lyte.
46
48
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company incurred costs of approximately $2.8 million associated with
the merger, which were charged to operations during the quarter ended June 30,
1999, the period in which the merger was consummated.
Acquisition of Alpha Photonics, Inc. by Lyte Optronics, Inc.
On September 29, 1998, Lyte acquired Alpha Photonics, Inc., or Alpha. The
transaction was accounted for as a purchase. Lyte issued its common and
preferred stock with a value of $11.5 million in exchange for all the
outstanding shares of capital stock of Alpha. Lyte recorded goodwill of $3.0
million, representing the excess of the value of the shares issued by Lyte over
the net book value of Alpha. The results of operations of Alpha are included in
the operations of the Company beginning on September 29, 1998.
NOTE 6. MARKETABLE SECURITIES
Marketable securities consist of Finisar Corporation common stock. An
unrealized gain of $2.2 million net of tax was recorded in 2000. These
securities are valued at fair market value at December 31, 2000. There is no
assurance that the Company will realize this value when the securities are sold
in the future.
47
49
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BALANCE SHEET DETAIL
The components of selected balance sheet accounts are summarized below (in
thousands):
DECEMBER 31,
--------------------
2000 1999
-------- --------
Inventories:
Raw materials........................................ $ 20,623 $ 13,503
Work-in-process...................................... 26,795 16,151
Finished goods....................................... 4,428 5,816
-------- --------
$ 51,846 $ 35,470
======== ========
Prepaid expenses:
Income tax receivable................................ $ 1,389 $ 4,013
Other................................................ 2,214 4,932
-------- --------
$ 3,603 $ 8,945
======== ========
Property, plant and equipment:
Land................................................. $ 2,447 $ 2,447
Building............................................. 19,747 18,507
Machinery and equipment.............................. 40,002 31,058
Leasehold improvements............................... 4,079 2,704
Construction in progress............................. 14,694 1,008
-------- --------
80,969 55,724
Less: accumulated depreciation and amortization...... (17,568) (14,859)
-------- --------
$ 63,401 $ 40,865
======== ========
Accrued liabilities:
Accrued compensation and other....................... $ 3,186 $ 2,090
Customer prepayments................................. 5,402 --
Accrued restructuring costs.......................... 1,991 --
Accrued discontinued operation costs................. 1,103 --
Other................................................ 4,969 5,374
-------- --------
$ 16,651 $ 7,464
======== ========
NOTE 8. DEBT
Short-Term Bank Borrowing
The Company has a $20.0 million bank line of credit that expires on May 31,
2002. The line of credit is secured by the Company's operating assets, excluding
equipment. Borrowings bear interest at 1.75% above LIBOR that was 6.4% at
December 31, 2000 or 0.5% above the bank's variable prime rate that was 9.5% at
December 31, 2000. The line of credit is subject to certain financial covenants
regarding current financial ratios and cash flow requirements that have all been
met as of December 31, 2000. The amounts outstanding under the line of credit
were $0 at December 31, 2000 and $11.3 million at December 31, 1999.
At December 31, 2000, the Company had two notes outstanding with banks in
China in the amount of $1.4 million. These notes mature in 2001 and bear
interest at 4.9% and 5.5% and are secured by a $400,000 certificate of deposit
and a building and land usage rights.
48
50
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-Term Debt
The components of long-term debt are summarized below (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Various notes payable to banks, secured by certain
equipment, bearing interest at fixed rates between 7.69%
and 9.01%, maturing between February 2001 and May 2003.... $ 2,035 $ 2,948
Debenture loan to Bay Area Employment Development Company,
guaranteed by the U.S. Small Business Administration,
bearing interest at a fixed rate of 7.27%, maturing
October 2016.............................................. 888 917
Taxable revenue bonds, secured by a letter of credit from a
bank, bearing interest at the H15 30 day bond yield for
commercial paper that was 6.65% on December 31, 2000,
maturing December 2023.................................... 10,555 11,135
Mortgage notes payable to a bank, secured by property,
bearing interest at 150 basis points above the prime rate
that was 9.5% on December 31, 2000, maturing May 2003..... 6,000 1,822
------- -------
19,478 16,822
Less current portion........................................ (4,355) (1,568)
------- -------
$15,123 $15,254
======= =======
Maturities of long-term debt at December 31, 2000 were as follows:
2001....................................................... $ 4,355
2002....................................................... 2,357
2003....................................................... 3,590
2004....................................................... 494
2005....................................................... 457
Thereafter................................................. 8,225
-------
$19,478
=======
Following the merger with Lyte Optronics in 1999, the Company prepaid Lyte
Optronics debt. The prepayment resulted in an extraordinary loss in the amount
of $508,000, net of tax benefits.
