20-F 1 a07-7076_120f.htm FORM 20-F - ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

o

Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934

 

or

 

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2006

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                           to                         

 

Commission file number: 000-51196

 

AIXTRON Aktiengesellschaft

(Exact Name of Registrant as Specified in Its Charter)

 

Federal Republic of Germany

(Jurisdiction of Incorporation or Organization)

 

Kackertstrasse 15-17

D-52072 Aachen

Federal Republic of Germany

(Address of Principal Executive Offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Ordinary shares, no par value (only in connection with the listing of

its American Depositary Shares on the NASDAQ Capital Market)

(Title of Class)

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:  None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None

 

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2006: 89,799,397 ordinary shares, no par value.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes  o    No  x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes  o    No  x

 

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 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  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer  o                   Accelerated filer  x                            Non-accelerated filer  o

 

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  o    Item 18  x

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o    No  x

 

 

 




 

Table of Contents

PART I

 

 

 

Item 1: Identity of Directors, Senior Management and Advisers

 

 

 

Item 2: Offer Statistics and Expected Timetable

 

 

 

Item 3: Key Information

 

 

 

A. Selected Financial Data

 

 

 

Exchange Rate Information

 

 

 

B. Capitalization and Indebtedness

 

 

 

C. Reasons for the Offer and Use of Proceeds

 

 

 

D. Risk Factors

 

 

 

Company-Related Risk

 

 

 

Risks Relating to Holding AIXTRON’s ADSs and Ordinary Shares

 

 

 

Item 4: Information on the Company

 

 

 

A. History and Development of the Company

 

 

 

Important Events

 

 

 

Capital Expenditures

 

 

 

B. Business Overview

 

 

 

Technology

 

 

 

Products and Services

 

 

 

Seasonality

 

 

 

Principal Markets

 

 

 

Geographical segments

 

 

 

Raw Materials and Manufacturing

 

 

 

Marketing Channels

 

 

 

Intellectual Property

 

 

 

Strategy and Competitive Positioning

 

 

 

Government Regulation

 

 

 

C. Organizational Structure

 

 

 

D. Property, Plant and Equipment

 

 

 

Environmental Issues

 

 

 

Item 4A: Unresolved Staff Comments

 

 

 

Item 5: Operating and Financial Review and Prospects

 

 

 

A. Operating Results

 

 

 

Preparation of consolidated financial statements under IFRS

 

 

 

Critical Accounting Policies

 

 

 

Recently Issued Accounting Standards

 

 

 

Management’s Discussion and Analysis of Results of Operations

 

 

 

Overview

 

 

 

Significant Factors Affecting Results

 

 

 

Results of Operations

 

 

 

B. Liquidity and Capital Resources

 

 

 

C. Research and Development, Patents and Licenses, etc.

 

 

 

D. Trend Information

 

 

 

E. Off-Balance Sheet Arrangements

 

 

 

Contingencies

 

 

 

F. Tabular Disclosure of Contractual Obligations

 

 

 

Item 6: Directors, Senior Management and Employees

 

 

 

A. Directors and Senior Management

 

 

 

Supervisory Board

 

 

 

Executive Board

 

 

 

B. Compensation

 

 

 

C. Board Practices

 

 

 

Audit Committee

 

 

 

Compliance with NASDAQ Listing Standards on Corporate Governance

 

 

 

D. Employees

 

 

 

E. Share Ownership

 

 

 

Employee Bonds and Options

 

 

 

Item 7: Major Shareholders and Related Party Transactions

 

 

 

 

2




 

A. Major Shareholders

 

 

 

B. Related Party Transactions

 

 

 

Item 8: Financial Information

 

 

 

A. Consolidated Statements and Other Financial Information

 

 

 

Export Revenues

 

 

 

Legal Proceedings

 

 

 

Policy on Dividend Distributions

 

 

 

B. Significant Changes

 

 

 

Item 9: The Offer and Listing

 

 

 

Trading Markets

 

 

 

Market Price Information

 

 

 

Item 10: Additional Information

 

 

 

A. Share Capital

 

 

 

B. Memorandum and Articles of Association

 

 

 

Corporate Governance

 

 

 

Sarbanes-Oxley Act Requirements and NASDAQ Rules

 

 

 

C. Material Contracts

 

 

 

Employment contracts of current members of the Executive Board

 

 

 

Intellectual Property Agreements

 

 

 

D. Exchange Controls

 

 

 

E. Taxation

 

 

 

German Taxation

 

 

 

U.S. Federal Taxation

 

 

 

F. Dividends and Paying Agents

 

 

 

G. Statement by Experts

 

 

 

H. Documents on Display

 

 

 

I. Subsidiary Information

 

 

 

Item 11: Quantitative and Qualitative Disclosure about Market Risk

 

 

 

Exchange Rate Risk

 

 

 

Foreign Currency Risk

 

 

 

Interest Rate Risk

 

 

 

Item 12: Description of Securities other than Equity Securities

 

 

 

PART II

 

 

 

Item 13: Defaults, Dividend Arrearages and Delinquencies

 

 

 

Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds

 

 

 

Item 15: Controls and Procedures

 

 

 

Item 16A: Audit Committee Financial Experts

 

 

 

Item 16B: Code of Ethics

 

 

 

Item 16C: Principal Accountant Fees and Services

 

 

 

Audit Committee Pre-Approval Policies

 

 

 

Item 16D: Exemptions from Listing Standards for Audit Committees

 

 

 

Item 16E: Purchases of Equity Securities by the Issuer

 

 

 

PART III

 

 

 

Item 17: Financial Statements

 

 

 

Item 18: Financial Statements

 

 

 

Item 19: Exhibits

 

 

 

Signatures

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

Consolidated Statements of Income

 

 

 

Consolidated Balance Sheet

 

 

 

Consolidated Cash Flow Statement

 

 

 

Consolidated Statement of Changes in Equity

 

 

 

Notes to the Consolidated Financial Statements

 

 

 

 

3




Presentation of Information

In this Annual Report on Form 20-F (this “report”), unless the context otherwise requires, references to “the Company” or “AIXTRON” are to AIXTRON Aktiengesellschaft and its consolidated subsidiaries.  Throughout this report, whenever a reference is made to AIXTRON’s website, such reference does not incorporate information from the website by reference into this report.

The Company’s audited Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and its interpretations adopted by the International Accounting Standards Board (“IASB”).

AIXTRON publishes its audited Consolidated Financial Statements in euros.  As used in this report, “EUR”, “euro” or “€” means the single unified currency that was introduced in the Federal Republic of Germany and ten other participating member states of the European Union on January 1, 1999. “U.S. dollar”, “U.S.$,” or “USD” means the lawful currency of the United States of America.

Except where AIXTRON otherwise attributes market or industry data to another source, all such data included in this report are its own estimates.  These estimates are based upon the Company’s experience in its industry and its familiarity with the relevant markets.  While AIXTRON believes these estimates to be reliable, the Company has not verified them with independent sources.

Forward-Looking Statements

AIXTRON believes that various statements in this report may constitute forward-looking statements.  You can identify these statements by forward-looking words such as “may,” “will,” “could,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words.  You should read statements that contain these words carefully because they:

·

 

discuss future expectations;

 

 

 

 

 

·

 

contain projections of future results of operations or financial condition; or

 

 

 

 

 

·

 

state other “forward-looking” information.

 

AIXTRON believes it is important to communicate its expectations.  There may be events in the future that AIXTRON is unable to predict accurately or over which the Company has no control.  The risk factors and cautionary language discussed in this document provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by AIXTRON in its forward-looking statements, including among other things:

·

 

the extent to which the technologies AIXTRON offers are demanded by the market place;

 

 

 

 

 

·

 

the actual number of customer orders AIXTRON receives;

 

 

 

 

 

·

 

the timing of final acceptance of products by customers;

 

 

 

 

 

·

 

the financial climate and accessibility of financing, general conditions in the thin film equipment market and in the macro-economy;

 

 

 

 

 

·

 

cancellations, rescheduling or delays in product shipments;

 

 

 

 

 

·

 

manufacturing capacity constraints;

 

 

 

 

 

·

 

lengthy sales and qualification cycles;

 

 

 

 

 

·

 

difficulties in the production process;

 

 

 

 

 

·

 

changes in semiconductor industry growth;

 

4




 

·

 

increased competition;

 

 

 

 

 

·

 

exchange rate fluctuations;

 

 

 

 

 

·

 

availability of government funding;

 

 

 

 

 

·

 

variability and availability of interest rates;

 

 

 

 

 

·

 

delays in developing and commercializing new products; and

 

 

 

 

 

·

 

general economic conditions being less favorable than expected.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

All subsequent written and oral forward-looking statements attributable to AIXTRON or to any person acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements.  AIXTRON does not undertake and expressly disclaim any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

5




PART I

6




Item 1:  Identity of Directors, Senior Management and Advisers

Not applicable.

7




Item 2:  Offer Statistics and Expected Timetable

Not applicable.

8




Item 3:  Key Information

A. Selected Financial Data

The table below presents AIXTRON’s selected historical consolidated financial data as of the dates and for the periods indicated, which are derived from the Company’s audited Consolidated Financial Statements.  The historical consolidated statement of operations data presented below for the fiscal years ended December 31, 2006, 2005, and 2004 and the historical consolidated balance sheet data as of December 31, 2006 and 2005 have been derived from AIXTRON’s historical Consolidated Financial Statements included in this report and audited by Deloitte & Touche GmbH in accordance with the standards of the Public Company Accounting Oversight Board (United States).

You should read the selected consolidated financial data set forth below in conjunction with “Item 5 — Operating and Financial Review and Prospects” and AIXTRON’s Consolidated Financial Statements included in this report.  The historical results included below and elsewhere in this report are not necessarily indicative of AIXTRON’s future performance.

 

 

Historical
(in thousands of euro, except share and per share data)
As of or For the Year Ended December 31

 

 

 

2006

 

2006

 

2005

 

2005

 

2004

 

2004

 

2003

 

2002

 

 

 

IFRS

 

US GAAP

 

IFRS

 

US GAAP

 

IFRS

 

US GAAP

 

US GAAP

 

US GAAP

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

171,685

 

171,685

 

139,402

 

139,402

 

140,004

 

140,004

 

90,402

 

152,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

5,699

 

4,682

 

-52,675

 

-94,273

 

9,674

 

8,097

 

-26,606

 

20,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

5,857

 

5,180

 

-53,468

 

-95,969

 

7,681

 

7,146

 

-17,838

 

15,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share-basic (EUR)(1)

 

0.07

 

0.06

 

-0.65

 

-1.17

 

0.12

 

0.11

 

-0.28

 

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share-diluted (EUR)(1)

 

0.07

 

0.06

 

-0.65

 

-1.17

 

0.12

 

0.11

 

-0.28

 

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share (EUR)(2)

 

0.00

 

0.00

 

0.00

 

0.00

 

0.00

 

0.00

 

0.08

 

0.18

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

263,482

 

261,821

 

237,317

 

235,711

 

176,335

 

174,880

 

163,712

 

192,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

79,540

 

79,540

 

53,718

 

53,718

 

39,368

 

39,476

 

35,261

 

40,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interests

 

0

 

0

 

0

 

0

 

0

 

0

 

159

 

359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

183,942

 

182,281

 

183,599

 

181,993

 

136,967

 

135,404

 

128,292

 

151,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed capital

 

87,836

 

87,836

 

87,797

 

87,797

 

64,832

 

64,832

 

64,832

 

64,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- basic

 

87,824,321

 

87,824,321

 

82,111,081

 

82,111,081

 

64,831,512

 

64,831,512

 

64,831,512

 

64,828,872

 

- diluted

 

87,902,699

 

87,902,699

 

82,111,081

 

82,111,081

 

65,165,246

 

64,856,952

 

64,831,512

 

64,854,312

 


(1)

 

Gives effect to the increases in stated share capital of 2:1 and 2:1 in 2000 and 2001, respectively, resulting in respective cumulative conversion factors of 1:2 in 2000 and 1:1 in 2001 when compared to results as reported in those periods.

 

 

 

(2)

 

Dividends declared in each year relate to prior year earnings. Gives effect to the increases in stated share capital of 2:1 and 2:1 in 2000 and in 2001, respectively, resulting in respective cumulative conversion factors of 1:4 and 1:2 when compared to actual dividends paid per share.

 

9




Exchange Rate Information

The following tables set forth, for the periods indicated, information concerning the exchange rates for euros per U.S. dollar.  AIXTRON has provided these rates solely for your convenience and you should not construe these translations as a representation that euro amounts actually represent these U.S. dollar amounts or that the euro amounts could have been, or could be, converted into U.S. dollars at those rates or at any other rate.  AIXTRON did not use these rates in the preparation of its financial statements included elsewhere in this report.  Fluctuations in the exchange rate between the U.S. dollar and the euro will affect the U.S. dollar equivalent of the euro price of the Company’s ordinary shares traded on the Frankfurt Stock Exchange and are likely to affect the market price of the Company’s American Depositary Shares (“ADSs”) traded on the NASDAQ Capital Market.

As used in this report, the term “noon buying rate” refers to the rate of exchange for euro, expressed in U.S. dollar per euro, as announced by the Federal Reserve Bank of New York for customs purposes as the rate in The City of New York for cable transfers in foreign currencies.

The table below shows the average noon buying rates in The City of New York for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for U.S. dollar per euro for AIXTRON’s fiscal years.  The average is computed using the noon buying rate on the last business day of each month during the period indicated.

Year ended December 31,

 

Average Rate

 

2002

 

0.9495

 

2003

 

1.1411

 

2004

 

1.2478

 

2005

 

1.2400

 

2006

 

1.2661

 

Quarter ended December 31, 2006

 

1.3077

 

 

The following table shows the noon buying rates for euros in U.S. dollars for the last six months.

Month Ended

 

High

 

Low

 

August 2006

 

1.2914

 

1.2735

 

September 2006

 

1.2833

 

1.2648

 

October 2006

 

1.2773

 

1.2502

 

November 2006

 

1.3261

 

1.2705

 

December 2006

 

1.3327

 

1.3073

 

January 2007

 

1.3286

 

1.2904

 

February 2007 (through February 15, 2007)

 

1.3140

 

1.2933

 

 

On February 15, 2007, the noon buying rate was U.S. $ 1.3140 per € 1.00.

B. Capitalization and Indebtedness

Not applicable

C. Reasons for the Offer and Use of Proceeds

Not applicable

10




D. Risk Factors

Any of the following risks could have a material adverse effect on AIXTRON’s financial position, results of operations, liquidity and the actual outcome of matters that the forward-looking statements contained in this annual report refer to.  The risks described below are not the only ones the Company faces.  There may be additional risks AIXTRON is currently unaware of and risks that are common to most companies.  There may also be risks that AIXTRON now believes are immaterial, but which may ultimately have a material adverse effect on the Company’s financial position, results of operations, liquidity and the actual outcome of matters that the forward-looking statements contained in this annual report refer to.  For additional information regarding forward-looking statements, see “Forward-looking statements notice” included in this annual report.

Company-Related Risk

The compound semiconductor and the semiconductor industries can be highly volatile and unpredictable, which may adversely affect AIXTRON’s operating results and result in significant volatility in the market price of its ordinary shares and American Depositary Shares.

The compound semiconductor and the semiconductor manufacturing equipment industry can be affected by the cyclical nature of the semiconductor industry.  Although semiconductors are used in many different products, the markets for those products are interrelated to various degrees.  The industry has historically experienced sudden changes in supply and demand for semiconductors.  The timing, length and severity of these industry cycles are difficult to predict.  During periods of declining demand for semiconductor manufacturing equipment, AIXTRON needs to be able to quickly and effectively align its cost structure with prevailing market conditions, to manage its inventory levels to reduce the possibility of future inventory write-downs resulting from obsolescence, and to motivate and retain key employees.  Because a high proportion of AIXTRON’s costs are fixed in the near term, the Company’s ability to reduce expenses quickly in response to revenue shortfalls is limited.  During periods of rapid growth, AIXTRON’s business must be able to acquire and/or develop sufficient manufacturing capacity and inventory to meet customer demand, and to attract, hire, assimilate and retain a sufficient number of qualified people.  The Company’s customers often accelerate or delay expenditures, as well as attempt to cancel or reschedule their orders, in reaction to variations in their businesses or market conditions.  As a result, AIXTRON must be able to react quickly to these changes in supply and demand.  A failure to quickly align the Company’s cost structure and manufacturing capabilities with industry fluctuations could lead to significant losses or to fail to capitalize on increased demand.  In either event, the results of operations may be adversely affected, which could result in significant volatility in the market price of the Company’s ordinary shares and American Depositary Shares (ADSs).

In order to compete, AIXTRON must attract, retain and motivate key employees, and its failure to do so could have an adverse effect on its results of operations.

In order to compete, AIXTRON must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions.  Hiring and retaining qualified executives, scientists, engineers, technical staff and sales representatives are critical to the Company’s business, and competition for experienced employees in the semiconductor industry can be intense.  To attract, retain and motivate qualified employees, AIXTRON relies heavily on paying cash compensation at market-competitive rates and offering additional incentives and bonus payments.  If such cash payments cease to be viewed as a valuable benefit by the Company’s key employees, the Company’s ability to attract, retain and motivate its employees could be adversely impacted, which could negatively affect its results of operations and/or require AIXTRON to increase the amount it expends on cash and other forms of compensation.

