10-Q 1 f66528e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED SEPTEMBER 30,2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 ---------------------------- FORM 10-Q (Mark One) [x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to ______________ Commission File Number 0-24085 -------------------- AXT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3031310 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 4281 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (510) 683-5900 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at September 30, 2000 ----- --------------------------------- Common Stock, $.001 par value 21,963,319 ================================================================================ 1 2 AXT, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 Condensed Consolidated Income Statements for the three and nine months ended September 30, 2000 and 1999 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 Notes To Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signatures PART I. FINANCIAL INFORMATION 2 3 Item 1. Financial Statements AXT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, December 31, 2000 1999 --------- --------- (Unaudited) Assets: Current assets Cash and cash equivalents $ 69,772 $ 6,062 Accounts receivable, net of allowance for doubtful accounts of $1,616 and $778 24,112 17,561 Inventories 46,711 35,470 Prepaid expenses and other current assets 9,371 8,945 Deferred income taxes 4,585 3,210 --------- --------- Total current assets 154,551 71,248 Property, plant and equipment, net 61,284 40,865 Other assets 3,664 1,405 Goodwill 1,795 2,244 --------- --------- Total assets $ 221,294 $ 115,762 ========= ========= Liabilities and Stockholders' Equity: Current liabilities Short-term bank borrowing $ - $ 11,298 Accounts payable 10,227 8,294 Accrued liabilities 15,429 7,464 Current portion of long-term debt 1,338 1,568 Current portion of capital lease obligation 7,443 2,162 --------- --------- Total current liabilities 34,437 30,786 Long-term debt, net of current portion 14,156 15,254 Long-term capital lease, net of current portion 8,252 6,853 Other long-term liabilities 150 410 --------- --------- Total liabilities 56,995 53,303 --------- --------- Stockholders' equity: Preferred stock $.001 par value per share; 2,000 shares authorized; 981 shares issued and outstanding 1 1 Additional paid-in capital 3,989 3,989 Common stock $.001 par value per share; 100,000 shares authorized; 21,963 and 18,659 shares issued and outstanding respectively 22 19 Additional paid-in capital 140,830 46,321 Deferred compensation (134) (217) Retained earnings 19,597 12,370 Cumulative translation adjustments (6) (24) --------- --------- Total stockholders' equity 164,299 62,459 --------- --------- Total liabilities and stockholders' equity $ 221,294 $ 115,762 ========= =========
See accompanying notes to these unaudited condensed consolidated financial statements. 3 4 AXT, INC. CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 -------- -------- -------- -------- Revenue $ 34,441 $ 20,017 $ 87,319 $ 59,697 Cost of revenue 19,773 13,077 51,971 43,288 -------- -------- -------- -------- Gross profit 14,668 6,940 35,348 16,409 Operating expenses: Selling, general and administrative 5,918 3,113 14,335 9,956 Research and development 3,291 670 7,142 2,190 Acquisition costs - - - 2,810 -------- -------- -------- -------- Total operating expenses 9,209 3,783 21,477 14,956 -------- -------- -------- -------- Income from operations 5,459 3,157 13,871 1,453 Interest expense 762 752 2,680 1,535 Other (income) and expense 16 (235) (482) (380) -------- -------- -------- -------- Income before provision for income taxes 4,681 2,640 11,673 298 Provision for income taxes 1,779 1,003 4,446 1,181 -------- -------- -------- -------- Net Income (loss) before extraordinary item 2,902 1,637 7,227 (883) Extraordinary item - - - 508 -------- -------- -------- -------- Net Income (loss) $ 2,902 $ 1,637 $ 7,227 $ (1,391) ======== ======== ======== ======== Basic income (loss) per share: Income before extraordinary item $ 0.15 $ 0.09 $ 0.37 $ (0.05) Extraordinary item (0.03) Net income 0.15 0.09 0.37 (0.07) Diluted income (loss) per share: Income before extraordinary item $ 0.14 $ 0.08 $ 0.34 $ (0.05) Extraordinary item (0.03) Net income 0.14 0.08 0.34 (0.07) Shares used in per share calculations: Basic 19,832 18,482 19,595 18,610 Diluted 21,226 19,946 21,062 18,610