49
51
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The components of the provision for income taxes are summarized below (in
thousands):
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------ -------
Current:
Federal.............................................. $ 7,738 $4,201 $ 5,297
State................................................ 948 690 611
Foreign.............................................. 155 247 51
------- ------ -------
Total current................................ 8,841 5,138 5,959
------- ------ -------
Deferred:
Federal.............................................. 5,489 (663) (1,097)
State................................................ 648 (95) (194)
------- ------ -------
Total deferred............................... 6,137 (758) (1,291)
------- ------ -------
Total provision from continuing operations
before discontinued operations............. $14,978 $4,380 $ 4,668
======= ====== =======
A reconciliation of the effective income tax rates and the U.S. statutory
federal income tax rate is summarized below:
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
---- ---- ----
Statutory federal income tax rate.......................... 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefits............ 3.3% 4.8% 2.6%
Foreign sales corporation benefit.......................... (1.4)% (3.0)% (3.2)%
Foreign income taxed at higher rate........................ 0.0% 0.0% 0.8%
Acquisition costs.......................................... 0.0% 11.0% 0.0%
Other...................................................... 1.1% 3.4% 6.9%
---- ---- ----
Effective tax rate......................................... 38.0% 50.2% 41.1%
==== ==== ====
Deferred tax assets and liabilities are summarized below (in thousands):
YEARS ENDED
DECEMBER 31,
-------------------
2000 1999
-------- -------
Deferred tax assets:
Accruals and reserves not yet deductible.................. $ 8,529 $ 3,659
State taxes............................................... 288 98
Net operating loss........................................ 867 925
Credits................................................... 165 128
-------- -------
$ 9,849 $ 4,810
Deferred tax liabilities:
Unrealized appreciation on Finisar marketable
securities............................................. (1,339) --
Gain on receipt of Finisar marketable securities.......... (9,945) --
Depreciation.............................................. (2,412) (1,600)
-------- -------
$(13,696) $(1,600)
Net deferred tax assets (liabilities)............. $ (3,847) $ 3,210
======== =======
50
52
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. NET INCOME PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted net income per share calculations is as follows (in thousands, except
per share data):
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Numerator:
Net income................................................ $21,610 $ 172 $ 4,284
======= ======= =======
Denominator:
Denominator for basic net income per share -- weighted
average common shares.................................. 19,677 18,655 16,076
Effect of dilutive securities:
Common stock options................................... 1,382 1,116 249
------- ------- -------
Denominator for dilutive net income per share............... $21,059 $19,771 $16,325
======= ======= =======
Basic income per share...................................... $ 1.10 $ 0.01 $ 0.27
Diluted income per share.................................... $ 1.03 $ 0.01 $ 0.26
Options excluded from diluted net income per share as the
impact is antidilutive.................................... 118 415 7
======= ======= =======
NOTE 11. STOCKHOLDERS' EQUITY
In May 1998, the Company completed its initial public offering, or IPO, and
issued 2,875,000 shares of its common stock at $10.00 per share, including the
shares from an over-allotment option. The Company received cash of approximately
$25.8 million net of underwriting discounts, commissions and IPO expenses. Upon
the closing of the IPO, all outstanding shares of the Company's then convertible
preferred stock were automatically converted into shares of common stock.
On May 28, 1999, the Company completed its acquisition of Lyte Optronics,
Inc. Under the terms of the acquisition, the Company issued approximately
2,023,000 shares of common stock and 883,000 shares of non-voting and
non-convertible preferred stock with a 5.0% cumulative annual dividend rate
payable when declared by the board of directors of the Company and $4 per share
liquidation preference over common stock, in exchange for all of the issued and
outstanding shares of capital stock of Lyte.