AIXTRON depends on a limited number of customers that operate in highly concentrated industries.

AIXTRON’s customer base is, has been and may in the future be highly concentrated.  Orders from a relatively limited number of customers have accounted for, and likely will continue to account for, a substantial portion of the Company’s revenues, which may lead customers to demand pricing and other terms less favorable to the Company.  If a principal customer discontinues its relationship with AIXTRON or suffers economic setbacks, AIXTRON’s business, financial condition and operating results could be materially and adversely affected.  AIXTRON’s ability to increase revenues in the future will depend in part upon its ability to obtain orders from new customers.  AIXTRON cannot be certain that it will be able to do so.

11




In addition, because a relatively small number of large manufacturers, many of whom are AIXTRON’s customers, dominate the industries in which they operate, it may be especially difficult for the Company to replace these customers if it loses their business.  A large portion of orders in AIXTRON’s order backlog are orders from its principal customers.  Furthermore, AIXTRON does not have long-term contracts with many of its customers.  As a result, the Company’s agreements with its customers do not provide any assurance of future revenues and AIXTRON is exposed to competitive price pressure on most new orders it attempts to obtain.  The Company’s failure to obtain new orders from new or existing customers, would have a negative impact on its results of operations.

AIXTRON’s business operates in a highly competitive industry characterized by increasingly rapid technological changes, and if the Company does not develop new products in a timely manner, it may not be able to compete successfully in this market.

The introduction of new products and technologies occurs at a continuously increasing pace and grows increasingly complex over time.  If AIXTRON’s business does not develop and introduce new products and technologies in a timely manner in response to changing market conditions or customer requirements, its financial condition and results of operations could be materially and adversely affected.  AIXTRON’s competitive advantage and future success depend on its ability to:

·

 

successfully develop new products and technologies;

 

·

 

develop new markets for its products and services;

 

·

 

introduce new products to the marketplace in a timely manner;

 

·

 

qualify new products with its customers; and

 

·

 

commence and adjust production to meet customer demands.

 

AIXTRON’s competitors may have greater resources than AIXTRON, or may otherwise be better suited to compete in the Company’s markets, and AIXTRON’s failure to compete successfully with these companies would seriously harm its business.

Some of AIXTRON’s competitors have greater financial, engineering, manufacturing and marketing resources than the Company does.  In addition, AIXTRON faces competition from smaller emerging equipment companies whose strategy is to provide a portion of the products and services that the Company’s semiconductor equipment business offers, using innovative technology to sell products into specialized markets.  New product introductions or enhancements by AIXTRON’s competitors could cause a decline in revenues or loss of market acceptance of its existing products.  Increased competitive pressure could also lead to intensified price competition resulting in lower margins.  The Company’s failure to compete successfully with these other companies would seriously harm its business.

AIXTRON faces lengthy sales and qualification cycles for its products and, in many cases, must invest a substantial amount of time and funds with no assurance that these efforts or expenditures will result in revenues.

Revenues from AIXTRON’s systems primarily depend upon the decision of a prospective customer to invest in or upgrade its manufacturing capabilities, which typically involves a significant capital commitment by the customer.  Customers usually place orders with AIXTRON between three to nine months, or longer, after the Company’s initial contact with them regarding a particular system. AIXTRON often experiences delays in obtaining system orders while customers evaluate and receive internal approvals for the purchase of these systems.  These delays may include the time necessary to plan, design or complete a new or expanded semiconductor fabrication facility.  Due to these factors, the Company expends substantial funds as well as marketing and management efforts to sell its semiconductor production systems.  These expenditures and efforts may not result in revenues.

In order to expand its materials production capabilities, the Company has dedicated a number of its systems to the manufacture of wafers and devices.  At any given time, some of AIXTRON’s products are being tested to determine whether they meet customer or industry specifications.  During such a qualification period, AIXTRON invests significant resources and dedicates substantial production capacity to the manufacture of these new products, prior to any commitment to purchase by the prospective customer and without generating significant revenues from the qualification process.

12




If AIXTRON was unable to meet these specifications or does not receive sufficient customer orders to profitably use the dedicated production capacity, its business, financial condition, results of operations and cash flows could be materially and adversely affected.

AIXTRON’s future budgets for operating expenses, capital expenditures, operating leases and service contracts are based upon the Company’s assumptions as to the anticipated market acceptance of its products.  If AIXTRON’s products do not meet the expected customer demand, the Company’s business, financial condition, results of operations and cash flows could be materially and adversely affected.

AIXTRON’s quarterly operating results fluctuate significantly, which may cause the market price of its ordinary shares and its ADSs to increase or decrease significantly.

AIXTRON has historically experienced significant fluctuations in its quarterly operating results and the Company anticipates that such fluctuations will continue.  AIXTRON’s results may vary significantly depending on a number of factors, including:

·

 

changes in the semiconductor market environment;

 

·

 

changes in regulations affecting the semiconductor industry;

 

·

 

changes in the mix or cost of its products and services;

 

·

 

the timing of the introduction or acceptance of new products and services offered by AIXTRON or its competitors; and

 

·

 

exchange rate fluctuations, in particular between the euro, the U.S. dollar and the pound sterling.

 

In addition, the Company derives a substantial portion of its revenues in any fiscal period from the sale of a relatively small number of high-priced systems.  As a result, the timing of recognition of revenue for a single transaction could have a material effect on total revenues and operating results for a particular reporting period.  A delay of only a week or two can often shift the related realization of revenues into the next quarter, which could adversely affect the Company’s ability to meet expectations.  In addition, customers at times attempt to cancel or reschedule orders, even when not permitted to do so under the contractual terms of the purchase order.

As stated above, AIXTRON has experienced long and unpredictable sales cycles.  The timing of an order often depends on the capital expenditure budget cycle of customers.  In addition, the time it takes the Company to build a product to customer specifications, which the Company refers to as the build cycle, typically ranges from four to nine months, followed in certain cases by a period of customer acceptance during which the customer evaluates the performance of AIXTRON’s system and may potentially reject its system.  As a result of the build cycle and evaluation periods, the period between a customer’s initial purchase decision and revenue recognition on an order often varies widely, and variations in length of this period can cause further fluctuations in operating results.

The factors described above, together with the cyclical nature of the semiconductor industry, could cause the market price of AIXTRON’s ordinary shares and its ADSs to fluctuate significantly.

AIXTRON’s business is exposed to the risks of operating an international business.

AIXTRON’s business has operations located in many countries throughout the world to support the Company’s sales and services to the global semiconductor industry. Managing international operations located in many countries throughout the world presents complex management challenges. These challenges may make it more difficult for AIXTRON to implement business strategies and enforce centralized business processes and controls across its enterprise.

AIXTRON is highly dependent on international revenues, particularly revenues from Asian countries.

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Revenues outside of Europe accounted for 87.05 % of the Company’s total revenues for the year ended December 31, 2006, versus 84.18 % for the year ended December 31, 2005, and 90.26 % of total revenues for the year ended December 31, 2004.  Revenues from AIXTRON’s Asian-based customers accounted for 78.76 % for the year ended December 31, 2006, versus 73.91 % of total revenues for the year ended December 31, 2005, and 77.21 % of total revenues for the year ended December 31, 2004.  AIXTRON anticipates that international revenues, including revenues from Asia, will continue to account for a significant portion of its revenues.  As a result, a significant portion of the Company’s revenues will be subject to risks, including:

 

unexpected changes in foreign law or regulatory requirements;

 

 

 

 

 

 

exchange rate volatility;

 

 

 

 

 

 

tariffs and other trade barriers;

 

 

 

 

 

 

political and economic instability;

 

 

 

 

 

 

military confrontation;

 

 

 

 

 

 

difficulties in accounts receivable collection;

 

 

 

 

 

 

extended payment terms;

 

 

 

 

 

 

difficulties in managing distributors or representatives;

 

 

 

 

 

 

difficulties in staffing its subsidiaries;

 

 

 

 

 

 

difficulties in managing foreign subsidiary operations; and

 

 

 

 

 

 

potentially adverse tax consequences.

 

Wherever currency devaluations occur abroad, AIXTRON’s products become more expensive for its customers in that country.  In addition, difficult economic conditions may limit capital spending by the Company’s customers.  These circumstances may also affect the ability of AIXTRON’s customers to meet their payment obligations, resulting in cancellations or deferrals of existing orders and the limitation of additional orders.

Exchange rate fluctuations, in particular between the euro, the U.S. dollar and the pound sterling, could adversely affect AIXTRON’s ability to price its products competitively and its operating results.

The Company’s operations are conducted by entities in many countries and a substantial portion of its sales and productions costs are denominated in currencies other than the euro. As a result, fluctuations between the value of the euro and other major currencies, in particular the U.S. Dollar and the pound sterling, may affect the Company’s operating results. While AIXTRON has taken steps to reduce part of these currency exposures, including by entering into forward exchange contracts to hedge the exchange rate risk arising on the export of equipment, AIXTRON is not able to completely eliminate the risk that fluctuations in foreign currencies will adversely affect its operating results.

Further details can be found in “Item 11, Quantitative and Qualitative Disclosure about Market Risk.”

Because AIXTRON’s operating income is subject to taxation in differing jurisdiction, the Company is exposed to a number of different tax risks.

Because AIXTRON operates in a number of countries throughout the world, including the U.S., its operating income is subject to taxation in differing jurisdictions and at differing tax rates.  AIXTRON seeks to organize its affairs in a tax efficient and balanced manner, taking into account the applicable regulations of the jurisdictions in which it operates.  As a result of the Company’s multi-jurisdictional operations, it is exposed to a number of different tax risks, including tax risks related to:  income tax, value added tax, payroll tax, social security tax, customs and excise duties, sales and use tax, U.S. state tax, withholding tax requirements, tax treaty interpretation, tax credits, permanent establishments, transfer pricing on internal deliveries of goods and services (including benefit tests and requirements to prove the arm’s length character of internal transactions), loss carryforwards, multi-jurisdictional double taxation, acquisitions, dispositions, reorganizations, and internal restructurings.

14




The tax authorities in the jurisdictions in which AIXTRON operates may audit the Company’s tax returns and may disagree with the positions taken in those returns.  An adverse outcome resulting from any settlement or future examination of AIXTRON’s tax returns may subject the Company to additional tax liabilities and may adversely affect its effective tax rate which could have a material adverse effect on its financial position, results of operations and liquidity.  In addition, any examination by the tax authorities could cause AIXTRON to incur significant legal expenses and divert the Company’s management’s attention from the operation of its business.

AIXTRON is exposed to risks associated with acquisitions.

AIXTRON has in the past and may in the future undertake acquisitions of or significant investments in, other businesses with complementary products, services or technologies.  Acquisitions, or other significant investments, involve many risks, including:

 

difficulties in integrating the operations, technologies, products and personnel of acquired companies;

 

 

 

 

 

 

lack of synergies or the inability to realize expected synergies and cost-savings;

 

 

 

 

 

 

revenue and expense levels of acquired entities differing from those anticipated at the time of the acquisitions;

 

 

 

 

 

 

difficulties in managing geographically dispersed operations;

 

 

 

 

 

 

the potential loss of key employees, customers and strategic partners of acquired companies;

 

 

 

 

 

 

claims by terminated employees, shareholders of acquired companies or other third parties related to the transaction;

 

 

 

 

 

 

the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of AIXTRON’s cash;

 

 

 

 

 

 

diversion of AIXTRON’s management’s attention from normal daily operations of the business; and

 

 

 

 

 

 

the impairment of acquired intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies.

 

AIXTRON may not be successful in addressing the risks that its past or future acquisitions may present and the Company may fail to realize the perceived benefits of such acquisitions.

AIXTRON is dependent on a limited number of suppliers and the Company’s operating results could be harmed if it loses access to sources of materials or services.

The systems that AIXTRON produces are complex and require the Company to manufacture or obtain through third party sources many critical components.  Many of these components are only available from a limited number of suppliers or, in some cases, a single supplier.  Because of the cost of AIXTRON’s systems, the Company generally aims to keep its inventories at minimum levels.  Because AIXTRON often does not account for a significant part of its suppliers’ business, the Company may not have access to sufficient capacity from these suppliers in periods of high demand.  In addition, AIXTRON risks having important suppliers terminate product lines, change business focus or even go out of business.  If AIXTRON was required to change any of its suppliers, it would be required to re-qualify each new supplier.  In the near term, the Company’s supplier qualification processes could prevent or delay component shipments, which could in turn prevent the Company from delivering products to its customers in a timely manner.  AIXTRON estimates that it could take approximately six to eighteen months to replace suppliers of certain critical components used in its systems. In addition, in connection with third-party manufacturing activities, it is possible that AIXTRON may encounter unforeseen technical complexities that it may be unable to resolve, or that the resolution of such complexities may lead to delays in the implementation of these third-party manufacturing activities.

15




Although AIXTRON has not experienced any material delays related to its suppliers in the last three years, any such delays would have a negative impact on its customer acceptance, and ultimately, to its ability to generate revenues.  In addition, AIXTRON generally does not have long-term supply agreements with many of its suppliers.  Consequently, the Company could experience significant price increases and may not be able to obtain replacement components in a timely manner or at all.  Such price increases would increase the cost of goods which could adversely affect the Company’s gross margins and operating results.

AIXTRON may increase production in anticipation of customer orders that may not materialize, which would negatively affect the Company’s operating results.

AIXTRON schedules production of its systems based upon order backlog and customer commitments.  Based on the complexity of the systems that AIXTRON produces, the Company must expend considerable efforts in hiring, training and retaining qualified manufacturing personnel.  AIXTRON has in the past experienced delays in customer delivery schedules, as well as outright cancellations of orders.  As a consequence, the Company may incur significant near term expenses for manufacturing capabilities that it may not be able to fully utilize, which would negatively affect its gross margins and its profitability.  Moreover, industry analysts evaluate AIXTRON’s backlog in determining the Company’s prospects.  If AIXTRON experiences significant reductions in its backlog as a result of cancellations or the Company’s failure to obtain new orders, it could experience negative ratings from analysts which could adversely impact the trading value of the Company’s stock.

The semiconductor industry and AIXTRON’s operations are characterized by a high percentage of costs that are fixed or otherwise difficult to reduce in the short-term, and by product demand that is highly variable and is subject to significant downturns that may adversely affect the Company’s business, results of operations and financial condition.

The semiconductor industry and AIXTRON’s operations are characterized by high costs, such as those related to facility construction and equipment, research and development, and employment and training of a highly skilled workforce, that are either fixed or difficult to reduce in the short-term.  At the same time, demand for the Company’s products is highly variable and downturns have been experienced, often in connection with maturing product cycles and downturns in general economic market conditions.  These downturns have been characterized by reduced product demand, manufacturing overcapacity, high inventory levels and decreased average selling prices.  The combination of these factors may cause AIXTRON’s revenue, gross margin, cash flow and profitability to vary significantly both in the short-term and over the long-term.

AIXTRON’s businesses use potentially harmful chemicals and other hazardous materials.  AIXTRON is subject to environmental risks and regulations which could harm the Company’s results of operations and financial condition.

The Company’s research and development activities, as well as the manufacturing and demonstration of AIXTRON’s products, involve the use of potentially harmful chemical and other hazardous or potentially hazardous materials and radioactive compounds. AIXTRON cannot completely eliminate the risk of contamination or injury from the use, storage, handling or disposal of these materials.  In the event of contamination or injury, AIXTRON could be held liable for damages that result, and any liability could exceed the Company’s resources. AIXTRON is subject to the laws and regulations of numerous jurisdictions governing the use, storage, handling and disposal of these materials and specified waste products.  The Company’s cost of compliance with these laws and regulations include local, state and federal fees and costs related to the installation and maintenance of safeguards to mitigate the risk of potential release of hazardous materials (including equipment safeguards, such as scrubbers).  The amounts expended in compliance with these laws and regulations to date have not had a material effect on the Company’s capital expenditures, earnings and competitive position.  However, if stricter laws were passed or applicable environmental laws were more strictly enforced, AIXTRON may incur significant additional capital expenditure to address compliance with such environmental laws and regulations.

16




Failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of production, each of which could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows.

AIXTRON is exposed to the risk that third parties may violate the Company’s proprietary rights or accuse the Company of infringing upon their proprietary rights.

AIXTRON’s success in the markets in which it operates may depend on its ability to operate without infringing the intellectual property rights of others and to prevent others from infringing the Company’s intellectual property rights.

There has been substantial litigation regarding patents and other intellectual property rights in the semiconductor industry.  AIXTRON may become a party to patent litigation or proceedings to determine its patent rights with respect to third parties, including, potentially, its customers. Interference  proceedings may be necessary to establish which party was the first to discover certain intellectual property.  AIXTRON may also become involved in patent litigation against third parties to enforce the Company’s patent rights, to invalidate patents held by third parties, or to defend against similar claims by others.  The cost to AIXTRON of any patent litigation or similar proceeding could be substantial, and it may require significant management time.  Any patent infringement litigation may also adversely affect the Company’s ADS or ordinary share prices.  If infringement litigation against the Company was resolved unfavorably, AIXTRON may be enjoined from providing some of its products or services, or the Company may be required to obtain a license from a third party.  AIXTRON may not be able to obtain the requisite license on commercially acceptable terms at all, which could require the Company to cease selling systems that contain infringing technology until it can identify and implement subsystems that do not infringe on third party technology.  AIXTRON may not be successful in developing non-infringing solutions and may be prevented from selling its systems, which could result in a significant reduction in the Company’s revenues and a reduction in the value of its ordinary shares and ADSs.