See accompanying notes to these unaudited condensed consolidated financial statements. 4 5 AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months Ended September 30, 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss): $ 7,227 $ (1,391) Adjustments to reconcile net income (loss) to cash used in operations: Depreciation 4,558 4,097 Deferred income taxes (1,375) (404) Amortization of goodwill 449 449 Stock compensation 83 83 Changes in assets and liabilities: Accounts receivable (6,551) (4,216) Inventories (11,241) (8,147) Prepaid expenses and other current assets (426) (5,057) Other assets (2,259) (160) Accounts payable 1,933 2,101 Accrued liabilities 7,965 5,725 Other long-term liabilities (260) (103) -------- -------- Net cash provided by (used in) operating activities 103 (7,023) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (16,807) (4,123) -------- -------- Net cash used in investing activities (16,807) (4,123) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments of): Issuance of common stock 94,512 745 Capital leases (1,490) (704) Short-term bank borrowings (11,298) 2,417 Long-term debt borrowings (1,328) (2,880) -------- -------- Net cash provided by (used in) financing activities 80,396 (422) -------- -------- Effect of exchange rate changes 18 13 -------- -------- Net increase (decrease) in cash and cash equivalents 63,710 (11,555) Cash and cash equivalents at the beginning of the period 6,062 16,438 -------- -------- Cash and cash equivalents at the end of the period $ 69,772 $ 4,883 ======== ======== Non cash activity: Purchase of PP&E through capital leases $ 8,170 $ 2,654 ======== ======== Retirements of property, plant and equipment $ (1,558) $ - ======== ========
See accompanying notes to these unaudited condensed consolidated financial statements. 5 6 AXT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The accompanying condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2000 and 1999 are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT, Inc. (the "Company") and its subsidiaries for all periods presented. Certain prior period reclassifications have been made to conform to the current period presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make a number of estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of these condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations are not necessarily indicative of the results to be expected in the future or for the full fiscal year. It is recommended that these condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto included in its 1999 Annual Report on Form 10-K and its Registration Statement dated September 19, 2000 on Form S-3 filed with the Securities and Exchange Commission. Note 2. Net Income (Loss) 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): 6 7
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Numerator: Net income (loss) $ 2,902 $ 1,637 $ 7,227 $ (1,391) ======== ======== ======== ======== Denominator: Denominator for basic earnings per share - weighted average common shares 19,832 18,482 19,595 18,610 Effect of dilutive securities: Common stock options 1,394 1,464 1,467 -------- -------- -------- -------- Denominator for dilutive earnings per share $ 21,226 $ 19,946 $ 21,062 $ 18,610 ======== ======== ======== ======== Basic earnings per share $ 0.15 $ 0.09 $ 0.37 $ (0.07) Diluted earnings per share $ 0.14 $ 0.08 $ 0.34 $ (0.07)
Common equivalent shares of approximately 1.2 million are excluded from the computation of diluted earnings per share for the nine-month period ended September 30, 1999, as their effect is antidilutive. Note 3. Inventories The components of inventory are summarized below (in thousands):
September 30, December 31, 2000 1999 ------------- ------------ Inventories: Raw materials $19,490 $13,503 Work in process 22,110 16,151 Finished goods 5,111 5,816 ------- ------- $46,711 $35,470 ======= =======
Note 4. Comprehensive Income The components of comprehensive income are summarized below (in thousands):
Three months ended Nine months ended September 30, September 30, --------------------- -------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Net Income (loss) $ 2,902 $ 1,637 $ 7,227 $(1,391) Foreign currency translation gain (loss) (104) 66 18 13 ------- ------- ------- ------- Comprehensive income $ 2,798 $ 1,703 $ 7,245 $(1,378) ======= ======= ======= =======
Note 5. Segment Information 7 8 Selected industry segment information is summarized below (in thousands):
Three months ended Nine months ended September 30, September 30, ------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Substrates Net revenues from external customers $ 31,686 $ 15,030 $ 77,024 $ 41,167 Gross profit 14,614 6,225 35,763 16,606 Operating income 8,717 4,371 23,136 8,394 Identifiable assets 182,183 83,500 182,183 83,500 Visible emitters Net revenues from external customers 1,446 3,889 6,312 13,280 Gross profit (loss) 83 920 (1,039) 810 Operating income (loss) (2,421) 97 (8,015) (2,787) Identifiable assets 34,117 22,547 34,117 22,547 Consumer products Net revenues from external customers 1,309 1,098 3,983 5,250 Gross profit (loss) (29) (205) 624 (1,007) Operating loss (837) (1,311) (1,250) (4,154) Identifiable assets 4,994 5,596 4,994 5,596 Total Net revenues from external customers 34,441 20,017 87,319 59,697 Gross profit 14,668 6,940 35,348 16,409 Operating income (loss) 5,459 3,157 13,871 1,453 Identifiable assets 221,294 111,643 221,294 111,643