On July 25, 2000 the Company completed a private securities offering,
raising approximately $8.5 million in exchange for 234,115 shares of common
stock.
On September 19, 2000, the Company sold pursuant to an underwritten public
offering, 2,510,000 shares of its common stock at a price of $34.25 per share,
including the shares from an over-allotment option. The Company received cash of
approximately $80.8 million net of underwriting discounts, commissions and
expenses. Following the public offering, proceeds were used to repay its line of
credit and for general corporate purposes.
NOTE 12. EMPLOYEE BENEFIT PLANS
Stock Option Plans
In 1993, the Company adopted the 1993 Stock Option Plan ("1993 Plan") which
provides for granting of incentive and non-qualified stock options to employees,
consultants, and directors of the Company. Under the 1993 Plan, 880,000 shares
of common stock have been reserved for issuance as of December 31, 1998. Options
granted under the 1993 Plan are generally for periods not to exceed ten years
and are granted at the fair market value of the stock at the date of grant as
determined by the board of directors. Options granted under
51
53
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the 1993 Plan generally vest 25.0% upon grant and 25.0% each year thereafter,
with full vesting occurring on the third anniversary of the grant date.
In May 1997, the Company adopted the 1997 Stock Option Plan ("1997 Plan")
which provides for granting of incentive and non-qualified stock options to
employees, consultants and directors of the Company. Under the 1997 Plan,
5,901,501 shares of common stock have been reserved for issuance as of December
31, 2000. Options granted under the 1997 Plan are generally for periods not to
exceed ten years (five years if the option is granted to a 10.0% stockholder)
and are granted at the fair market value of the stock at the date of grant as
determined by the board of directors. Options granted under the 1997 Plan
generally vest 25.0% at the end of one year and 2.1% each month thereafter, with
full vesting after four years.
Information about stock option activities is summarized below:
OPTIONS OUTSTANDING
----------------------------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE EXERCISE
AVAILABLE NUMBER OF PRICE PER PRICE PER
FOR GRANT SHARES SHARE SHARE
---------- --------- -------------- ---------
Balance at December 31, 1997.............. 467,819 1,346,152 $ 4.77
Additional shares authorized............ 1,500,000 -- --
Granted................................. (320,599) 320,599 $ 5.00 - 11.87 7.46
Exercised............................... -- (71,407) 1.20 - 5.00 1.94
Cancelled............................... 64,268 (64,268) 5.00 - 7.50 5.39
---------- ---------
Balance at December 31, 1998.............. 1,711,488 1,531,076 5.44
Additional shares authorized............ 1,000,000 -- --
Granted................................. (1,504,350) 1,504,350 9.12 - 24.96 18.21
Exercised............................... -- (200,679) 1.20 - 8.25 4.64
Cancelled............................... 154,645 (154,645) 1.90 - 22.69 13.82
---------- ---------
Balance at December 31, 1999.............. 1,361,783 2,680,102 12.18
Additional shares authorized............ 2,101,501 -- --
Granted................................. (1,182,550) 1,182,550 15.06 - 47.00 30.21
Exercised............................... -- (711,259) 0.20 - 22.69 8.49
Cancelled............................... 681,218 (681,218) $ 1.90 - 47.00 17.29
---------- ---------
Balance at December 31, 2000.............. 2,961,952 2,470,175 $20.46
========== =========
52
54
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information about stock options outstanding at December 31, 2000 is
summarized below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE OUTSTANDING PRICE
--------------- ----------- ----------- ----------- --------
$ 5.00 - 5.00 353,944 6.63 259,162 $5.00
5.50 - 9.12 393,771 7.40 129,619 6.92
10.04 - 15.69 259,417 8.87 15,292 14.11
15.87 - 21.19 277,293 8.60 82,186 19.92
21.25 - 24.00 329,300 8.93 2,182 22.69
24.50 - 29.56 105,500 9.28 -- --
29.56 - 31.63 277,100 9.61 -- --
31.88 - 36.50 269,300 9.67 -- --
36.623 - 44.25 204,050 9.65 125 39.13
$44.38 - 44.38 500 9.13 -- --
--------- ---- ------- -----
2,470,175 8.55 488,566 $8.39
========= ==== ======= =====
Stock-Based Compensation Under APB No. 25
In connection with certain stock option grants the Company recorded
deferred compensation costs totaling $203,000 for the year ended December 31,
1998 and $322,000 for the year ended December 31, 1997. Compensation cost is the
difference between the exercise price and the deemed fair value at the date of
grant. Compensation cost is being amortized over the vesting period relating to
these options, of which approximately $110,000 was amortized for the year ended
December 31, 2000, $110,000 for 1999 and $96,000 for 1998.