The Company’s competitive position may depend on its ability to protect its intellectual property rights and trade secrets.  If AIXTRON was unable to protect such rights and secrets, other companies may be able to compete more effectively against it, and the Company’s business could suffer.

AIXTRON’s success is dependent upon the protection of the Company’s proprietary rights.  In the high-tech industry, intellectual property is an important asset that is always at risk of infringement.  AIXTRON incurs costs to file for patents and defend its intellectual property and AIXTRON relies upon the laws of Germany and of foreign countries in which it develops, manufactures or sells its products to protect its proprietary rights.  However, there can be no assurance that these proprietary rights will provide competitive advantages, or that other parties will not challenge, invalidate or circumvent these rights.  Moreover, the laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate.  Infringement upon the Company’s proprietary rights by a third party could result in lost market and revenue opportunities for AIXTRON.

AIXTRON relies on trade secret protection for its confidential and proprietary information and procedures.  AIXTRON currently protects this information and these procedures as trade secrets through recognized practices, including confidentiality agreements with employees, consultants, collaborators and customers.  These confidentiality agreements may be breached, however, and AIXTRON may not have adequate remedies for any breach.  In addition, these trade secrets may otherwise become known to, or be independently discovered by, competitors.  If AIXTRON’s trade secrets were to become known to, or be independently discovered by, competitors, the Company’s competitive position and its business may be negatively impacted.

17




Risks Relating to Holding AIXTRON’s ADSs and Ordinary Shares

You may be unable to enforce a judgment against AIXTRON or members of its Executive Board or Supervisory Board.

AIXTRON is a stock corporation organized under the laws of the Federal Republic of Germany.  Only one of the members of its Supervisory or Executive Boards is currently a citizen or resident of the United States.  Substantially all of the assets of these individuals and most of the assets of the Company are located outside the United States.  As a result, it may not be possible for you to enforce against AIXTRON judgments obtained in the United States.  You may also encounter difficulties in connection with the enforcement in Germany of liabilities based solely upon United States laws in original actions or in actions for the enforcement of judgments of United States courts.

You may have less access to information about AIXTRON and less opportunity to exercise your rights as a shareholder if you hold AIXTRON’s ordinary shares through its ADSs.

The rights and terms of AIXTRON’s ADSs are designed to replicate, to the extent reasonably practicable, the rights applicable to the Company’s ordinary shares, for which there is no active trading market in the United States.  However, because of aspects of German law, the Company’s Articles of Association and the contractual terms of the deposit agreement under which AIXTRON’s ADSs are issued, your rights as a holder of ADSs will differ in various ways from a shareholder’s rights, and you may be affected in other ways, including:

 

 

you may not be able to participate in rights offerings or dividend alternatives;

 

 

 

 

 

 

you may not receive copies of AIXTRON’s reports as promptly as a holder of ordinary shares;

 

 

 

 

 

 

you will be able to exercise voting rights only by instructing the depositary how to exercise the voting rights of the shares that underlie your ADSs, and due to logistical, timing and other issues, you may not receive the opportunity to exercise a right to vote;

 

 

 

 

 

 

the deposit agreement may be amended by the Company and the depositary, or may be terminated by AIXTRON or the depositary, without your consent in a manner that could prejudice your rights; and

 

 

 

 

 

 

the deposit agreement limits AIXTRON’s obligations and liabilities and those of the depositary.

 

As a holder of AIXTRON’s ADSs you may have fewer or less well-defined shareholders’ rights compared to a holder of common stock of a U.S. company.

AIXTRON’s corporate affairs are governed by its Articles of Association (Satzung) and German law.  German law is generally less specific than U.S. law in terms of governance of corporate operations.  Under German law, as a holder of AIXTRON’s ADSs you may have fewer or less well-defined rights than you would as a shareholder of a U.S. company.  For example, a shareholder of a U.S. corporation may institute lawsuits on behalf of the corporation and class actions.  In Germany the company must assert claims for damages against members of the Executive Board or the Supervisory Board upon a respective shareholders’ resolution requiring a simple majority of the votes cast.  Moreover, in Germany, shareholders whose shares represent 1 % or a proportional amount of € 100,000 of the stated share capital of the stock corporation may apply in court for authorization to assert claims for damages of the Company against members of the Executive Board and/or the Supervisory Board in their own name.  However, the Company may at any time assert its claims for damages on its own behalf; in such case any pending authorization or court proceeding initiated by a shareholder of the Company related to the same claims for damages will then be inadmissible.  As a result, a shareholder of a German stock corporation may not be able to protect his or her interest in the shares as well as a shareholder of a U.S. corporation could.

AIXTRON may in the future be considered a passive foreign investment company.

The United States Internal Revenue Code contains special rules relating to passive foreign investment companies (“PFICs”).  A United States holder who owns stock in a PFIC is generally subject to adverse tax consequences under these rules.  These rules do not apply to non-United States holders.  A company is treated as a PFIC if at least 75 % of the company’s gross income for a taxable year consists of “passive income,” defined generally as income from passive investments, as opposed to operating income.  A company is also treated as a PFIC if the average percentage of the value of its assets, including cash balances, that produce or are held for the production of passive income is at least 50 %.

18




While AIXTRON believes it is currently not a PFIC, because a company’s status as a PFIC is a complex, factual determination made on an annual basis, there can be no assurance that the Company will not become a PFIC in the future.  The Company will explain in more detail the PFIC rules and their consequences to United States holders under “Item 10 Additional Information — Taxation.”

If AIXTRON was classified as a PFIC, unless a U.S. holder made a timely specific election, a special tax regime would apply to any “excess distribution,” which would be such holder’s share of distributions in any year that are greater than 125 % of the average annual distributions received by such holder in the three preceding years or such holder’s holding period, if shorter; and any gain realized on the sale or other disposition of the ADSs.  Under this regime, any excess distribution and realized gain would be treated as ordinary income and would be subject to tax as if the excess distribution or gain had been realized ratably over such holder’s holding period for the ADSs.  A U.S. holder will generally be required to pay taxes on the amount allocated to a year at the highest marginal tax rate and pay interest on the prior year’s taxes.  Such U.S. holder may be able to ameliorate the tax consequences somewhat by making a mark-to-market election or “QEF election”, which is an election to have AIXTRON treated as a qualified electing fund for U.S. federal income tax purposes.  You should consult your tax advisor of the consequences of AIXTRON’s classification as a PFIC.

Because AIXTRON is not obligated to continue to have its ADSs quoted on the NASDAQ Capital Market beyond eighteen months after the closing of the AIXTRON, Inc. acquisition, your ability to trade the ADSs may be eliminated in the future, and the market prices of the Company’s ADSs and ordinary shares may be negatively affected and it may become more difficult to sell the ordinary shares.

Because AIXTRON is not obligated to continue to have the ADSs quoted on the NASDAQ Capital Market for a prolonged period, some United States holders of AIXTRON’s ADSs may be prohibited from or disinclined to own shares of companies that may have no trading market inside the United States.  This may result in the sale of ADSs received in the acquisition of Genus or the underlying ordinary shares, which could adversely affect the market price for the ADSs and ordinary shares.  In addition, if the ADSs are no longer quoted on the NASDAQ Capital Market, there can be no assurance that a market will develop for the ADSs and it will be more difficult for a United States holder to sell the underlying ordinary shares outside the United States.

Identification of deficiencies or weaknesses in AIXTRON’s internal control over financial reporting may have an adverse impact on the Company’s financial condition and results of operations and the trading price of its securities.

Commencing with AIXTRON’s annual report for the fiscal year ended December 31, 2006, the Company’s management is required to prepare a report relating to its evaluation of the Company’s internal control over financial reporting, as required pursuant to Section 404 of the U.S. Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). AIXTRON intends to take prompt measures to eliminate any identified deficiencies or weaknesses in the Company’s internal control structure.  Such measures may involve significant effort and expense.  Depending on the nature and extent of any identified deficiency or weakness, AIXTRON could be required to restate previously issued financial statements.  Any of such actions may have an adverse impact on the Company’s financial condition and results of operations and the trading price of its securities.

19




Item 4:  Information on the Company

A. History and Development of the Company

AIXTRON Aktiengesellschaft was incorporated as a German limited liability corporation in 1983 and converted to a stock corporation under the laws of the Federal Republic of Germany in 1997.  AIXTRON is headquartered in Aachen, Germany and has wholly-owned subsidiaries in Germany, the United Kingdom, Japan, South Korea, Sweden, Taiwan and the United States.  AIXTRON’s principal executive office is located at Kackertstrasse 15-17, D-52072 Aachen, Germany, and the Company’s telephone number there is 011-49-241-8909-0.

Important Events

Acquisition of Genus

On July 2, 2004 AIXTRON announced its intention to acquire Genus.  Genus, which is based in Sunnyvale, California, supplies chemical vapor deposition (“CVD”) and atomic layer deposition (“ALD”) technologies, which are required in the production of advanced semiconductors and hard disk drives.  At an Extraordinary Meeting of AIXTRON’s shareholders on September 30, 2004, the Company’s shareholders approved the amendment of the Company’s Articles of Association.  This amendment authorized the Executive Board, with the approval of the Supervisory Board, to increase the capital against contribution in kind in order to effect the Genus transaction.  The approval of this amendment required the affirmative vote of more than 75 % of the Company’s ordinary shares present.  Following this shareholder meeting, four dissenters filed contestation claims with the local court in Aachen against adoption of the resolution.  By way of a court approved settlement, these plaintiffs withdrew their complaints.  The resolution of the extraordinary meeting of shareholders was subsequently registered in the commercial register on January 3, 2005.

The ordinary shares underlying the American Depositary Shares (“ADSs”) issued in the transaction were registered with the United States Securities and Exchange Commission (the “SEC”) on AIXTRON’s Registration Statement on Form F—4 (Regis. No. 333-122624), declared effective on February 8, 2005.  On March 10, 2005, the Genus shareholders approved the merger pursuant to the laws of the State of California through the affirmative vote of holders of more than 50 % of the issued and outstanding shares of Genus.

On March 12, 2005, AIXTRON’s Executive Board resolved, with the approval of the Company’s Supervisory Board, to increase its authorized share capital by issuing 24,967,885 ordinary shares against all issued and outstanding Genus shares as contribution in kind pursuant to the merger.  As a result, Genus shareholders received 0.51 of the Company’s ADSs for each Genus common share.  Each ADS represents one of AIXTRON’s ordinary shares.  AIXTRON registered this capital increase with the commercial register on March 14, 2005. The Frankfurt Stock Exchange’s admission authority authorized the registration of the new shares to the regulated securities market of the Frankfurt Stock Exchange with a resolution of March 14, 2005. See “Item 9.  The Offer and the Listing — Trading Markets” and “— Market Price Information.”  Upon consummation of the transaction, AIXTRON’s historic, pre-merger shareholders held approximately 72 % and the former shareholders of Genus held approximately 28 % of AIXTRON, taking into consideration all ADSs issued as part of the transaction.  Based on the average market value of the Company’s ordinary shares during a period of two days before and after the merger agreement, the purchase price amounted to € 92.1 million.

On March 14, 2005, 4,427,929 of the new ADSs were transferred to a trust in order to serve the employee stock option program of Genus, and to cover both convertible bonds and warrants issued by Genus.  In accordance with IFRS, AIXTRON’s financial statements show the shares held in this property trust as its own shares, which are deducted from the share capital.  In August 2005, 2,383,920 shares were issued to the owners of Genus’ convertible bonds.  In the third quarter 2005, 41,226 ADSs from this property trust were issued to employees for exercised share options.

AIXTRON completed the Genus merger on March 14, 2005. On March 15, 2005, the AIXTRON Group’s (defined as parent company AIXTRON AG and its subsidiaries, listed in Note 34 to the Consolidated Financial Statements incorporated by reference to Item 18, in which AIXTRON AG has 100 % direct or indirect shareholding or which can be controlled by AIXTRON AG) ADSs started trading on the NASDAQ in the United States under the ticker symbol AIXG. Genus changed its name to AIXTRON, Inc. in May 2006, although it continues to trade under the name “Genus.”

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Amendments to AIXTRON’s Articles of Association

At AIXTRON’s ordinary shareholders’ meeting on May 11, 2006, the Company’s shareholders approved amendments to §§ 19, 20, and 21 of AIXTRON’s Articles of Association:

A. Resolution on the amendment of § 19 (Calling of General Meetings) and § 20 (Attendance of General Meetings) of the Articles of Association:

As a result of the German Act on Corporate Integrity and Modernization of the Right of Rescission (Gesetz zur Unternehmensintegrität und zur Modernisierung des Anfechtungsrechts (the “UMAG”)) which entered into force on November 1, 2005, among other things, the statutory provisions governing the calling of general meetings and attendance of general meetings have changed.

In accordance with these changes, general meetings must now be called at least thirty days in advance of the date of the respective meeting. The Articles of Association may determine that attendance of the general meeting or the exercise of voting rights shall require a notice of attendance from the shareholder which must be given prior to the date of the respective general meeting. With respect to bearer shares, the Articles of Association may additionally determine how shareholders must evidence that they are entitled to attend the general meeting and to exercise their voting rights.

The following amendments to the Articles of Association were made:

a)

 

§ 19 sentence 2 of the Articles of Association (Calling of General Meetings) is hereby amended and shall read as follows:

 

 

 

 

 

 

 

 

 

“General meetings shall be called at least thirty days in advance of the day by the end of which the shareholders must have given notice of attendance (§ 20 (1)).”

 

 

 

 

 

 

 

b)

 

§ 20 of the Articles of Association (Attendance of General Meetings) is hereby amended
and shall read as follows:

 

 

 

 

 

 

 

“1.

Those shareholders who have given notice of attendance not later than by the end of the seventh day prior to the date of the respective general meeting shall be entitled to attend such general meeting and to exercise their voting rights. Notice of attendance must be in text form and may be given in German or English.

 

 

 

 

2.

In addition, the shareholders must evidence that they are entitled to attend the general meeting and to exercise their voting rights. This shall require submission by the shareholders of proof of their shareholding in text form issued by the bank which keeps their securities account. Such proof may be submitted in German or English.”

 

B. Resolution on the amendment of § 21 (Presiding Over General Meetings) of the Articles of Association:

As a result of the UMAG, among other things, the statutory provisions governing the course of general meetings have changed. In accordance with these changes, the Articles of Association may empower the person presiding over the general meeting to limit the right of shareholders to speak and to ask questions to an appropriate amount of time.

The following amendment to the Articles of Association was made:

In § 21 of the Articles of Association (Presiding over General Meetings), a new subsection 3 was added as follows:

 

“3.

The person presiding over the general meeting may limit the right of shareholders to speak and to ask questions, to an appropriate amount of time. Specifically the person presiding over the general meeting may determine an appropriate time frame for the course of the entire general meeting, for individual items on the agenda and for questions and contributions by the shareholders.”

 

The amendments to AIXTRON’s Articles of Association were registered in the commercial register on May 18, 2006.

 

21




Research and Development

For significant research and development events during the financial year, see “Item 5.  Operating and Financial Review and Prospects — Research and Development, Patents and Licenses, etc.”

Capital Expenditures

During 2006, AIXTRON had € 2.4 million in capital expenditures, of which € 2.2 million were related to purchases of technical equipment (including testing and laboratory equipment) and € 0.2 million were related to intangible assets.  Additionally, bank deposits totaling € 2.8 million with a maturity of six months had to be recorded as cash outflow from investing activities. During 2005, AIXTRON had € 12.0 million in capital expenditures, primarily related to purchases of technical equipment built in-house totaling € 8.3 million (including testing and laboratory equipment) and costs related to the acquisition of Genus totaling € 3.6 million.  During 2004, AIXTRON had € 6.4 million in capital expenditures, primarily related to the acquisition of the remaining interests of Epigress AB and AIXTRON KK totaling € 2.0 million and capital expenditures for fixed assets and intangible assets totaling € 4.4 million.  All of these expenditures during 2006, 2005, and 2004 were funded out of operating cash flow and available cash resources.

B. Business Overview

Technology

AIXTRON is a leading provider of deposition equipment to the semiconductor industry.  The Company’s technology solutions are used by a diverse range of customers worldwide to build advanced components for electronic and opto-electronic applications based on compound, silicon or organic semiconductor materials.  Such components are used in fiber optic communication systems, wireless and mobile telephony applications, optical and electronic storage devices, computing, signaling and lighting, displays, as well as a range of other leading-edge technologies.  More than 400 customers worldwide use the Company’s technology.  To date over 1,500 AIXTRON systems have been installed worldwide.

Compound semiconductors are complex synthetic material structures composed of several chemical elements grown on a substrate.  The substrate is a primary base material on which structures are developed to create semiconductor devices. The Company’s compound semiconductor systems are principally used in the growth of periodic table group III and group V compounds for numerous compound semiconductor applications, including optical and electronic devices, such as light emitting diodes (LEDs), lasers, transistors, and logic structures, and are used in a variety of end applications including lighting, displays, memory, and microprocessor devices, data transmission, mobile telephony and solar cells.  As an example of market positioning, AIXTRON’s Compound Semiconductor production systems are the recognized market leading technology for growing gallium nitride-based material device structures.  AIXTRON’s Metal Organic Chemical Vapor Deposition (“MOCVD”) systems are also capable of depositing a wide variety of other materials onto a substrate on an atomic scale.