The Company sells its products in the United States and in other parts of the world. Also, the Company has operations in China and Japan. Revenues by geographic location based on the country of the customer are summarized below (in thousands):
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Net revenues: United States $18,167 $11,068 $46,037 $31,061 Europe 2,063 1,786 8,019 5,479 Canada 3,709 46 4,920 170 Japan 2,937 1,337 7,373 4,418 Asia Pacific and other 7,565 5,780 20,970 18,569 ------- ------- ------- ------- Consolidated $34,441 $20,017 $87,319 $59,697 ======= ======= ======= =======
Note 6. New Debt Financing On August 28, 2000, the Company entered into a new 21-month $20 million line of credit and additional long-term loans of $6.0 million with its bank. The interest rate on the line of credit varies with the banks prime rate and the Company's debt ratio. This line of credit is secured by all business assets, less equipment, and expires on May 31, 2002. This line of credit is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which were met as of September 30, 2000. At September 30, 2000, there were no borrowings outstanding under the $20 million line of credit. 8 9 Note 7. Common Stock Sale In September 2000, the Company completed its public offering of 2.53 million shares of common stock including the exercise of the underwriters' over-allotment option at $34.25 per share. The Company sold 2.51 million shares and a selling stockholder sold 20,000 shares. Net proceeds to the Company, before offering expenses, were approximately $81.7 million. Offering expenses to date are approximately $912,000. On July 25, 2000, the Company raised $8.5 million for the sale of 234,115 shares of common stock in a private securities offering. For the nine months ended September 30, 2000, the Company received $5.2 million in proceeds from the exercise of stock options from the employee stock option plan and stock purchases from the employee stock purchase plan. Note 8. Commitments 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, 2000 and December 31, 2001 with a current contract value of approximately $53.3 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 between 5% and 10% of the value of the delinquent monthly deliveries. Partial prepayments received for these supply contracts totaling $1.3 million are included as deferred revenue in accrued liabilities at September 30, 2000. Note 9. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. In June 2000, SFAS No. 133 was amended by SFAS No. 138. The Company has not determined what the effect of SFAS No. 133 will be on the operations and financial position of the Company. The Company will be required to implement SFAS No. 133 as amended by SFAS No. 137, beginning in 2001. Adopting the provisions of SFAS 133 is not expected to have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the impact of SAB 101 would have no material effect on the financial position or results of operations of the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "future," "intends," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and its Registration Statement dated September 19, 2000 as filed on Form S-3 with the Securities and Exchange Commission and the condensed consolidated financial statements included elsewhere in this report. Results of Operations 9 10 The following table sets forth certain information relating to the operations of the Company expressed as a percentage of total revenues for the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 2000 1999 2000 1999 ------ ------ ------ ------ Revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 57.4 65.3 59.5 72.5 ------ ------ ------ ------ Gross profit 42.6 34.7 40.5 27.5 Operating expenses: Selling, general and administrative 17.2 15.6 16.4 16.7 Research and development 9.6 3.3 8.2 3.7 Acquisition costs - - - 4.7 ------ ------ ------ ------ Total operating expenses 26.8 18.9 24.6 25.1 ------ ------ ------ ------ Income (loss) from operations 15.8 15.8 15.9 2.4 Interest expense 2.2 3.8 3.1 2.6 Other income and expense - (1.2) (0.6) (0.6) ------ ------ ------ ------ Income (loss) before provision for income taxes 13.6 13.2 13.4 0.5 Provision for income taxes 5.2 5.0 5.1 2.0 ------ ------ ------ ------ Net income (loss) before extraordinary item 8.4 8.2 8.3 (1.5) Extraordinary item - - - 0.9 ------ ------ ------ ------ Net Income (loss) after extraordinary item 8.4% 8.2% 8.3% (2.3)% ====== ====== ====== ======