Certain Pro Forma Disclosures
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, which also requires that information be determined as
if the Company had accounted for its employee stock options granted under the
fair value method. The fair value for these options was estimated using the
Black-Scholes option pricing model.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123
using the following assumptions:
YEARS ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ---- ----
Risk free interest rate................................... 5.8% 5.6% 5.2%
Expected life (in years).................................. 5.0 5.0 5.0
Dividend yield............................................ 0.0% 0.0% 0.0%
Volatility................................................ 124.0% 96.0% 75.0%
The weighted average grant-date fair value of options granted during the
year ended December 31, 2000 was $25.73, $13.09 in 1999 and $4.57 in 1998.
53
55
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation cost for the Company's options been determined based on
the fair value at the grant dates, as prescribed in SFAS 123, the Company's pro
forma net income and net income per share would have been as summarized below
(in thousands except per share data):
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
Net income:
As reported.......................................... $21,610 $ 172 $4,284
Pro forma net income................................. 16,417 (2,747) 3,936
Net income per share:
As reported:
Basic............................................. $ 1.10 $ 0.01 $ 0.27
Diluted........................................... 1.03 0.01 0.26
Pro forma net income:
Basic............................................. $ 0.83 $ (0.15) $ 0.24
Diluted........................................... 0.78 (0.15) 0.24
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects on
reported net income for future years.
Employee Stock Purchase Plan
In February 1998, the Company's board of directors approved the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan"). The Company's
stockholders approved the 1998 Purchase Plan in March 1998. At December 31, 2000
a total of 900,000 shares of the Company's common stock were reserved for
issuance under the 1998 Purchase Plan. A total of 149,000 shares were purchased
as of December 31, 2000. The 1998 Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through payroll deductions. The
common stock purchase price is determined as 85.0% of the lower of the market
price of the common stock at the purchase date or the date of offer to the
employee.
Retirement Savings Plan
The Company has a 401(k) Savings Plan (the "Savings Plan") which qualifies
as a thrift plan under Section 401(k) of the Internal Revenue Code. All
full-time U.S. employees are eligible to participate in the Savings Plan after
90 days from the date of hire. Participants may contribute up to 10.0% of their
earnings to the Savings Plan with a discretionary matching amount provided by
the Company. The Company's contributions to the Savings Plan were $236,000 for
the year ended December 31, 2000, $146,000 for 1999 and $101,000 for 1998.
NOTE 13. SEGMENT AND FOREIGN OPERATIONS INFORMATION
The Company has three reportable segments: substrates, visible emitters and
discontinued consumer products. The segments in which the Company operates are
subject to rapid technological change and significant competition. Also, the
number of suppliers of certain materials used by the Company and the number of
customers are limited.