In a production environment, a chemical reaction takes place within a vacuum chamber, known as a reactor platform, and consequently ultra-thin material layers are grown in a crystalline structure on a wafer.  The chemical composition and sequence of the layers are pre-determined by the desired architecture of the chip or component, which will subsequently be produced from the compound semiconductor.  The precursors, or primary materials, used to produce the periodic table group III and group V semiconductors by MOCVD are typically either organometallic or hydride group V molecules combined with organometallic group III molecules.  During the deposition process onto a heated substrate, the molecules decompose, often in a very complex manner, to produce the compound materials needed for formation of the desired semiconductor device.  More complex device structures can consist of more than 100 layers with different material composition and physical properties and require deposition precision control down to the atomic scale.  The ability to manage the deposition of new complex, compound materials with atomic level accuracy is increasingly essential for the microelectronics and display industries to meet the current trends and demands required in microelectronics and photonics:  higher performance, higher speed, smaller devices and lower energy consumption.

22




As well as being the world’s leading manufacturer of MOCVD equipment for the Compound Semiconductor market, the Company has begun, in recent years, the process of diversifying into other next-generation technologies and markets. These opportunities include silicon wafer production applications, employing technologies such as: Chemical Vapor Deposition (“CVD”), Atomic Vapor Deposition (or “AVD®”) and Atomic Layer Deposition (“ALD”). The potential Silicon Semiconductor end market applications include memory and complex logic devices as well as data storage and MEMS devices.

AIXTRON is also developing equipment for an Organic Vapor Phase Deposition (or “OVPD®”) technology for organic light emitting diodes (or “OLED”) applications. OLEDs are increasingly being used in new high-performance small display products and are seen to have relevance to potential future large display, lighting and solar applications in the future.

Products and Services

AIXTRON’s products range from customized production-scale chemical vapor deposition systems capable of depositing material films on up to 95 two-inch diameter compound semiconductor wafers or 300 mm silicon semiconductor wafers per single production run, to small systems for research and development use and small-scale production.  AIXTRON also offers a full range of peripheral equipment and services, including products capable of monitoring the concentration of gases in the air and of cleaning the exhaust gas from metal organic chemical vapor deposition processes.  AIXTRON assists its customers in designing the production layouts of tube piping and switching devices for the gas supply to thin film deposition systems, through to a full installation service of “clean room” laboratories (laboratories with reduced particle counts per volume).  Additionally, AIXTRON offers its customers process technology, training and consulting services.

Demand for AIXTRON’s products is driven by the increasing miniaturization, increased processing speed and efficiency, and reduced cost of ownership demands for microelectronic components.  The ability of AIXTRON’s products to precisely deposit thin film materials and the ability to control critical surface dimensions in these components enables semiconductor manufacturers to improve precision performance, yield, and quality in the fabrication of advanced microelectronic devices.

Addressing three strategic customer market applications — Compound, Silicon, and Organic Semiconductor Materials — AIXTRON provides customers with technologies for the manufacture of a wide variety of devices:

Compound Semiconductors:

 

LEDs for lighting, signaling, and outdoor giant screens

 

 

 

 

 

 

Optoelectronic devices such as photo diodes, lasers, or modulators for telecom/datacom applications

 

 

 

 

 

 

Laser devices for consumer electronics such as compact discs (“CDs”), digital versatile discs (“DVD”), including next generation technology such as High Definition DVD (“HD DVD”) and “Blu-Ray” DVD technology

 

 

 

 

 

 

High-frequency devices, such as Hetero Bipolar Transistors (“HBTs”) and High Electron Mobility Transistors (“HEMTs”), for wireless datacom applications

 

 

 

 

 

 

Silicon Carbide (“SiC”)-based Schottky diodes for high-power and high temperature applications

 

 

 

 

 

 

Solar cell technology

 

Silicon Semiconductors:

 

Metal and oxide films for Complementary Metal-Oxide Semiconductors (“CMOS”) gate stacks used in logic and memory Integrated Circuits (“ICs”)

 

23




 

Metal and oxide films for capacitor structures as used in Dynamic Random Access Memory (DRAM) and Ferro-Electric Random Access Memory (“FeRAM”) ICs

 

 

 

 

 

 

Silicon Germanium (“SiGe”) and Strained Silicon epitaxial layers for high-performance CMOS logic ICs

 

 

 

 

 

 

MEMS (“Micro-Electro-Mechanical Systems”) for the integration of mechanical elements, sensors, actuators, and electronics on a common silicon substrate

 

 

 

 

 

 

Thin Film Heads (“TFH”), i.e. read-write sensors used in computer and hard disk drives

 

Organic Semiconductors:

 

OLEDs for Flat Panel and Flexible Display applications

 

 

 

 

 

 

OLEDs for solid state lighting and signage applications

 

 

 

 

 

 

Organic transparent thin film solar cells

 

 

 

 

 

 

Electronic semiconductor structures (plastic electronics) for applications in Flexible Displays, Radio Frequency Identification Devices (“RFID”)

 

Customers manufacture devices on AIXTRON’s state-of-the-art equipment that are largely destined for end-user applications such as datacom/telecom, consumer electronics, automotive, for industrial products, and, since the Genus acquisition; computing and data storage.

AIXTRON’s Service Organization provides a full range of customer services, from the initial customized development of an AIXTRON system through to the final installation and ongoing operational support of a system. The AIXTRON Group’s onsite application laboratories in Aachen, Germany and Sunnyvale, California are equipped for leading edge research and development and are utilized for the development of customized solutions for the Company’s customers.  AIXTRON’s service managers, process engineers and service technicians also provide systems consulting as well as installation and process support services. AIXTRON’s standard service program includes service and support for warranty work, routine field service, expert process support, preventative maintenance contracts, spare part stocking at various locations worldwide and a 24-hour, seven-days-a-week technical support line.

The following table summarizes the systems technologies AIXTRON offers to its customers:

 

Material

 

Compound
Semiconductors

 

Organic
Semiconductors

 

Silicon
Semiconductors

Systems Technology

 

MOCVD           

 

OVPD®

 

CVD

ALD

AVD
®

 

 

 

 

 

 

 

Systems

 

Planetary Reactor

CCS Reactor

SiC Reactor

 

Gen1 Prototype

Gen1 R&D Tool

Gen2 Production Tool

 

Lynx 3 CVD

Stratagem 300 ALD

Tricent
® AVD®

 

 

 

 

 

 

 

Potential Applications / Devices

 

LEDs


Optoelectronics (photo diodes, lasers, modulators for Telecom/Datacom)

Laser devices for consumer electronics (CDs, DVDs)

High-Frequency devices (HBTs, HEMTs) for wireless datacom

SiC based Schottky Diodes

Solar cells

 

OLEDs for displays


OLEDs for solid state lighting


Organic transparent thin film solar cells

Electronic semiconductor structures for flexible displays and RFID





 

Metal and Oxide films for
CMOS gate stacks

Metal and Oxide films for
capacitor structures in
DRAMs and FeRAMS

SiGe and SSi expitaxial
layers for CMOS

MEMS - Micro Electronic Mechanical Systems


TFH - Thin Film Heads
for data storage hard disk drives


 

24




Seasonality

AIXTRON’s business is currently not materially affected by seasonality.

Principal Markets

The supply of gas phase deposition equipment is AIXTRON’s only reporting segment.  The Company markets and sells its products worldwide, principally through its direct sales organization and appointed agents.

The following segment information has been prepared in accordance with IAS 14 “Segment Reporting.”  As the Company has only one business segment, the segment information provided relates only to the Company’s geographical segments — this being secondary segment information.  For more information about AIXTRON’s segments, see Note 3 to the Company’s Consolidated Financial Statements.

In presenting information on the basis of geographical segments, segments revenue is based on the geographical location of customers.  Segment assets are based on the geographical location of the assets.

Segment capital expenditure consists of the total additions to segment assets that are expected to be used for more than one period.

The following table summarizes revenues for the significant geographical areas in which the Company operates, for each of the years ended December 31, 2006, 2005, and 2004.

Geographical segments

in EUR thousands

 

 

 

Asia

 

Europe

 

United States

 

Consolidation

 

Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues realized with third parties

 

2006 2005 2004

 

135,223 103,036 108,097

 

22,232 22,052 13,642

 

14,230
14,314
18,265

 

 

 

171,685 139,402 140,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues realized with other segments

 

2006

 

15,671

 

2,642

 

13,101

 

(31,414

)

 

 

 

2005

 

11,582

 

1,055

 

6,311

 

(18,948

)

 

 

 

2004

 

4,905

 

1,676

 

11,646

 

(18,227

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment revenues

 

2006

 

150,894

 

24,874

 

27,331

 

(31,414

)

171,685

 

 

2005

 

114,618

 

23,107

 

20,625

 

(18,948

)

139,402

 

 

2004

 

113,002

 

15,318

 

29,911

 

(18,227

)

140,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets

 

2006

 

12,967

 

231,370

 

91,158 

 

(132,530

)

202,965

 

 

2005

 

13,841

 

214,775

 

98,795

 

(127,862

)

199,549

 

 

2004

 

5,798

 

139,087

 

10,340

 

(30,209

)

125,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment capital expenditures*

 

2006 2005 2004

 

202
308
171

 

1,953 10,213 5,202

 

700
93,262
57

 

 

 

2,855 103,783 5,430

 

 


* Segment capital expenditures for the financial year 2005 also include the additions resulting from the change in composition of the AIXTRON Group companies.

25




 

in EUR thousands

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

Revenues for sale of goods*

 

169,759

 

137,306

 

138,592

 

Revenues for service and repair

 

1,926

 

2,096

 

1,412

 

 

 

171,685

 

139,402

 

140,004

 

 


* Revenues for the sales of goods in 2005 include revenues from barter transactions in the amount of € 3,701 thousand.

The sale of equipment, including upgrades, comprised approximately 83 %, 81 % and 83 % of AIXTRON’s revenues in the years ended December 31, 2006, 2005, and 2004, respectively, with the remaining revenue relating to sales of spare parts and services.

Raw Materials and Manufacturing

AIXTRON involves itself principally in the final assembly stage of the production process, as well as final equipment tuning and testing.  The Company purchases most of its products’ components, sub-assemblies and assemblies from third-party suppliers.  Its contractors and suppliers are selected and qualified to supply source material, standard components, and tested and untested sub-assemblies.  AIXTRON typically has several suppliers qualified for each component or sub-assembly, however AIXTRON completes the final system assembly and product testing processes in house.

AIXTRON generally purchases these components, sub-assemblies and assemblies on a purchase order basis and provides rolling forecasts to the suppliers of its future needs.  AIXTRON generally does not enter into contractual commitments for future supply commitments.  The Company focuses its internal manufacturing efforts on the final assembly and test procedures to ensure the highest quality standards.  AIXTRON anticipates continued reliance upon third party suppliers to achieve and contribute to manufacturing efficiency improvements.

AIXTRON’s principal manufacturing activities consist primarily of design, assembly, integration and test operations.  The Company has manufacturing sites in Aachen and Herzogenrath, Germany, in Sunnyvale, California, and in Cambridge, United Kingdom.  Many of the development and production processes are computerized.

Marketing Channels

AIXTRON sells its products and services directly through strategically located sales and service facilities in Germany, the United States, the United Kingdom, Sweden, Japan, South Korea, China and Taiwan, as well as through independent sales and service representatives in India, Israel, Poland, Russia and Taiwan.  The relationships with these independent sales and service representatives are generally terminable at the Company’s will.  These arrangements typically require that AIXTRON reimburse the representatives for their business expenses as well as pay specified service rates or sales commissions, which vary by geographic region.

Intellectual Property

AIXTRON’s success depends in part on its proprietary technology.  Although AIXTRON attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, the Company cannot assure that its efforts to protect its technology will be adequate or that competitors will not be able to develop similar technology independently.  Moreover, the success of the Company’s business depends to a significant extent on its employees’ technical expertise, innovation, and experience.

26




AIXTRON has patents and exclusive and non-exclusive licenses to patents owned by others covering certain of AIXTRON’s products, which AIXTRON believes provide the Company with a competitive advantage.  AIXTRON has a policy of seeking patents on inventions concerning new products and improvements as part of its ongoing research, development and manufacturing activities.  AIXTRON is the licensee of certain patents owned by Philips, Centre National de la Recherche Scientifique and Universal Display Corporation which are critical to the Company’s operations in the fields of MOCVD, AVD® and OVPD®.  Under the terms of those licenses, AIXTRON sells epitaxial reactors that manage the layering of complex materials, produced by thin film deposition processes that enable the high precision liquid injection, evaporation and gas phase deposition of metal organic materials required to produce photoelectric and electronic devices.  Similar principles are employed in the design of Organic Vapor Phase Deposition equipment for use in the manufacture of organic light emitting devices.  Management finds it impractical to quantify the portion of revenues attributable to products that incorporate the technology governed by these agreements because all product sales can be aggregated into one group based upon the common technology.

AIXTRON secures its technology by patenting inventions and know-how, provided it is strategically expedient to do so.  As of December 31, 2006, 107 patent-protected inventions were in use, of which 6 were registered in the reporting period.  Patent protection for these inventions applies, although not exclusively, in the sales markets relevant for AIXTRON and within the regions of its main competitors’ production locations, particularly in Europe as well as in Japan, South Korea, Taiwan and the United States.  These patents are maintained and renewed annually and will expire between 2007 and 2026.

Strategy and Competitive Positioning

AIXTRON is strategically positioned as one of the world’s leading manufacturers of state-of-the-art deposition equipment for the production of complex materials for the semiconductor industry:  Compound Semiconductors (MOCVD equipment), Silicon Semiconductors (AVD®, ALD, CVD equipment) and Organic Semiconductors (OVPD® equipment).

Systems for Compound Semiconductor Manufacturing

AIXTRON’s main competitor in the market for MOCVD equipment is the Process Equipment Group of Veeco Instruments Inc./USA. AIXTRON also competes with a number of Asian manufacturers including Nippon Sanso/Japan and Nippon EMC/Japan, amongst others. Based on market research by VLSI Research, Inc. it is estimated that the share of the MOCVD equipment market held by AIXTRON in 2005 was more than 60 % (estimated 2005 total market value: US$ 156 million). The Company’s strongest competitor in terms of sales, Veeco Instruments Inc., had an estimated market share of approximately 18 % for the same period. The Company anticipates an estimated market share in excess of 60 % in the global MOCVD market for 2006, when next reported by VLSI.

Systems for Silicon Semiconductor Manufacturing

In the CVD, AVD® and ALD equipment markets, AIXTRON mainly competes with a variety of other equipment companies.  These include Applied Materials, Inc./USA, Tokyo Electron, Ltd./Japan, ASM International N.V./Netherlands, Veeco Instruments Inc./USA, IPS Technology/South Korea, Jusung Engineering Co., Ltd./South Korea, Aviza Technology, Inc./USA und Hitachi Kokusai Electric Co., Ltd/Japan.

Based on market research by VLSI Research, Inc. it is estimated that in 2005 AIXTRON held an approximate 13 % share in the developing ALD systems market (total market value:  U.S.$ 127 million), an approximate 12 % share of the established market for silicide CVD systems (total market value:  U.S.$ 210 million) and a share of approximately 48 % of the tungsten silicide CVD systems specifically sold to DRAM and NAND Flash memory chip manufactures (total market value:  approximately U.S.$ 55 million).

With the Company’s currently available silicon semiconductor manufacturing technologies, AIXTRON is well positioned for the adoption of sub 75 nm memory and logic integrated circuits (ICs). These technologies enable extremely high precision in depositing very thin material layers and facilitate the even coating of complex three-dimensional microelectronic device structures. These technologies offer the semiconductor industry new material coating possibilities for the next generation of computer chips, and, in AIXTRON’s opinion, present high development potential for the future.

27




Systems for Organic Semiconductor Manufacturing

In the market for Organic Semiconductor equipment, AIXTRON competes with established manufacturers such as Ulvac Inc./Japan, Tokki Corporation/Japan, Applied Materials, Inc./USA, Doosan DND Co., Ltd./South Korea, and Sunic System/South Korea as well as a number of smaller companies.  While these competitors use established vacuum thermal evaporation (“VTE”) technology to produce organic light emitting diodes (OLEDs), AIXTRON offers to OLED manufacturers its own highly innovative organic vapor phase deposition (OVPD®) technology. As AIXTRON is currently in the market entry phase, AIXTRON market share information is not meaningful at this point.

In AIXTRON’s opinion, due to the superior process technology and the potential for reducing manufacturing costs, OVPD® technology has the potential to compete successfully with VTE technology.  AIXTRON is positioned as a key system supplier for next generation OLEDs, to be used in innovative, self-lumi­nous displays that have the potential to replace today’s display technologies such as liquid crystal displays (LCDs) and plasma displays (PDPs) at some point in the future, in addition to future lighting, solar cells, and electronic OLED technologies.