Three months ended September 30, 2000 compared to three months ended September 30, 1999 Revenues. Revenues increased $14.4 million, or 72.1%, to $34.4 million for the three months ended September 30, 2000, compared to $20.0 million for the three months ended September 30, 1999. The increase in revenues was primarily due to a $16.7 million, or 110.8%, increase in substrate sales comprised of a 124.1% increase in sales of GaAs substrates and a 456.8% increase in sales of InP substrates, offset by a 79.1% decrease in sales of Ge substrates and a 100% decrease in contract revenues at the substrate division. The increase in GaAs and InP substrate sales was primarily due to increased sales volume to existing and new domestic and foreign customers due in part to strong growth in the fiber optic and wireless handset markets. The decrease in Ge sales is the result of a cancellation of a contract by a major customer due to weakness in the satellite market. Sales at our visible emitter division decreased $2.4 million, or 62.8% of visible emitter sales to $1.4 million due to an 87.7% decrease in sales of laser diodes, offset by an increase in sales of HBLEDs. The decrease in laser diode sales and the increase in HBLED sales reflects our change in emphasis in the future direction of the visible emitter division. International revenues increased to 47.3% of total revenues for the three months ended September 30, 2000 compared to 44.7% of total revenues for the three months ended September 30, 1999. The increase in the percentage of international revenue to total revenue was primarily the result of increased substrate sales to Japan. Gross margin. Gross margin increased to 42.6% of total revenues for the three months ended September 30, 2000 compared to 34.7% of total revenues for the three months ended September 30, 1999. The gross margin at the substrate division increased to 46.1% of substrate revenues for the three months ended September 30, 2000 compared to 41.4% of substrate revenues for the period ended September 30, 1999. The increase was primarily due 10 11 to higher volume and the realization of lower labor and manufacturing overhead costs as a result of expanding our wafer production capacity in China. The gross margin at the visible emitter division decreased to 5.7% of visible emitter revenues for the three months ended September 30, 2000 compared to 23.7% of visible emitter revenues for the period ended September 30, 1999. The decrease was primarily due to increased costs associated with the start-up of HBLED and other product production. Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.8 million, or 90.1%, to $5.9 million for the three months ended September 30, 2000, compared to $3.1 million for the three months ended September 30, 1999. As a percentage of total revenues, selling, general and administrative expenses were 17.2% for the three months ended September 30, 2000 compared to 15.6% for the three months ended September 30, 1999. Selling, general and administrative expenses increased 90.1% compared to increased total revenues of 72.1% for the three months ended September 30, 2000. The increase in selling, general and administrative expenses was primarily due to increases in personnel and related expenses required to support current and future increases in sales volume. Research and development expenses. Research and development expenses increased $2.6 million, or 391.2%, to $3.3 million for the three months ended September 30, 2000, compared to $670,000 for the three months ended September 30, 1999. As a percentage of total revenues for these three-month periods, research and development expenses were 9.6% in 2000 and 3.3% 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 and 6" GaAs and 4" InP substrate research and development at the substrate division. Interest expense. Interest expense increased $10,000, or 1.3%, to $762,000 for the three months ended September 30, 2000 compared to $752,000 for the three months ended September 30, 1999. Other income and expense. Other income and expense decreased $251,000 to $16,000 for the three months ended September 30, 2000, compared to income of $235,000 for the three months ended September 30, 1999. The decrease was primarily due to lower foreign exchange gains. Provision for income taxes. Income tax expense remained at our effective tax rate of 38.0% for the three months ended September 30, 2000 and 1999. Nine months ended September 30, 2000 compared to nine months ended September 30, 1999 Revenues. Revenues increased $27.6 million, or 46.3%, to $87.3 million for the nine months ended September 30, 2000 compared to $59.7 million for the nine months ended September 30, 1999. The increase in revenues was primarily due to a $35.9 million, or 87.1% increase in substrate sales comprised of a 107.0% increase in sales of GaAs substrates and a 333.6% increase in InP substrates offset by a 73.8% decrease in sales of Ge substrates and a 100% decrease in contract revenues at the substrate division. The increase in GaAs and InP substrate sales was due to increased sales volume to existing and new domestic and foreign customers due in part to strong growth in the fiber optic wireless