54
56
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Selected financial information by business segment is summarized below (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Subtrates Division
Net revenues from external customers............. $113,374 $ 56,732 $ 43,177
Gross profit..................................... 52,013 23,286 17,936
Operating income................................. 34,087 12,275 10,416
Identifiable assets.............................. 215,527 88,579 76,505
Visible Emitter Division
Net revenues from external customers............. $ 8,129 $ 18,640 $ 5,897
Gross profit (loss) *............................ (4,194) 2,060 2,135
Operating income (loss) *........................ (19,487) (2,779) 1,132
Identifiable assets.............................. 33,181 23,423 18,917
Discontinued Consumer Products Division
Identifiable assets.............................. $ 1,512 $ 3,760 $ 7,561
Total
Net revenues from external customers............. $121,503 $ 75,372 $ 49,074
Gross profit..................................... 47,819 25,346 20,071
Operating income................................. 14,600 9,496 11,548
Identifiable assets.............................. 250,220 115,762 102,983
- ---------------
* Includes restructuring charge of $1.8 million in gross profit and $8.2 million
in operating loss in 2000
The Company sells its substrates in the United States and in other parts of
the world. Also, the Company has operations in Japan and China. Revenues by
geographic location based on the country of the customer were as follows (in
thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Net revenues:
United States...................................... $ 62,905 $36,497 $30,172
Europe............................................. 12,743 8,175 3,960
Canada............................................. 6,661 2,221 1,356
Japan, Asia Pacific and other...................... 39,194 28,479 13,586
-------- ------- -------
Consolidated....................................... $121,503 $75,372 $49,074
======== ======= =======
Property, plant and equipment by geographic location is summarized below
(in thousands):
YEARS ENDED
DECEMBER 31,
------------------
2000 1999
------- -------
Property, plant and equipment, net:
United States.......................................... $58,022 $37,362
China.................................................. 5,379 3,491
Other.................................................. -- 12
------- -------
$63,401 $40,865
======= =======
55
57
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. RELATED PARTY TRANSACTIONS
Equipment & Materials, a California corporation engaged in international
trading and quartzware fabrication, supplies us with various raw materials from
China and has manufactured quartzware for us. Christina X. Li, the sole
shareholder and president of Equipment & Materials, is the wife of Davis Zhang,
the president of our substrate division. Purchases from Equipment & Materials
were approximately $8.9 million for the year ended December 31, 2000, $3.6
million for 1999 and $3.7 million for 1998. A balance of $318,000 due to
Equipment & Materials was included in accounts payable at December 31, 2000.
NOTE 15. COMMITMENTS AND CONTINGENCIES
From time to time the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date will
not have a material adverse effect on the Company's financial position or
results of operations.
The Company has entered into contracts to supply several large customers
with GaAs wafers. The contracts guarantee the delivery of a certain number of
wafers between January 1, 2001 and December 31, 2001 with a current contract
value of $87.8 million. The contract sales prices are subject to review
quarterly and can be adjusted in the event that raw material prices change. In
the event of non-delivery of the determined wafer quantities in any monthly
delivery period, the Company could be subject to non-performance penalties of
between 5% and 10% of the value of the delinquent monthly deliveries. Partial
prepayments received for these supply contracts totaling $5.4 million are
included in accrued liabilities at December 31, 2000.
The Company leases certain office space, manufacturing facilities and
property and equipment under long-term operating leases expiring at various
dates through December 2006. Total rent expense under these operating leases was
approximately $224,048 for the year ended December 31, 2000.
Included in property and equipment is approximately $13.0 million of
equipment that is leased under non-cancelable leases accounted for as capital
leases. These leases expire at various dates through 2005.
Total minimum lease payments under the above leases as of December 31,
2000, are summarized below (in thousands):
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
2001.................................................. $ 3,742 $ 359 $ 4,101
2002.................................................. 4,386 375 4,761
2003.................................................. 4,289 391 4,680
2004.................................................. 2,348 407 2,755
2005.................................................. 633 148 781
Thereafter............................................ -- -- --
------- ------ -------
15,398 $1,680 $17,078
====== =======
Less amounts representing interest at 6.0% to 8.8%.... (2,063)
-------
13,335
Less short-term portion............................... (6,057)
-------
Long-term portion..................................... $ 7,278
=======
NOTE 16. FOREIGN EXCHANGE CONTRACTS AND TRANSACTION LOSSES
The Company uses short-term forward exchange contracts for hedging purposes
to reduce the effects of adverse foreign exchange rate movements. The Company
has purchased foreign exchange contracts to hedge
56
58
AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
against certain trade accounts receivable denominated in Japanese yen. The
change in the fair value of the forward contracts is recognized as part of the
related foreign currency transactions as they occur. As of December 31, 2000,
the Company's outstanding commitments with respect to the foreign exchange
contracts, which were commitments to sell Japanese yen, had a total contract
value of approximately $500,000.
The Company incurred a foreign transaction exchange loss of $552,000 for
the year ended December 31, 2000, a gain of $652,000 in 1999 and a loss of
$24,000 in 1998.
57
59
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
AXT, Inc.