Government Regulation

Due to the nature of AIXTRON’s products, the shipment of some products to customers in certain countries requires the Company to obtain an export license from legal and statutory authorities in the U.S., Germany, U.K. and Sweden, including, for example, the Department of State and the Department of Commerce in the U.S., the Bundesamt für Wirtschaft und Ausfuhrkontrolle (“BAFA”) in Germany, and the Department of Trade and Industry in the U.K. Although the applicable export regulations have not had a material impact on the Company’s business to date, AIXTRON may experience delays in obtaining required export licenses, which in turn would cause delays in AIXTRON’s ability to sell its products and recognize revenues from such sales.

AIXTRON is subject to environmental and safety regulations in connection with its business operations.  Research and development activities, as well as the manufacturing and demonstration of the Company’s products, in both the Company’s compound semiconductor and silicon semiconductor equipment businesses, involve the use of potentially harmful chemical and hazardous materials and radioactive compounds.  Failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of production, each of which could materially and adversely affect AIXTRON’s business, financial condition, results of operations and cash flows.

Because AIXTRON’s securities are publicly traded in the U.S., the Company is also subject to the rules and regulations promulgated by the SEC, including those promulgated under the Sarbanes Oxley Act of 2002.  In addition, AIXTRON is subject to the provisions of the U.S. Foreign Corrupt Practices Act relating to the maintenance of books and records and anti-bribery.

EU regulation requires that AIXTRON prepare its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”).  Note 40 to the Company’s Consolidated Financial Statements for fiscal year 2006 contains a reconciliation of AIXTRON’s Net Income and Equity under IFRS to U.S. GAAP. See also “Item 5. Operating and Financial Review and Prospects — Operating Results — European Union Regulation Regarding IFRS” below.

C. Organizational Structure

The following table lists AIXTRON’s significant subsidiaries:

Significant Subsidiaries of AIXTRON AG (direct and indirect) as of December 31, 2006

Name

 

Jurisdiction of Incorporation

 

Ownership Interest

 

 

 

 

 

Thomas Swan Scientific Equipment Ltd.

 

England and Wales

 

100%

Epigress AB

 

Sweden

 

100%

AIXTRON Korea Co. Ltd.

 

South Korea

 

100%

AIXTRON KK

 

Japan

 

100%

AIXTRON Taiwan Co. Ltd.

 

Taiwan

 

100%

AIXTRON, Inc.*

 

California, USA

 

100%

 


*trading as Genus, Inc.; formed upon the merger of former Genus, Inc. (“Genus”), Sunnyvale, California, USA and former AIXTRON Inc., Atlanta, Georgia, USA.

28




D. Property, Plant and Equipment

As of December 31, 2006, AIXTRON’s owned facilities used as headquarters and for manufacturing, research and development, sales and service and engineering. The approximate size and the uses of such facilities, were:

Owned Facility Location

 

Approximate Size (sq. m.)

 

Mortgaged

 

Use

Aachen, Germany

 

7,260

 

No

 

Headquarters, Manufacturing, Sales, Research and Development

Herzogenrath, Germany

 

12,457

 

No

 

Manufacturing, Sales and Service, Engineering

 

AIXTRON additionally leases certain office and plant facilities.  Most of the lease commitments contain options to renew the leasing contracts.  These leases typically run for a period between one to fifteen years.  None of the leases include contingent rentals.   The approximate size and the uses of such facilities were:

 

 

Approximate Size

 

 

 

 

Leased Facility Location

 

(sq. m.)

 

Lease Expires

 

Use

 

 

 

 

 

 

 

Cambridge, UK

 

2,180

 

September 13,
2014

 

Manufacturing, Sales and Service, Engineering

Lund, Sweden

 

449

 

December 31,
2008

 

Engineering, Service

Sunnyvale, CA, USA

 

9,300

 

December 31,
2012

 

Manufacturing, Sales and Service, Engineering, Research and Development

Seoul, South Korea

 

1,032

 

August 31,
2010

 

Sales and Service

Shanghai, China

 

282

 

July 9,
2008

 

Representative Office

Hsinchu, Taiwan

 

1,000

 

December 31,
2008

 

Sales and Service

Tokyo, Japan

 

311

 

March 31,
2008

 

Sales and Service

 

AIXTRON believes that its current facilities are in good condition and are adequate to meet the requirements of its present and foreseeable future operations.

Environmental Issues

The research and development activities, as well as the manufacturing and demonstration of AIXTRON’s products conducted in some of its facilities, involve the use of potentially harmful chemical and other hazardous or potentially hazardous materials and radioactive compounds.  Failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of production.

29




Item 4A:  Unresolved Staff Comments

None.

 

30




Item 5:  Operating and Financial Review and Prospects

You should read the following operating and financial review of AIXTRON’s results of operations and financial condition together with AIXTRON’s Consolidated Financial Statements prepared in accordance with IFRS included elsewhere in this report.  A reconciliation of the Company’s 2004, 2005, and 2006 results in accordance with IFRS as adopted by the European Union to AIXTRON’s 2004, 2005, and 2006 results in accordance with U.S. GAAP is provided in Note 40 to the Company’s Consolidated Financial Statements.

The following discussions include “forward-looking statements” that involve risks and uncertainties that are discussed more fully in “Risk Factors” and “Forward-looking statements notice” included in this annual report.  Actual results could differ materially from future results expressed or implied by the forward-looking statements.

A. Operating Results

Preparation of consolidated financial statements under IFRS

Until 2004, AIXTRON prepared its Consolidated Financial Statements under generally accepted accounting principles in the U.S. (“U.S. GAAP”). Starting with fiscal year 2005, AIXTRON has prepared its Consolidated Financial Statements in accordance with IFRS and the interpretations adopted by the International Accounting Standards Board (the “IASB”).

Critical Accounting Policies

The preparation of AIXTRON’s Consolidated Financial Statements requires the Company to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the Company’s Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods presented.  The significant accounting policies that AIXTRON believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following:

Revenue Recognition

Revenue is generated from the sale and installation of equipment, spare parts and maintenance services. The sale of equipment involves a customer acceptance test at AIXTRON´s production facility. After successful completion of this test, the equipment is dismantled and packaged for shipment. Upon arrival at the customer site the equipment is reassembled and installed, which is a service generally performed by AIXTRON engineers. AIXTRON gives no general rights of return, discounts, credits or other sales incentives within its terms of sale. However, occasionally some customers of AIXTRON have specifically negotiated terms and conditions of business.

Revenues from the sale of products that have been demonstrated to meet product specification requirements are recognized upon shipment to the customer, if a full customer acceptance test has been successfully completed at the AIXTRON production facility and the risk has passed to the customer.

Revenue relating to the installation of the equipment at the customer’s site is recognized when the installation is completed and the final customer acceptance has been confirmed. The portion of the contract revenue deferred until completion of the installation services is determined based on either the fair value of the installation services or the portion of the contract amount that is due and payable upon completion of the installation. Fair value of the installation services is determined based on an estimate of the materials and time required to complete the installation.

Revenue related to products where meeting the product specification requirements has not yet been demonstrated, or where specific rights of return have been negotiated, is recognized only upon final customer acceptance.

Revenue on the sale of spare parts is recognized when title and risk passes to the customer, generally upon shipment. Revenue from maintenance services is recognized as the services are provided.

31




Goodwill Valuation

All business combinations are accounted for by applying the purchase method.  Goodwill is stated at cost less any accumulated impairment loss.  Goodwill is allocated to cash-generating units and is tested annually for impairment.

Goodwill purchased as part of a business acquisition is tested annually for impairment, irrespective of whether there is any indication of impairment.  For impairment test purposes, the goodwill is allocated to cash-generating units.  Impairment losses are recognized to the extent that the carrying amount exceeds the net realizable value or the value in use (recoverable amount) of the cash-generating unit.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments and the risks associated with the asset.

In estimating the discounted future cash flows, management makes significant assumptions.  These include determining the appropriate discount rate, projected sales growth, projected research and development costs and projected capital expenditures.  In making these assumptions, AIXTRON considers current and anticipated market conditions and technological changes. It is possible, however, that future market conditions and technological changes may differ from AIXTRON’s estimations and this may require impairment of goodwill in future periods.

Valuation of Inventories

Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. Cost is determined using weighted average cost.

The cost includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of work in progress and finished goods, cost includes direct material and production cost, as well as an appropriate share of overheads based on normal operating capacity.

Allowance for slow moving, excess and obsolete, and otherwise unsaleable inventory is recorded based primarily on either the Company’s estimated forecast of product demand and production requirement for the next twelve months or historical trailing twelve month usage. This evaluation is inherently judgmental and requires material estimates, including both forecasted product demand and pricing environment, both of which may be susceptible to significant change. As of December 31, 2006, total inventory was € 53.1 million. When there has been no usage of an inventory item during a period of twelve months, the Company writes down such inventories based on previous experience.

In future periods, write-downs of inventory may be necessary due to (1) reduced demand in the markets in which the Company operates, (2) technological obsolescence due to rapid developments of new products and technological improvements, or (3) changes in economic or other events and conditions that impact the market price for the Company’s products.  These factors could result in adjustment to the valuation of inventory in future periods, and significantly impact the Company’s future operating results.

Accounting for Income Taxes

Deferred tax assets and liabilities are recorded for all temporary differences between tax and commercial balance sheets and for losses brought forward for tax purposes as well as for tax credits of the companies included in consolidation. The deferred taxes are calculated, based on tax rates applicable at the balance sheet date or known to be applicable in the future. Effects of changes in tax rates on the deferred tax assets and liabilities are recognized upon adoption of the amended law.

A deferred tax asset is recognized only to the extent that it is probable that future taxable profits can be set off against tax credits and tax loss carry forwards. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit can be realized.

32




Judgments by management concerning the probability that future taxable profits will be available to use deferred tax assets may have a material effect on the results after taxes and therefore the policy of accounting for Income Taxes is critical to an understanding of the results after taxes.

Recently Issued Accounting Standards

The following survey shows IFRS Standards and Amendments to IFRS not compulsory and not applicable for reporting periods ending on December 31, 2006.  These standards were not applied earlier than required.  AIXTRON is currently analyzing the impact of the new standards on its Consolidated Financial Statements.  AIXTRON does not expect the adoption of these standards to have a material impact on its Consolidated Financial Statements with the exception that additional or revised information about financial instruments should be presented in the notes, when IFRS 7 is applied.

IFRS 7

 

Financial Instruments: Disclosures

 

 

Issued: August 2005

 

 

 

IFRS 8

 

Operating Segments

 

 

Issued: November 2006

 

 

 

IFRIC 7

 

Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies

 

 

Issued: November 2005

 

 

 

IFRIC 8

 

Scope of IFRS 2

 

 

Issued: January 2006

 

 

 

IFRIC 9

 

Reassessment of Embedded Derivatives

 

 

Issued: March 2006

 

 

 

IFRIC 10

 

Interim Financial Reporting and Impairment

 

 

Issued: July 2006

 

 

 

IFRIC 11

 

IFRS 2: Group and Treasury Share Transactions

 

 

Issued: November 2006

 

 

 

IFRIC 12

 

Service Concession Arrangements

 

 

Issued: November 2006

 

 

 

Amendment

 

Capital Disclosures

to IAS 1

 

Issued: August 2005

 

Management’s Discussion and Analysis of Results of Operations

Overview

AIXTRON is a leading provider of deposition equipment to the semiconductor industry.  The Company’s technology solutions are used by customers worldwide to build advanced components for electronic and opto-electronic applications based on compound, silicon or organic semiconductor materials.  Such components are used in fiber optic communication systems, wireless and mobile telephony applications, optical and electronic storage devices, computing, signaling and lighting, displays and a range of other technologies.

AIXTRON’s products range from customized production-scale chemical vapor deposition systems to small systems for research and development use and small-scale production.  The Company’s technology offering also includes a range of production-qualified deposition technologies for the silicon industry.  The supply of gas phase deposition equipment is the Company’s only reporting segment.  Equipment sales and installation, including upgrades, generated 83 %, 81 % and 83 % of the Company’s revenues in 2006, 2005, and 2004, respectively.

33




The remaining revenues were generated by the sale of spare parts and by providing maintenance services.

AIXTRON’s principal manufacturing facilities locations are in Germany, the U.S. and the U.K.  The Company sells its products and services principally through its direct sales organization using facilities in eight counties, as well as through independent sales and service representatives.

Demand for the Company’s products is driven by the increasing miniaturization, increased processing speed and efficiency, and reduced cost of ownership demands for microelectronic components.  The ability of the Company’s products to precisely deposit thin film materials and the ability to control critical surface dimensions in these components, enables manufacturers to improve performance, yield, and quality in the fabrication of advanced microelectronic devices.

Significant Factors Affecting Results

In comparison to 2005, in 2006 the world real gross domestic product grew by an estimated 5.4 %, semiconductor industry revenues grew by an estimated 10.0 % and spending on wafer front end (WFE) equipment, such as AIXTRON’s deposition equipment, increased by an estimated 25 %.

Compound Semiconductor Market Applications

AIXTRON’s estimates indicate that overall demand in the LED manufacturing industry, which represents a significant market for AIXTRON’s compound semiconductor deposition equipment, grew by 10 % in 2006 as compared to the previous year.

Reflecting this feeling of optimism in the marketplace, in 2006 AIXTRON experienced increased demand for both established compound semiconductor equipment products and the more recently released new Integrated Concept (IC) common platform and high-capacity systems.

The increase in market confidence was driven largely by rising demand for LED end market applications, including an increased market-driven focus on LED backlighting for small area consumer liquid crystal display (“LCD”) and commercial display products. The delay in the large scale adoption of a number of other new LED end market applications (e.g., mobile phone LED camera flash), and the delayed introduction of a new industry standard for DVD blue lasers (Blu-Ray vs. HD DVD) continue to suppress any additional potential equipment demand, but medium-term demand expectations remain promising.

AIXTRON has also recently seen a small improvement in demand for MOCVD systems from customers serving the data-communication and telecommunication market, but the Company still believes that the existing capacity of its customers in that end market area means that sustainable revenue growth is unlikely to return before late 2007 at the earliest.

Silicon Semiconductor Market Applications

Generally, customer demand in the silicon market has been volatile during 2006, 2005, and 2004. However, AIXTRON continued to predominantly receive purchase orders and generated revenues from silicon semiconductor mass production CVD system orders for the production of NAND flash memory and Dynamic Random Access Memory (“DRAM”) devices throughout 2006.

The predictions for AIXTRON’s new silicon semiconductor equipment target applications, employing ALD and AVD® technology, remain fluid in the estimated timing on the introduction of new material films and technologies for the mass production of next-generation integrated circuit (“IC”) devices. This has resulted in slower-than-anticipated demand for AIXTRON’s ALD and AVD® production technologies, but the Company continues to experience active interest for research & development applications from major production customers.

In this generally optimistic market environment, AIXTRON achieved total revenues of € 171.7 million in 2006, a 23 % increase compared to € 139.4 million in 2005, when AIXTRON experienced a generally weaker customer capital spending on deposition tools (2004:  € 140.0 million in revenues).

34




Due to increased revenues as well as lower operating costs, the Company generated a net income after tax of € 5.9 million in 2006, as compared to a net loss after tax of € 53.5 million in 2005 (2004:  net income of € 7.7 million). AIXTRON’s net loss after tax in 2005 included € 30.3 million in certain asset impairments, accruals expensing and certain tax effects as well as beneficial allocations to deferred tax assets which did not occur in 2006.

The value of equipment orders, excluding spare parts, received by AIXTRON in 2006 rose by 57 %, compared to 2005, to € 178.0 million, reflecting a significant rise in demand for compound semiconductor equipment, especially from the LED end application markets. Equipment order intake increased by 2 % to € 113.6 million in 2005 compared to 2004.

Results of Operations

Fiscal Year Ended December 31, 2006 Compared with Fiscal Year Ended December 31, 2005 and Fiscal Year Ended December 31, 2004

Key financial information regarding the AIXTRON Group’s results of operations is summarized in the following table:

(million €)

 

2006

 

2005

 

2004

 

Sales revenues

 

171.7

 

139.4

 

140.0

 

 

 

 

 

 

 

 

 

Gross profit

 

63.4

 

34.7

 

52.4

 

Gross margin,% revenues

 

37

%

25

%

37

%

 

 

 

 

 

 

 

 

Operating result

 

5.7

 

(52.7

)

9.7

 

Operating result,% revenues

 

3

%

-38

%

7

%

 

 

 

 

 

 

 

 

Net result

 

5.9

 

(53.5

)

7.7

 

Net result,% Revenues

 

3

%

-38

%

6

%

 

 

 

 

 

 

 

 

Net result per share - basic (€)

 

0.07

 

(0.65

)

0.12

 

Net result per share - diluted (€)

 

0.07

 

(0.65

)

0.12

 

 

 

 

 

 

 

 

 

Equipment Order Intake

 

178.0

 

113.6

 

111.4

 

Equipment Order Backlog (End of Period)

 

85.1

 

48.6

 

52.5

 

 

The results of operations of the AIXTRON Group in 2005 and 2006 include the results of operations of AIXTRON Inc. (formerly Genus, Inc.) and its subsidiaries, which have been consolidated into AIXTRON’s results of operations since March 14, 2005. The comparative values for 2004 do not include the results of Genus, Inc. and the comparative values for 2005 only include Genus, Inc. from March 14, 2005, the date AIXTRON acquired Genus, Inc.