handset markets. The decrease in Ge sales was the result of a cancellation of a contract by a major customer due to weakness in the satellite market. Sales at our visible emitter division decreased $7.0 million, or 52.5% of visible emitter sales to $6.3 million due to a 58.5% decrease in sales of laser diodes, offset by a 100% increase in sales of HBLEDs. The decrease in laser diode sales and increase in HBLED sales reflects our change in emphases in the future direction of the visible emitter division. Sales at our consumer products division decreased $1.3 million, or 24.1% of consumer product sales, due to declining sales prices and lower demand for laser pointer products. International revenues decreased to 47.3% of total revenues for the nine months ended September 30, 2000, compared to 48.0% of total revenues for the nine months ended September 30, 1999. The decrease in the percentage of international revenue to total revenue was primarily the result of increased substrate sales to domestic customers. Gross margin. Gross margin increased to 40.5% of revenues for the nine months ended September 30, 2000, compared to 27.5% of revenues for the nine months ended September 30, 1999. The gross margin at the substrate division increased to 46.4% of substrate revenues for the nine months ended September 30, 2000, compared 11 12 to 40.3% of substrate revenues for the period ended September 30, 1999. The increase was primarily due to higher volume and the realization of lower labor and manufacturing overhead costs as a result of expanding our wafer production capacity in China. The gross margin at the visible emitter division decreased to negative 16.5% of visible emitter revenues for the nine months ended September 30, 2000, compared to 6.1% of visible emitter revenues for the period ended September 30, 1999. The decrease was primarily due to increased costs associated with the start-up of HBLED and other new product production. The gross margin at the consumer products division increased to 15.7% of consumer product revenues for the nine months ended September 30, 2000 compared to negative 19.2% of consumer product revenues for the nine months ended September 30, 1999. The increase was primarily due to manufacturing process improvements and cost reductions. Selling, general and administrative expenses. Selling, general and administrative expenses increased $4.4 million, or 44.0%, to $14.3 million for the nine months ended September 30, 2000 compared to $10.0 million for the nine months ended September 30, 1999. The increase in selling, general and administrative expenses were primarily due to increases in personnel and related expenses required to support current and future increases in sales volume. As a percentage of total revenues, selling, general and administrative expenses were 16.4% for the nine months ended September 30, 2000 and 16.7% for the nine months ended September 30,1999. Selling, general and administrative expenses increased 44.0% compared to increased total revenues of 46.3% for the nine months ended September 30, 2000. Research and development expenses. Research and development expenses increased $5.0 million, or 226.1%, to $7.1 million for the nine months ended September 30, 2000 compared to $2.2 million for the nine months ended September 30, 1999. As a percentage of total revenues for these nine-month periods, research and development expenses were 8.2% in 2000 and 3.7% 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 and 6" GaAs and 4" InP substrate research and development at the substrate division. Interest expense. Interest expense increased $1.1 million, or 74.6%, to $2.7 million for the nine months ended September 30, 2000, compared to $1.5 million for the nine months ended September 30, 1999. The increase was primarily due to interest on short-term debt used to finance the short-term liquidity needs resulting from our increased sales volume and the addition of certain capital leases to finance equipment purchases. Other income and expense. Other income and expense increased $102,000 to $482,000 for the nine months ended September 30, 2000 compared to $380,000 for the nine months ended September 30, 1999. The increase was primarily due to higher foreign exchange gains. Provision for income taxes. Income tax expense remained at our effective tax rate of 38.0% for the nine months ended September 30, 2000 and 1999. For the nine months ended September 30, 1999, income tax expense was adjusted for non-deductible acquisition costs of $2.8 million. Liquidity and Capital Resources Working capital increased $79.6 million, or 196.9%, to $120.1 million at September 30, 2000 compared to $40.5 million at December 31, 1999. The increase was primarily due to the increase in cash and cash equivalents resulting from the sale of common stock in our public offering completed in September, 2000, and the private placement