By: /s/ MORRIS S. YOUNG
------------------------------------
Morris S. Young, Chief Executive
Officer and President
Date: February 22, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Morris S. Young and Donald L.
Tatzin, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution, each with power to act alone, to sign and execute on
behalf of the undersigned any and all amendments to this Report on Form 10-K,
and to perform any acts necessary in order to file the same, with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requested and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or their or his or her substitutes, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MORRIS S. YOUNG President, Chief Executive February 22, 2001
- --------------------------------------------------- Officer and Chairman of the
Morris S. Young Board
/s/ DONALD L. TATZIN Senior Vice President, Chief February 22, 2001
- --------------------------------------------------- Financial Officer
Donald L. Tatzin
/s/ JOHN E. DRURY Corporate Controller February 22, 2001
- ---------------------------------------------------
John E. Drury
/s/ DAVID C. CHANG Director February 22, 2001
- ---------------------------------------------------
David C. Chang
/s/ JESSE CHEN Director February 22, 2001
- ---------------------------------------------------
Jesse Chen
/s/ B.J. MOORE Director February 22, 2001
- ---------------------------------------------------
B.J. Moore
58
60
EXHIBITS TO FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2000
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1(1) Agreement and Plan of Merger between American Xtal
Technology, a California corporation, and American Xtal
Technology Delaware Corporation, a Delaware corporation.
2.2(4) Agreement and Plan of Reorganization dated May 27, 1999
(which is incorporated herein by reference to Exhibit 2.1 to
the registrant's form 8-K dated May 28, 1999).
2.3(4) Certificate of Merger dated May 27, 1999, filed with the
Secretary of State of the State of Delaware on May 28, 1999
(which is incorporated herein by reference to Exhibit 2.1 to
the registrant's form 8-K dated May 28, 1999).
2.4(4) Articles of Merger dated May 27, 1999, filed with the
Secretary of State of Nevada on May 28, 1999 (which is
incorporated herein by reference to Exhibit 2.1 to the
registrant's form 8-K dated May 28, 1999).
2.5(4) Agreement and Plan of Reorganization by and among American
XTAL Technology, Inc., Monterey Acquisition Corp., Lyte
Optronics, Inc. and certain stockholders of Lyte Optronics,
Inc. dated May 27, 1999.
3.1(3) Restated Certificate of Incorporation.
3.2(4) Certificate of Designation, Preferences and Rights of Series
A Preferred Stock, as filed with the Secretary of State of
the state of Delaware on May 27, 1999 (which is incorporated
herein by reference to Exhibit 2.1 to the registrant's form
8-K dated May 28, 1999).
3.3(4) By Laws.
4.0(4) Rights Agreement.
10.1(1) Form of Indemnification Agreement for directors and
officers.
10.2(1) 1993 Stock Option Plan and forms of agreements thereunder.
10.3(1) 1997 Stock Option Plan and forms of agreements thereunder.
10.4(1) 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5(1) 1998 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.6(1) Loan Agreement between U.S. Bank National Association and us
dated March 4, 1998.
10.7(2) Purchase and Sale Agreement by and between Limar Realty
Corp. #23 and us dated April 1998.
10.8(3) Loan Agreement between U.S. Bank National Association and us
dated September 18, 1998
10.9(3) Letter of Credit and Reimbursement Agreement between U.S.
Bank National Association and us dated December 1, 1998.
10.10(3) Bond Purchase Contract between Dain Rauscher Incorporated
and us dated December 1, 1998.
10.11(3) Remarketing Agreement between Dain Rauscher Incorporated and
us dated December 1, 1998.
10.12 Loan Agreement between U.S. Bank National Association and us
dated August 28, 2000.
21.1(1) List of Subsidiaries.
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers
LLP.
23.2 Consent of Independent Accountants -- Arthur Andersen LLP.
24.1 Power of Attorney (see signature page).
- ---------------
(1) As filed with the SEC in our Registration Statement on Form S-1 on March 17,
1998.
(2) As filed with the SEC in our Registration Statement on Amendment No. 2 to
Form S-1 on May 11, 1998.
(3) As filed with the SEC in our Annual Report on Form 10-K for the year ended
December 31, 1998
(4) As filed with the SEC in our Form 8-K on June 14, 1999
59