Revenues

AIXTRON recorded revenues in 2006 of € 171.7 million, an increase of € 32.3 million, or 23 %, compared to € 139.4 million in 2005 (2004: € 140.0 million). The year-over-year revenue increase in 2006 was largely due to an improved customer capital spending environment, especially in the compound semiconductor equipment market. AIXTRON also benefited from additional revenues generated by AIXTRON’s silicon business interests which were significantly expanded with the acquisition of Genus on March 14, 2005.

The largest element of AIXTRON’s revenues in 2006, 56 % (2005: 58 %; 2004: 82 %), was generated from sales of compound semiconductor equipment, which in turn was driven by LED systems demand, especially from Asia. Sales of compound semiconductor equipment to Asia accounted for 79 % of AIXTRON’s total revenues in 2006 (2005: 74 %; 2004: 77 %).

35




Revenues related to sales of silicon semiconductor equipment accounted for 27 % of total revenues in 2006, an increase from 23 % in 2005 (2004: 1 %). This increase resulted largely from the consolidation of Genus, Inc. (now part of AIXTRON Inc.) in the AIXTRON Group for the entire fiscal year 2006 whereas in 2005, Genus, Inc. was consolidated in the AIXTRON Group only between March 14, 2005 and December 31, 2005. In 2004, and between January 1 and March 31, 2005, revenues from sales of silicon semiconductor equipment were generated solely from AIXTRON’s own silicon technology AVD®.

Equipment sales generated 83 % of revenues in 2006, virtually unchanged compared to 2005 and 2004 (81 % and 83 %, respectively). The remaining revenues were provided by spare parts sales and service.

 

(million €)

 

2006

 

2005

 

2004

 

Revenues

 

171.7

 

 

 

139.4

 

 

 

140.0

 

 

 

of which from sale of silicon semiconductor
equipment

 

46.1

 

27%

 

32.7

 

23%

 

1.5

 

1%

 

of which from sale of compound
semiconductor equipment and other equipment
(OVPD
®, SiC)

 

97.0

 

56%

 

80.7

 

58%

 

115.1

 

82%

 

of which other revenues (service, spare parts,
etc.)

 

28.6

 

17%

 

26.0

 

19%

 

23.4

 

17%

 

 

The Company’s revenues in 2006 were largely generated in Asia, as was the case in 2005 and 2004:

Regional Revenue Split

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

million €

 

 

 

million €

 

 

 

million €

 

 

 

Asia

 

135.2

 

79

%

103.0

 

74

%

108.1

 

77

%

Europe

 

22.2

 

13

%

22.1

 

16

%

13.6

 

10

%

USA

 

14.3

 

8

%

14.3

 

10

%

18.3

 

13

%

Total

 

171.7

 

100

%

139.4

 

100

%

140.0

 

100

%

 

Gross Profit

The Company’s gross profit increased by € 28.7 million to € 63.4 million in 2006, an increase of 83 % compared to 2005 (2004: gross profit of € 52.4 million).  As a consequence, the Company’s gross margin rose from 25 % in 2005 to 37 % in 2006 (2004: 37 %). The increase in the Company’s gross margin in 2006 as compared to 2005 was driven by a decrease in the cost of sales relative to revenue by 12 percentage points which in turn was largely due to the fact that impairment charges resulting from the Genus acquisition, certain impairment charges on inventories and intangible assets, as well as expenses for the creation of a reserve for pending losses were incurred in 2005, but were not incurred in 2006.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses totaled € 40.7 million in 2006, as compared to € 45.8 million in 2005 (2004: € 31.5 million). This decrease was mainly due to both a reduction in administrative overheads and efficiency gains in the sales organization despite an expanding business. € 2.3 million in SG&A expenses 2005 were attributable to impairment charges and expenses for the creation of a reserve for pending losses. The € 14.3 million increase in SG&A expenses in 2005 as compared to 2004 was largely attributable to the consolidation of Genus, Inc. into the AIXTRON Group (€ 10.7 million). Due to the acquisition of Genus, Inc. (now part of AIXTRON Inc.) in 2005 both the variety of products and the number of sales channels had increased, leading to an increase in the complexity of AIXTRON’s sales and administrative structure.

Due to efficiency gains in the sales organization as well as a reduction in warranty costs, selling expenses in 2006 amounted to € 23.4 million, a decrease of 16 % compared to € 27.8 million in 2005 (2004: € 18.3 million).

Administrative expenses in 2006 totaled € 17.3 million (2005: € 18.0 million; 2004: € 13.2 million). Administrative expenses decreased by 4 % in 2006 in comparison to 2005 despite additional external expenses totaling approximately € 2.0 million, which were related to compliance with Section 404 of the Sarbanes-Oxley Act completed at the end of fiscal year 2006 (€ 0 in both 2005 and 2004).

36




Research and Development Costs

Research and development (R&D) costs totaled € 23.9 million in 2006, a decrease of € 6.6 million, or 22 %, compared to € 30.5 million in 2005 (2004: € 20.4 million). The decrease in R&D expense in 2006 compared to 2005 was largely due to the fact that € 5.3 million in impairment charges incurred in 2005 were not incurred in 2006 as well as a more focused R&D project selection and control in line with the Company’s strategy. In 2005, consolidated R&D expenses included R&D expenses from Genus, Inc. (now part of AIXTRON Inc.) only for the period March 14, 2005 through December 31, 2005, while in 2006 R&D expenses included R&D expenses from AIXTRON Inc. for the entire twelve-month period. The ratio of R&D costs to revenues decreased in 2006 to 14 %, compared to 22 % in 2005 (2004: 15 %).

The increase in R&D expenses in 2005 compared to 2004 expenses was largely due to impairment charges totaling € 5.3 million on assets for the development of emerging markets technologies (of which € 3.7 million were impairment charges on other intangible assets and € 1.6 million impairment charges on property, plant, and equipment) and the consolidation of Genus, Inc. into the AIXTRON Group, adding € 5.6 million in R&D expenses to the AIXTRON R&D expenses since the date of acquisition on March 14, 2005.

Personnel Costs

With the number of global employees at 566 at year end 2006, slightly reduced as compared to year end 2005 (570 employees), personnel expenses amounted to € 42.0 million in 2006, a slight increase in comparison to € 41.1 million in 2005 (2004: € 29.5 million). The increase in 2006 as compared to 2005 primarily reflected additional headcount acquired from Genus, Inc. (now part of AIXTRON Inc.). Personnel costs are allocated to the cost line items of the income statement as follows:

Personnel Costs
(million €)

 


2006

 


2005

 


2004

 

Cost of Sales

 

12.2

 

8.5

 

7.0

 

Selling, General and Administrative Expenses

 

16.5

 

18.6

 

12.8

 

Research and Development Expenses

 

13.3

 

14.0

 

9.7

 

Total

 

42.0

 

41.1

 

29.5

 

 

Other Operating Income / Expenses

Other operating income in 2006 was € 8.5 million, in comparison to € 5.6 million in 2005 and € 9.9 million in 2004.  Other operating income included the receipt of external research and development funding totaling € 4.5 million in 2006, € 2.9 million in 2005 and € 2.6 million in 2004.  Other operating expenses of €1.6 million in 2006 mainly resulted from foreign currency exchange losses of € 0.9 million. Other operating expenses of € 2.9 million in 2005 mainly resulted from foreign currency exchange losses of € 2.1 million, whereas other operating expenses of € 0.7 million in 2004 mainly resulted from losses from the disposal of items of property, plant, and equipment of € 0.4 million.

Impairment of Goodwill

No charges for the impairment of goodwill were incurred in 2006. In connection with testing goodwill for impairment at December 31, 2005, AIXTRON concluded that goodwill for its subsidiary Genus, Inc. was impaired in light of reduced market expectations and the Company recorded a charge of € 13.7 million in 2005.  The Company did not record any goodwill impairment charges in 2004.

Net Interest Income

Net interest income increased from € 0.5 million in 2005 to € 1.0 million in 2006 due to an increase in the amount of interest received from bank balances.  In comparison, net interest income declined to € 0.5 million in 2005, from € 0.8 million in 2004.  The reduction in the net interest income was the result of the reduced amount of interest received from bank balances due to lower bank balances in 2005. Interest expenses amounted to € 56 thousand in 2006, € 233 thousand in 2005, and € 2 thousand in 2004.

37




Income Taxes

Despite a positive result before taxes amounting to € 6.6 million in 2006, AIXTRON recorded a tax expense in 2006 of € 0.8 million (2005: € 1.3 million; 2004: € 2.8 million), utilizing tax loss carry-forwards from previous years. The change in income taxes in 2005 in comparison to 2004 reflects profitable operations in 2004 compared to losses on operations in 2005. As of December 31, 2006, AIXTRON had deferred tax assets totalling € 5.4 million of which € 4.5 million were related to tax loss carry-forwards (December 31, 2005 and 2004: € 6.3 million and € 5.8 million, respectively).

Reconciliation to U.S. GAAP

The Company’s Consolidated Financial Statements have been prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. For 2006, the Company’s net income for the year after taxes under IFRS was € 5.9 million and for 2005, net loss under IFRS was € 53.5 million (2004: € 7.7 million net income after taxes under IFRS), compared to a consolidated net income under U.S. GAAP of € 5.2 million in 2006 and a consolidated net loss under U.S. GAAP of € 96.0 million in 2005 (2004: € 7.1 million net income under U.S. GAAP).

The most significant items in reconciling net income (loss) under IFRS to net income (loss) under U.S. GAAP in 2006 were additional charges booked for share-based payments under U.S. GAAP, and in 2005 it was the higher impairment charge related to Genus under U.S. GAAP.

The most significant items in reconciling the Company’s consolidated equity under IFRS to consolidated equity under U.S. GAAP as of December 31, 2006 was the reversal of write-downs in inventories, and the most significant items in reconciling the Company’s consolidated equity under IFRS to consolidated equity under U.S. GAAP as of December 31, 2005 was the impairment charge related to the Genus acquisition as well as the accounting treatment of inventories.

Please refer to Note 40 to the Company’s Consolidated Financial Statements for a reconciliation of AIXTRON’s equity and net loss in accordance with IFRS to U.S. GAAP.

B. Liquidity and Capital Resources

Cash Flows

Compared to December 31, 2005, cash and cash equivalents increased by € 15.4 million, or 49 %, to € 46.8 million as of December 31, 2006. The increase in cash and cash equivalents was largely due to cash inflows from operating activities totaling € 20.8 million and was recorded despite a € 21.4 million increase in the value of inventories as of December 31, 2006 compared with December 31, 2005. By comparison, due to cash outflows from business investments and operating activities, AIXTRON’s cash and cash equivalents decreased from € 45.5 million as of December 31, 2004 to € 31.4 million as of December 31, 2005.

Due to an increase in net income in 2006 as well as a € 19.8 million increase in the amount of advanced payments from customers, AIXTRON generated € 20.8 million in cash flows from operating activities in 2006.  In 2005, challenging market conditions resulted in a net loss of € 53.5 million and € 12.2 million in cash used for operating activities.  In comparison, during 2004, AIXTRON generated cash flows from operating activities of € 6.8 million.

In 2006, AIXTRON recorded cash outflows from investing activities of € 5.2 million, including bank deposits with a maturity of six months which were recorded as cash outflows totaling € 2.8 million. The decline in cash outflows from investing activities in property, plant, and equipment as well as intangible assets totaling € 2.4 million was due primarily to a more focused investing policy.  By comparison, in 2005 net cash used in investing activities was € 3.0 million, including purchases of fixed assets (€ 8.3 million) as well as capitalized acquisition payments related to the Genus acquisition (€ 3.6 million), less cash acquired from Genus (€ 9.0 million).  In 2004, net cash used in investing activities totaled € 6.4 million, including € 3.8 million of capital expenditures in property, plant, and equipment as well as the acquisition cost of a minority interest in AIXTRON KK of € 2.0 million.

38




There are currently no material restrictions on the Company’s use of cash resources.

Financing Activities

As of December 31, 2006, AIXTRON’s customers were granted advance payment guarantees by six banks (Deutsche Bank AG, Dresdner Bank AG, Commerzbank AG, Lloyds TSB Group plc., Seoul Guarantee Insurance Co., and Sparkasse Aachen) totaling € 17.1 million (December 31, 2005: € 11.9 million; December 31, 2004: € 8.7 million).

The Company had no recorded bank borrowings as of December 31, 2006, as of December 2005, and as of December 2004. Due to an increase in the balance sheet total, the equity to balance sheet total ratio declined to 70 % as of December 31, 2006, from 77 % as of December 31, 2005 (78 % as of December 31, 2004).

A total of 2.0 million AIXTRON shares, which were issued in connection with the acquisition of Genus, Inc., were deposited into a trust during 2005 to service the Genus, Inc. employee stock options program and to cover the warrants issued by Genus, Inc. AIXTRON treats these specific shares as its own shares. Because AIXTRON’s own shares are deducted from its subscribed capital, AIXTRON records shareholders’ equity net of its own shares.

As part of the acquisition of Genus, Inc., the Company assumed the obligation of Genus, Inc.’s convertible bonds, which had a total par value of € 4,807,000 (US$ 6,450,000) and an interest rate of 7%. The convertible bonds matured in August 2005.  The holders of the notes had the option to either convert the note into shares of AIXTRON common stock.  This option was changed as of the date of the AIXTRON acquisition into a right to convert into AIXTRON ADSs.  For this purpose the required AIXTRON ADSs were contributed into the trust as part of the acquisition.  For more information about the contribution, see Note 22 to the Company’s Consolidated Financial Statements.  In August 2005, the convertible bonds and the interest accrued since March 13, 2005 were settled in full by conversion into AIXTRON ADSs.  In this conversion, 2,383,920 ADSs from the trust were issued to the holders of the convertible bonds.  As a result no liability from the Genus, Inc. convertible bond exists at the balance sheet dates of December 31, 2006 and December 31, 2005.  For more information about these convertible bonds, see Note 28 to the Company’s Consolidated Financial Statements.

AIXTRON AG provides loans and other financial security to its subsidiaries where necessary to enable operations to continue efficiently. The Company has granted no security interest in its own land and buildings.

In order to support the development of future equipment technology, the Company continuously explores and assesses additional funding opportunities available in the market.

Due to the nature of its business, AIXTRON believes that the business should be financed primarily, but not exclusively, by equity and not by debt.  As a result, the Company’s Articles of Association provide for the potential offering of equity and equity-linked notes (convertible bonds).

Assessment of Liquidity and Capital Resources

The Company’s liquidity is affected by many factors, some of which are related to its ongoing operations and others which are related to the nature of the semiconductor equipment industry and to the economics of the countries in which the Company operates. Although the cash requirements fluctuate based on the timing and extent of these factors, the Company believes that the liquidity provided by existing cash resources and financing arrangements, as well as the ability to raise equity capital, will be sufficient to fund working capital, capital expenditures and other ongoing business requirements for at least the next twelve months.  Should the favorable market and economic environment currently experienced by AIXTRON change to a period of continued weakness, lower customer demand for the Company’s products and services and continued fixed costs could result in cash generated by operations to be lower than forecasted and not to be sufficient.  In such a situation, the Company might need to pursue accessing short-term credit facilities or additional equity financing offerings.  See “Item 3. Key Information — D. Risk Factors” for more information about the risks facing the Company.

39




C. Research and Development, Patents and Licenses, etc.

As a high-technology company, AIXTRON maintains a strong research and development (R&D) infrastructure, with significant resources devoted to R&D projects.  AIXTRON’s R&D activities are critical for the Company’s long-term strategy to position itself as one of the world’s leading provider of nano deposition equipment for the manufacture of complex device structures for the semiconductor industry.

AIXTRON’s R&D organization works closely with its own global sales and service organization to develop systems, tailored to customers’ individual needs.

AIXTRON maintains its own R&D laboratories in Aachen, Germany and in Sunnyvale, California. These in-house laboratories are equipped with AIXTRON systems for researching new equipment and processes, as well as for producing reference samples of semiconductor material films.  As part of the R&D efforts employed, AIXTRON regularly collaborates with well-known universities and research centers worldwide and participates in numerous government and European Union-funded development projects.

The following table summarizes key R&D information:

 

 

2006

 

2005

 

2004

 

R&D expenses (million €)

 

23.9

 

30.5

 

20.4

 

R&D expenses, % of sales

 

14%

 

22%

 

15%

 

 

 

 

 

 

 

 

 

R&D employees (period average)

 

181

 

188

 

147

 

R&D employees,% of total headcount (period average)

 

32%

 

33%

 

35%

 

 

The decrease in R&D expense in 2006 compared to 2005 was largely due to the fact that € 5.3 million in impairment charges incurred in 2005 were not incurred in 2006 as well as a more focused R&D project selection and control in light of the Company’s future strategy. In 2005, consolidated R&D expenses included R&D expenses from Genus, Inc. (now part of AIXTRON Inc.) only for the period March 14, 2005 through December 31, 2005 while in 2006, R&D expenses included R&D expenses from AIXTRON Inc. for the entire twelve-month period. The increase in R&D expenses in 2005 compared to 2004 expenses was largely due to [exceptional amortization charges totaling € 5.3 million. Additionally, in 2005 the consolidation of Genus, Inc. into the AIXTRON Group added € 5.6 million in R&D expenses to the AIXTRON R&D expenses since the date of acquisition (March 14, 2005).