completed in July, 2000. Cash generated from operating activities generated $103,000 for the nine months ended September 30, 2000 compared to cash used in operating activities of $7.0 million for the nine months ended September 30, 1999. The increase was primarily due to increased profitability at the substrate division. Cash generated from operations for the nine months ended September 30, 2000 was primarily used to finance an $11.2 million increase in inventories. We invested $25.0 million in capital expenditures during the nine months ended September 30, 2000 compared to $6.8 million during the nine months ended September 30, 1999. The increase in spending was primarily due to facility expansion and equipment additions in order to increase crystal growth and wafer processing capacity at the substrate division as well as facility expansion and equipment additions at the visible emitter division to begin volume epitaxy, wafer processing and chip production for HBLEDs. 12 13 We are currently engaged in constructing an additional 32,000 square foot building in Beijing, China to expand substrate wafer processing facilities and a 27,000 square foot building in El Monte, California to expand HBLED and VCSEL production. We are also constructing improvements to the existing production facilities in Fremont, California to increase crystal growth and wafer processing capacity. We expect to invest approximately $47 million in additional facilities and equipment over the next 12 months. Cash provided by financing activities for the nine months ended September 30, 2000 includes $94.5 million from the sale of common stock. On September 25, 2000 we raised $70.1 million for the sale of 2.18 million shares of common stock in a public offering. On September 29, 2000 we raised $10.7 million from the sale of 330,000 shares of common stock to the underwriters of the public offering when they exercised their over-allotment option. On July 25, 2000 we raised $8.5 million from the private placement of 234,115 shares of common stock to eleven stockholders. For the nine months ended September 30, 2000, we received $5.2 million in proceeds from the exercise of stock options from the employee stock option plan and stock purchases from the employee stock purchase plan. Total debt was $31.2 million at September 30, 2000 compared to $37.1 million at December 31, 1999. We currently have a $20.0 million line of credit with a commercial bank at an interest rate that varies with the banks prime rate and our debt ratio. This line of credit is secured by all business assets, less equipment, and expires on May 31, 2002. This line of credit is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which were met as of September 30, 2000. We must obtain the lender's approval to obtain additional borrowings or to further pledge our assets, except for borrowings obtained in the normal course of business or the pledging of equipment. At September 30, 2000, there were no borrowings outstanding under the $20.0 million 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 10.0% per annum. Some of our manufacturing facilities have been financed by long-term borrowings, which were repaid 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 secured by a letter of credit from our bank and is paid on a quarterly basis. We have the option to redeem in whole or in part the bonds during their term. At September 30, 2000, $10.6 million was outstanding under these bonds. We anticipate that the combination of existing working capital and the borrowings available under the current credit agreements together with the net proceeds from the offerings discussed above, 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 our 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 raise additional equity and debt financing in the future. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 against certain trade accounts receivable denominated in Japanese yen. These contracts are accounted for using hedge accounting, under which the change in the fair value of the forward contracts is recognized as part of the related foreign currency transactions as they occur. As of September 30, 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 $1.8 million. PART II FINANCIAL INFORMATION 13 14 Item 1. Exhibits and reports on Form 8-K a. Exhibits 27.1 Financial Data Schedule b. Reports on Form 8-K None 14 15 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. AXT, INC. Dated: October 26, 2000 By: /s/ Morris S. Young --------------------------------- Morris S. Young Chief Executive Officer Dated: October 26, 2000 By: /s/ Donald L. Tatzin --------------------------------- Donald L. Tatzin Chief Financial Officer Dated: October 26, 2000 By: /s/ John Drury --------------------------------- John Drury Corporate Controller 15 16 INDEX TO EXHIBITS ----------------- a. Exhibits 27.1 Financial Data Schedule