Manufacturing-Oriented Research Laboratory, Taiwan

On June 1, 2006, AIXTRON announced that its Taiwanese subsidiary successfully completed its first R&D project funded by the Taiwanese government. This project entitled “Manufacturing-Oriented Research Lab” related to LED production technology, new material films for advanced nano-electronics, such as the next generation of computer chips; transfer of nanotechnology into production; technology and process simulation tools for cost-effective semiconductor production; and OLED for display and lighting applications. As a result of the R&D project, which consisted of 17 joint research projects with local industry partners and 9 product developments, a number of important milestones were reached, including the reduction of operating costs in LED manufacturing and the development of red, blue, yellow, and white OLEDs with OVPD® production technology. AIXTRON considers the network of competence introduced by and the expertise developed on these projects as key assets for its future business in Taiwan.

AIXTRON utilizes this research activity in Taiwan to enhance its current market position.

CHEMAPH, Europe

On August 9, 2006 AIXTRON announced its participation in the European Commission-funded CHEMAPH (Chemical Vapor Deposition of Chalcogenide Materials for Phase-change Memories- EU IST Project) project which has a duration of two years and is aimed at the development of chalcogenide-based phase change materials.

40




The consortium carrying out this study consists of three academic and three industrial partners from five European countries, namely CNR (National Lab MDM-INFM), Italy; ST Microelectronics, Italy; Epichem, United Kingdom; Consejo Superior de Investigaciones Cientificas (CSIC), Spain; Vilnius University, Lithuania; and AIXTRON AG, Germany.

Phase-change memories (PCM) are some of the most promising candidates for next-generation non-volatile memories, having the potential to improve the device performance, compared to Flash memories, as well as being potentially scalable beyond the current generation Flash technology for which one outstanding technological issue is the phase-change layer deposition process.

The project aims at demonstrating the feasibility of a film manufacturing process based on metal-organic chemical vapor deposition (MOCVD). This technique is known to enable the production of thin films with superior quality compared to those obtained by the currently most used method known as sputtering, a physical vapor deposition (PVD) technique.

AIXTRON’s participation in this project is expected to result in the more rapid development and refinement of the range of its MOCVD systems for chalcogenide materials.

OPAL 2008, Europe

On September 15, 2006, AIXTRON announced that it will participate in an R&D project with the Company’s Organic Vapor Phase Deposition (OVPD®) technology platform in a consortium together with OSRAM Opto Semiconductors GmbH, Philips GmbH, BASF Future Business GmbH and Applied Materials, Inc. (formerly Applied Films). The final goal of this project, called OPAL 2008 (Organic Phosphorescent lights for Applications in the Lighting market 2008), is the development of an OLED production technology capable of manufacturing a high performance white OLED device at a target cost of a few euro cents per cm2. To reach this target, the individual research activities of all partners within this group will be coordinated to maximize the feasible development synergy effects.

The specialized organic materials required will be developed by BASF Future Business GmbH. The device architecture for the lighting modules and the adapted OLED processing technology will be developed by OSRAM Opto Semiconductors GmbH and Philips GmbH.

AIXTRON’s contribution to the project will be to improve the production capabilities of the OVPD® process by designing equipment for large area material deposition for OLED devices. The research will be carried out in Aachen, Germany at the Philips production site in Aachen Rothe Erde where a prototype OVPD® system is already installed and running. Additional scientific support is provided by RWTH Aachen University.

OLED 2015, Europe

The German Ministry of Science and Technology (BMBF) has indicated its support for the development of organic light emitting diodes (OLED) for lighting applications with € 100 million for the next 5 years (OLED 2015). The involved companies in Germany, 33 partners within the OLED initiative, including AIXTRON AG, will collectively contribute an additional € 500 million to achieve the technical targets. The stated scope of the initiative is the introduction of new OLED lighting technology into the market. The OPAL 2008 project is funded by the BMBF under the OLED 2015 initiative.

D. Trend Information

For information about trends, see “Item 5. Operating and Financial Review and Prospects — Overview,” “ —Significant Factors,” “ —Operating Results,” and “ —Liquidity and Capital resources.”

41




Future Strategic Positioning

The development of deposition technology for highly complex materials is expected to remain the Company’s core competency and competitive advantage, upon which AIXTRON plans to further establish its expanded product portfolio in the period of 2007-2008.

 

AIXTRON expects to maintain its market leadership and strong competitive positioning in the market for MOCVD systems over the coming years. However, the relatively small market size and the high market concentration on just two internationally operating MOCVD system providers may be detrimental to future expansion objectives of its market leadership.

 

AIXTRON expects that the principal market driver for silicon semiconductor applications will be the demand for new complex material solutions, such as high-k dielectrics, that could potentially replace materials currently used in silicon semiconductor applications. The combined AIXTRON and Genus strengths in silicon semiconductor equipment technologies position as well in the silicon systems market niches the Company addresses (tungsten silicide CVD, ALD, and AVD® systems for the production of specialized applications such as gate stacks and capacitors).

 

Based on acceptance of the first AIXTRON Gen2-OVPD®-system for the mass production of OLEDs by RiTdisplay Corporation in 2005, AIXTRON plans to drive forward its strategy to introduce its OVPD® technology to a broader OLED display and lighting market, with the goal to achieve revenue contributions in 2007. As with all emerging technologies, there is an element of risk associated with the timing of AIXTRON’s OVPD® technology being adopted by the market.

E. Off-Balance Sheet Arrangements

As of December 31, 2006, the Company had entered into purchase commitments with suppliers in the amount of € 23.4 million (December 31, 2005: € 10.7 million; December 31, 2004: € 7.8 million) for purchases within the next 12 months.  Commitments for capital expenditures at December 31, 2006 were € 44 thousand (December 31, 2005:  € 0 thousand; December 31, 2004: € 0 thousand).

Contingencies

The Company is involved in various legal proceedings, none of which management believes are material.  The Company grants some customers advance payment guarantees, which are for a limited period of time.  Management does not expect that such matters will have a material effect on the Company’s net assets, results of operations and financial position.

See also “Item 5. Operating and Financial Review and Prospects — Tabular Disclosure of Contractual Obligations”.

F. Tabular Disclosure of Contractual Obligations

In the ordinary course of business, AIXTRON’s primary contractual obligations regarding cash involve purchase commitments, operating lease commitments and capital expenditures.

The following table summarizes contractual obligations for future cash outflows as of December 31, 2006:

 

42




 

 

 

Payments Due by Period (in millions of EUR)

 

 

 

 

 

 

 

 

 

 

 

More

 

 

 

Total

 

Less than
1 year

 

1-3
years

 

3-5
years

 

than 5 
years

 

Long-Term Debt Obligations

 

0

 

0

 

0

 

0

 

0

 

Finance lease commitments

 

0

 

0

 

0

 

0

 

0

 

Operating lease commitments

 

12.31

 

2.26

 

4.03

 

3.84

 

2.18

 

Purchase commitments

 

23.42

 

23.42

 

0

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual obligations

 

35.73

 

25.68

 

4.03

 

3.84

 

2.18

 

 

At December 31, 2006, the Company’s commitments for capital expenditures were € 44,000.

 

No obligations for funding of pension plans existed at December 31, 2006.

The Company outsources a substantial portion of the manufacturing of its operations to third party suppliers.  As the Company’s products are technologically complex, the lead times for purchases from its suppliers can vary up to six months.  Principally, but not exclusively, contractual commitments are made for specific customer orders or forecast orders. In some circumstances, where contractual commitments to suppliers for multiple modules or systems reduce the Company’s purchase prices per module or system, purchase commitments may be made against anticipated demand.  For the majority of purchase commitments, the Company has flexible delivery schedules depending on the market conditions, which allow the Company, to a certain extent, to delay delivery beyond originally planned delivery schedule estimates, if necessary.

The Company leases certain office and plant facilities, office furniture and motor vehicles under various operating leases.  Regarding most of the lease commitments for office and plant facilities the Company has options to renew the leasing contracts.  The leases typically run for a period between one and 15 years.  None of the leases includes contingent rentals.

 

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Item 6:  Directors, Senior Management and Employees

A. Directors and Senior Management

In compliance with German law — the German Stock Corporation Act (Aktiengesetz) — governing a stock corporation such as the Company, AIXTRON has a Supervisory Board (Aufsichtsrat) and an Executive Board (Vorstand).  The two boards are separated and no individual may simultaneously be a member of both boards.  The Executive Board is responsible for managing the Company’s business in accordance with applicable laws, AIXTRON’s Articles of Association and the Bylaws of the Executive Board, and as such it represents the Company in its dealings with third parties.  The Supervisory Board appoints and removes the members of the Executive Board.  The Supervisory Board is responsible for overseeing AIXTRON’s management policy, practice and decisions taken, but is not permitted by law to participate in such decisions.

In carrying out their duties, members of both the Supervisory Board and the Executive Board must exercise the standard of care of a diligent and prudent business person.  In complying with this standard of care, board members must take into account a broad range of considerations, in particular, the interests of the Company.  The members of the Supervisory Board and the Executive Board may also be personally liable for violations by AIXTRON under the German Stock Corporation Act.

The Executive Board is required to respect the rights of shareholders to be treated on an equal basis and receive equal information.  The Executive Board is also required to ensure that appropriate risk management mechanisms are established and that internal monitoring systems are employed.

Supervisory Board

The principal function of AIXTRON’s Supervisory Board is to supervise the activities and actions of the Executive Board without being involved in the conduct of day-to-day transactions.  The Supervisory Board has comprehensive monitoring functions and is also responsible for appointing and removing the members of the Executive Board.  Although the Supervisory Board may not make management decisions, certain types of transactions require its prior consent.  The rules of procedure of the Executive Board, which were approved by the Supervisory Board, provide that some affairs, operations and major transactions, such as large capital expenditure items, require the prior consent of the Supervisory Board. Additionally, the Executive Board is required to regularly report to the Supervisory Board on current business operations and future business planning. The Chairman of the Supervisory Board and the respective chairman of the Supervisory Board committees participate in numerous conference calls and personal meetings with the Executive Board to keep abreast of the Company’s business and its commercial activities.

All of the Company’s present Supervisory Board members were elected by its shareholders.  The shareholders may remove any member of the Supervisory Board they have elected in a general meeting by a simple majority of the votes cast by the shareholders in a general meeting.

The members of the Supervisory Board are each elected for a term expiring at the end of the annual general shareholders’ meeting after the fourth fiscal year following the year in which the Supervisory Board was elected.  Supervisory Board members may be re-elected and are not subject to a compulsory retirement age.  The Company’s Articles of Association establish the compensation of the Supervisory Board members.  For further details, see “— Compensation.”

The Supervisory Board met four times during 2006:  on March 9, on May 10, on September 21, and on November 15.

AIXTRON’s Supervisory Board consists of the following individuals:

·                                          Dipl.-Kfm. Kim Schindelhauer (Chairman): Mr. Schindelhauer is a businessman. He joined AIXTRON in 1992. From 1997 to 2002, Mr. Schindelhauer was the Joint Chief Executive Officer of AIXTRON, and a member of its Executive Board. From 2002 to the present, Mr. Schindelhauer has been the Chairman of AIXTRON’s Supervisory Board. Mr. Schindelhauer is member of the Executive Board of Deutsches Aktieninstitut e.V., Frankfurt/Main, Germany.

44




 

·                                          Dr. Holger Jürgensen (Deputy Chairman): Dr. Jürgensen is a physicist and was one of AIXTRON’s founders. From 1997 to 2002, Dr. Jürgensen was the President and Joint Chief Executive Officer of AIXTRON, and a member of its Executive Board. From 2002 to the present, Dr. Jürgensen has been the Deputy Chairman of AIXTRON’s Supervisory Board.

 

·                                          Prof. Dr. Wolfgang Blättchen (Chairman of the Audit Committee): Prof. Dr. Blättchen is a business consultant. Since 1998, Prof. Dr. Blättchen has been a member of AIXTRON’s Supervisory Board. He is a member of the Board of Management of Blättchen & Partner AG, Leonberg/Munich, Germany. Prof. Dr. Blättchen is also a member of the Supervisory Board of Gardena AG, Ulm, Germany; chairman of the Supervisory Board of Marc O’Polo AG, Stephanskirchen, Germany; a member of the Supervisory Board of APCOA Parking AG, Stuttgart, Germany; deputy chairman of the Supervisory Board of HAUBROK AG, Düsseldorf, Germany; and a member of the Supervisory Board of Datagroup IT Services Holding AG, Pliezhausen, Germany. Prof. Dr. Blättchen has been a deputy chairman of the Supervisory Board of Horvárth AG, Stuttgart, Germany through September 2006 and chairman of the Supervisory Board of tec2B, until March 2006 and a member of the board of Datagroup IT Services Holding AG, since July 2006.

 

·                                          Karl-Hermann Kuklies: Mr. Kuklies is a businessman. Since 1997, Mr. Kuklies has been a member of AIXTRON’s Supervisory Board.

 

·                                          Prof. Dr. Rüdiger von Rosen: Prof. Dr. von Rosen is a businessman. Since 2002, Prof. Dr. von Rosen has been a member of AIXTRON’s Supervisory Board. He is managing director of Deutsches Aktieninstitut e.V. and a member of the Supervisory Board of PriceWaterhouseCoopers AG, Frankfurt/Main, Germany.

 

·                                          Dipl.-Kfm. Joachim Simmroß: Mr. Simmroß is a businessman. Since 1997, Mr. Simmroß has been a member of AIXTRON’s Supervisory Board. Mr. Simmroß is also chairman of the Supervisory Board of technotrans AG, Sassenberg, Germany; a member of the Supervisory Board of WeHaCo Unternehmensbeteiligungs-Aktiengesellschaft, Hanover, Germany; a member of the advisory committee of BAG-Biologische Analysensystem GmbH, Lich, Germany; a member of the advisory committee of Astyx GmbH (formerly MTS Mikrowellen Technologie und Sensoren GmbH), Ottobrunn, Germany; a member of the advisory board of KAPPA opto-electronics GmbH, Gleichen, Germany; a member of the Supervisory Board of Commerz Unternehmensbeteiligungs-Aktiengesellschaft, Frankfurt/Main, Germany; a member of the Supervisory Board of GBK Beteiligungen AG, Hamburg Germany; and a member of the advisory board of Hannover Finanz Beteiligungen und Kapitalanlagen GmbH, Hanover, Germany.

 

No member of AIXTRON’s Supervisory Board serves as a director of an SEC-reporting company in the United States.

The Supervisory Board’s business address is Kackertstrasse 15-17, D-52072 Aachen, Germany.

Executive Board

The Supervisory Board appoints and removes the members of the Executive Board, who may serve for a maximum term of five years before being reappointed.  The Executive Board is responsible for managing AIXTRON’s day-to-day business according to the German Stock Corporation Act, AIXTRON’s Articles of Association and the rules of procedure for the conduct of the affairs of the Executive Board, which are approved by the Supervisory Board.  The rules of procedure of the Executive Board describe the allocation of responsibilities of the Executive Board members and provide a list of important issues and matters that require the Supervisory Board’s prior consent, such as borrowing or lending of material amounts, participating in joint ventures, making investments in other enterprises and establishing subsidiaries.

45




The Executive Board must respect the rights of shareholders to be treated on an equal basis and receive equal information.  The Executive Board must also ensure the establishment of appropriate risk management mechanisms and the use of internal monitoring systems.

As of December 31, 2006 AIXTRON’s Executive Board consisted of the following individuals:

·                                          Paul Hyland (Chairman of the Executive Board, President and Chief Executive Officer): Mr. Hyland has been the President and Chief Executive Officer and a member of the Executive Board of AIXTRON since April 1, 2002. His present term will expire on March 31, 2010. From 2000 to 2002, prior to his appointment to the Executive Board, Mr. Hyland was Managing Director of Thomas Swan Scientific Equipment Limited, an acquired subsidiary of AIXTRON. Mr. Hyland was born on October 20, 1953.

·                                          Dr. Bernd Schulte (Member of the Executive Board, Executive Vice President and Chief Operating Officer): Dr. Schulte has been Executive Vice President, Chief Operating Officer and a member of the Executive Board of AIXTRON since April 1, 2002. His present term will expire on March 31, 2010. Dr. Schulte joined AIXTRON in 1993, and he served as Director, Sales and Marketing, from 2001 to 2002. Dr. Schulte was born on August 22, 1962.

·                                          Wolfgang Breme (Member of the Executive Board, Executive Vice President and Chief Financial Officer): Mr. Breme has been Chief Financial Officer and Executive Vice President and a member of the Executive Board of AIXTRON since April 1, 2005. His present term will expire on March 31, 2008. Mr. Breme was born on May 15, 1960.

·                                          Dr. William W.R. Elder (Member of the Executive Board, Executive Vice President): Dr. Elder has been Executive Vice President and a member of the Executive Board of AIXTRON since July 1, 2005. His present term will expire on June 30, 2008. Prior to joining AIXTRON, Dr. Elder was Chairman of the Board, President and Chief Executive Officer of Genus, Inc. since May 1998. Dr. Elder served as Chairman of the Board of Genus, Inc. from October 1996 to April 1998, as Chairman and CEO of Genus, Inc. from April 1990 to September 1996, and as President and CEO of Genus, Inc from November 1981 to April 1990. Dr. Elder was born on October 24, 1938.

 

Dr. Elder is the only member of AIXTRON’s Executive Board that serves as a director of an SEC-reporting company in the United States.

The Executive Board’s business address is Kackertstrasse 15-17, D-52072 Aachen, Germany.

B. Compensation

In a resolution passed during the annual general meeting on May 18, 2005 and following the respective amendment of the Company’s bylaws, AIXTRON modified the Supervisory Board’s compensation, in accordance with the German Corporate Governance Code.

Individual members of the Supervisory Board receive € 18,000 per year. The Chairman receives € 54,000 per year, and the Deputy Chairman receives € 27,000 per year. Supervisory Board members receive in the aggregate a variable compensation of 1% of the Company’s retained earnings, less an amount corresponding to 4% of the paid-in contributions to the share capital.  The Chairman receives 6/17, the Deputy Chairman 3/17, and each other member of the Supervisory Board 2/17 of the variable compensation.  The Company limits variable compensation to four times the fixed compensation per Supervisory Board member.  In addition, Supervisory Board members receive an attendance fee of € 1,500 for attending committee meetings, with the Chairman receiving twice that amount.  The total annual attendance fee per Supervisory Board member is limited to one and a half times that person’s fixed compensation.

Executive Board remuneration consists of three components: fixed remuneration including allowances for private pension provision, a variable bonus, and stock-based remuneration. In the Executive Board contracts of employment, an annual income is stipulated for the fixed remuneration component. The variable bonus is aligned to the consolidated net income for the year.

46




As far as stock-based remuneration is concerned, the Executive Board members participate in the AIXTRON stock option plans. The appropriateness of the above-mentioned payments is reviewed every 3 years.

The fixed remuneration component is non-performance-related and is paid out on a monthly basis (13 times a year) as a salary. Additional payments in kind are made, mainly consisting of company car usage and premiums for insurance policies.

The variable remuneration is paid from an “accrued internal bonus”, defined as 10% of the modified consolidated net income for the year concerned and limited to no more than EUR 6.5 million in total. In 2006, EUR 411,000 is payable. The modified consolidated net income for the year is obtained from the Company’s Consolidated Financial Statements (IFRS) certified by the auditor, less a consolidated loss carryforward figure and those amounts that are to be allocated to earnings reserves in the Annual Financial Statements of AIXTRON AG by law or in accordance with the Articles of Association. The consolidated loss carryforward is obtained from consolidated net losses from previous years, less consolidated net income from subsequent fiscal years. Loss carryforwards from fiscal years before January 1, 2006 are not taken into account.

AIXTRON and its affiliates paid € 1.67 million aggregate cash compensation during the 2006 fiscal year to four members of the Executive Board for services in all capacities and €0.18 million to six members of the Supervisory Board.  The tables below set forth these amounts by individual members of the Executive and Supervisory boards, respectively.

Executive Board Member

 

Fixed
(EUR)

 

Premium
for Pension
Provision
(EUR)

 

Others*
(EUR)

 

Variable
(EUR)

 

Total Cash
Remu-
neration
(EUR)

 

Stock-
based
Remu-
neration

(EUR)

 

Total
Executive
Board
Remuneration

(EUR)

 

Paul Hyland

 

310,918

 

40,000

 

9,577

 

176,000

 

536,495

 

52,148

 

588.643

 

Wolfgang Breme

 

223,200

 

40,000

 

9,259

 

88,000

 

360,459

 

12,678

 

373.137

 

Dr. Bernd Schulte

 

260,000

 

40,000

 

10,926

 

88,000

 

398,926

 

52,148

 

451.074

 

Dr. William W.R. Elder

 

286,634

 

8,251

 

16,150

 

59,000

 

370,035

 

66,600

 

436.635

 

Total

 

1,080,752

 

128,251

 

45,912

 

411,000

 

1,665,915

 

183,574

 

1.849.489

 


* Benefits in kind

Supervisory Board Member

 

Fixed

 

Variable

 

Attendance
Fee

 

Total

 

Kim Schindelhauer* (Chairman of the Supervisory Board)

 

54,000

 

0

 

6,000

 

60,000

 

Dr. Holger Jürgensen* (Deputy Chairman of the Supervisory Board)

 

27,000

 

0

 

6,000

 

33,000

 

Prof. Dr. Wolfgang Blättchen* (Chairman of the Audit Committee)

 

18,000

 

0

 

12,000

 

30,000

 

Karl-Hermann Kuklies

 

18,000

 

0

 

0

 

18,000

 

Prof. Dr. Rüdiger von Rosen

 

18,000

 

0

 

0

 

18,000

 

Joachim Simmroß*

 

18,000

 

0

 

6,000

 

24,000

 

Total

 

153,000

 

0

 

30,000

 

183,000

 


* Member of the Audit Committee

Remuneration of the Executive Board is included in “personnel expenses”; remuneration of the Supervisory Board is included in “other operating expenses.”

47




AIXTRON has granted each Executive Board member 55,000 new options to receive AIXTRON shares in 2006.  Additionally, no member has exercised his right to receive AIXTRON shares in 2006.  No options to acquire AIXTRON ordinary shares may be granted to members of the Supervisory Board.

In total, as at December 31, 2006, the AIXTRON Executive Board held options to subscribe to 617,876 shares or American depositary shares (“ADS”) in the Company. The amounts of shares, underlying the options, are set out below. The realizable profits from exercising of the stock options can differ significantly from the figures shown in the table.

Executive Board
Member

 


Allocation

 

Outstanding
(shares)

 

Exercisable
(shares)

 

Option Value
on Allocation
(EUR)

 

Exercise
Price
(EUR)

 


Maturity

Paul Hyland

 

May 2006
May 2004
May 2003
May 2002
May 2001
May 2000

 

55,000
35,000
27,500
27,500
5,000
5,400

 

0
8,750
13,750
0
0
1,350

 

84,150
107,800
48,950
152,625
106,500
114,507

 

3.83
6.17
3.10
7.48
26.93
67.39

 

Nov. 2016
Nov. 2014
Nov. 2013
May 2017
May 2016
May 2015

Wolfgang Breme

 

May 2006

 

55,000

 

0

 

84,150

 

3.83

 

Nov. 2016

Dr. Bernd Schulte

 

May 2006
May 2004
May 2003
May 2002
May 2001
May 2000
May 1999

 

55,000
35,000
27,500
27,500
5,000
2,640
2,976

 

0
8,750
13,750
0
0
660
2,976

 

84,150
107,800
48,950
152,625
106,500
55,981
35,640

 

3.83
6.17
3.10
7.48
26.93
67.39
18.70

 

Nov. 2016
Nov. 2014
Nov. 2013
May 2017
May 2016
May 2015
May 2014

Dr. William W.R. Elder

 

May 2006
Oct. 2003
Oct. 2002
June 2002

 

55,000
102,000
43,860
51,000

 

0
78,625
43,860
51,000

 

EUR 84,150
US $285,600
US $62,281
US $72,420

 

EUR 3.83
US $8.00
US $2.53
US $5.02

 

Nov. 2016
Oct. 2013
Oct. 2007
June 2007

Total

 

 

 

617,876

 

223,471

 

 

 

 

 

 

 

The current Executive Board members have no individual pension benefits. The allowances for pension provision, paid by AIXTRON and listed above, are paid into an insurance contract with a benevolent fund.

The Company’s net obligation in respect of defined benefit pension plans reflects commitments to two former members of the Executive Board of AIXTRON AG. As at the end of 2006, this resulted in pension provisions totaling € 0.98 million). Expenditure from these pensions amounted to € 5 thousand in the reporting year.

C. Board Practices

See “Item 6. Directors, Senior Management and Employees — Supervisory Board” and “— Executive Board.”

No additional benefits are generally paid to the Company’s Executive Board Members upon termination of their employment contracts. If the employment contract of any of the Company’s Executive Board Members is terminated without notice for good cause on the part of the Executive Board Member and for which he has to bear responsibility, the entitlement to the profit sharing bonus lapses from the time that the termination becomes effective.

48




See “Item 10. Additional Information — Material Contracts” as well as Exhibits 4.4, 4.5, 4.6, 4.7, 4.8, and 4.9 to this report for further details of the Company’s directors’ employment contracts.

Audit Committee

According to Article 16.1 of AIXTRON’s Articles of Association, the Supervisory Board is authorized and, if prescribed by law, required to form committees of its members.

The Audit Committee primarily deals with matters such as accounting, risk management, the control system, the auditors’ mandate, identification of areas to be audited, auditors’ fee arrangements, while at the same time ensuring the necessary independence of the auditors. The Chairman of the Committee regularly reports to the Supervisory Board with regard to the work performed.

As of November 14, 2006, AIXTRON’s Audit Committee operates under the terms of reference of a codified Audit Committee charter. The Audit Committee’s charter includes the following terms of reference:

·                  The Audit Committee consists of up to four members, elects one Audit Committee member to be the Audit Committee’s chairman and one Audit Committee member to be a financial expert, and meets at least two times per year.

·                  The Audit Committee performs its duties in accordance with legal requirements, AIXTRON’s articles of association, the charter of AIXTRON’s Supervisory Board, and the Audit Committee charter.

·                  The Audit Committee may inspect AIXTRON’s records and routinely liaises with both the Company’s Executive Board and the auditors of the Company to identify and remedy possible weaknesses in AIXTRON’s accounting and internal controls and to solve potential differences of opinion between the Company’s Executive Board and the Company’s auditors.

Set forth in the table below are the current members of the Audit Committee:

Committee

 

Members

Audit Committee

 

Prof. Dr. Wolfgang Blättchen (Chairman), Dr. Holger Jürgensen, Dipl.-Kfm. Kim Schindelhauer and Dipl.-Kfm. Joachim Simmroß

 

Compliance with NASDAQ Listing Standards on Corporate Governance

For information about the Company’s compliance with the NASDAQ listing Standards on corporate governance, see “Item 10. Additional Information — Memorandum and Articles of Association — Sarbanes-Oxley Requirements and NASDAQ Rules.”

D. Employees

The Company’s acquisition of Genus, now part of AIXTRON Inc., in March 2005 increased significantly both the total number of employees (from 443 employees as of December 31, 2004 to 570 employees as of December 31, 2005) and the proportion of U. S. employees (from 6 % as of December 31, 2004 to 21 % as of December 31, 2005).  Throughout 2005 and 2006, the Company implemented a number of cost reduction measures, including terminations of employee labor contracts in the United States and closures on existing fixed-term employee labor contracts in Germany.  As a result, the global number of employees decreased by 9 %  between March 31, 2005 (624 employees) and December 31, 2006 (566 employees).  As of December 31, 2006, the majority of AIXTRON’s worldwide employees was based in Europe.  The following table illustrates the division of AIXTRON’s employees by category of activity and geographic region at December 31 for each of the years 2006, 2005, and 2004:

49




Employees by Function
as of December 31

 

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and Service

 

181

 

32

%

171

 

30

%

112

 

25

%

Research and Development

 

183

 

32

%

187

 

33

%

161

 

36

%

Manufacturing

 

128

 

23

%

130

 

23

%

111

 

25

%

Administration

 

74

 

13

%

82

 

14

%

59

 

14

%

Total

 

566

 

100

%

570

 

100

%

443

 

100

%

 

Employees by Region
as of December 31

 

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia

 

73

 

13

%

70

 

12

%

34

 

8

%

Europe

 

364

 

64

%

381

 

67

%

381

 

86

%

USA

 

129

 

23

%

119

 

21

%

28

 

6

%

Total

 

566

 

100

%

570

 

100

%

443

 

100

%

 

During the last three years, AIXTRON has not experienced any major labor disputes resulting in work stoppages.

E. Share Ownership

The following table sets forth certain information known to AIXTRON regarding beneficial ownership of the Company’s ordinary shares and options to acquire its equity securities as of December 31, 2006 by (i) each of the Company’s Supervisory and Executive Board members, (ii) each of the Company’s executive officers, (iii) all directors and executive officers of AIXTRON as a group, (iv) each person known by AIXTRON to beneficially own more than 5% of its shares, and (v) the percentage of the Company’s shares held by U.S. holders:

Name and Address of Beneficial Owner **

 

Number of
Shares (1)

 

%
of
Class (2)

 

Number of
Options to
Acquire
AIXTRON
Equity
Securities

 

 

 

 

 

 

 

 

 

Prof. Dr. Wolfgang Blättchen

 

294

(3)

*

 

0

 

Wolfgang Breme

 

0

 

*

 

55,000

 

Dr. William W.R. Elder

 

121,747

(4)

*

 

251,860

(11)

Paul Hyland

 

0

 

*

 

151,350

(11)

Dr. Holger Jürgensen

 

10,037,108

(5)

11.18

%

0

 

Karl-Hermann Kuklies

 

3,600

(6)

*

 

0

 

Prof. Dr. Rudiger von Rosen

 

1,100

 

*

 

0

 

Kim Schindelhauer

 

1,039,604

(7)

1.16

%

0

 

Dr. Bernd Schulte

 

0

 

*

 

150,908

(11)

Joachim Simmroß

 

35,000

(8)

*

 

 

 

All Supervisory and Executive Board members as a group.

 

11,238,453

 

12.52

%

609,118

 

Approximate% held by U.S. holders (ADSs outstanding)

 

10,539,639

(9)

11.74

%

 

 

 

50





*                    Less than 1%.

**             Except as indicated otherwise, the address is:  c/o AIXTRON Aktiengesellschaft, Kackertstrasse 15-17, D-52072 Aachen, Germany.

(1)             Except as otherwise indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

(2)             Applicable percentage ownership is based on 89,799,397 shares of common stock outstanding as of December 31, 2006 (according to German GAAP rules based on the German Commercial Code (HGB)) together with applicable options for such shareholder.  Beneficial ownership is determined in accordance with the rules of the SEC, based on factors including voting and investment power with respect to shares.

(3)             Consists of 294 shares owned by Prof. Dr. Blättchen’s wife.

(4)             Equivalent to 121,747 ADSs. Dr. William W.R. Elder, beneficially owns 121,747 ADSs, of which 47,735 were held directly, 55,398 were held indirectly through the Elder family trust and 18,614 were held by a custodian for his sons.

(5)             Dr. Jürgensen, directly or indirectly, beneficially owns 10,037,108 shares through his ownership stake in CAMMA GmbH.

(6)             Includes 1,900 shares owned by his wife and 1,700 shares owned by his daughter.

(7)             Mr. Schindelhauer, directly or indirectly, beneficially owns 1,039,604 shares through his ownership stake in SBG Beteiligung GmbH.

(8)             Includes 20,000 shares owned directly, and 15,000 owned indirectly by Mr. Simmroß’s wife.

(9)             Equivalent to 10,539,639 ADSs outstanding as a percentage of total shares outstanding, assuming that all ADSs are held by U.S. beneficial holders.  Source:  JPMorgan. Data as of December 31, 2006.

(10)       Mr. Hyland, Mr. Breme, and Dr.. Schulte hold options to acquire AIXTRON ordinary shares. Dr. Elder holds 196,860 options to acquire AIXTRON ADSs and 55,000 Options to acquire AIXTRON ordinary shares.

 

As of December 31, 2006, members of the Company’s Supervisory Board, a group of six persons, indirectly or directly, held 11,116,706 AIXTRON ordinary shares.

Pursuant to Section 15a of the German Securities Trading Act (WpHG), in effect during the reporting period, members of the Executive and Supervisory Boards were required to disclose significant purchases or sales of shares of AIXTRON.  In fiscal year 2006, Supervisory Board member Joachim Simmroß reported he had purchased directly 300 shares of AIXTRON on September 9, 2006 at a purchase price per share of € 3.02. Additionally, Mr. Simmroß reported that he had purchased on September 25, 2006 2,700 shares of AIXTRON directly at a purchase price per share of € 3.02 and 5,000 shares of AIXTRON indirectly through his wife at a purchase price per share of € 3.02.

51




Employee Bonds and Options

Employee Bonds

In November 1997, the Company issued 6% convertible bonds to employees, due November 2007, with a principal amount of € 320 thousand, interest payable annually in arrears. The bonds are not transferable and must be repurchased at par if the employee leaves the Company. The notes are convertible, at the option of the holder, into shares of common stock, initially at a conversion rate of 480 shares (after the effects of share splits) of common stock for each € 51.13 principal amount of notes plus payment of an additional € 971.45, subject to adjustment in certain circumstances. The right to convert expires at the end of the life of the bond in November 2007. The conversion feature was not deemed to be beneficial at issuance.

During 2006 and 2005 no bonds were converted into common stock.

The remaining outstanding convertible bonds as of December 31, 2006, amounting to € 3 thousand can be converted, at the option of the holders, into 25,440 shares of common stock through November 2007.

As part of the acquisition of Genus, Inc, the Company assumed liabilities from convertible bonds at total par value of € 4,807 thousand (US$ 6,450 thousand) and at an interest rate of 7%. The convertible bonds were issued by Genus, Inc. in August 2002 and had a maturity term of three years. The interest was due every six months in February and in August and could be paid, at the option of Genus, Inc. either in cash or in shares of common stock. The holder of the notes had the option to either convert the note into shares of Genus common stock at a conversion rate of one Genus share for each US$ 1.42 principal amount of notes, or to demand that there be a repayment in cash at the due date in August 2005. The option of conversion into Genus stock shares was changed, at the date of the Genus acquisition, into a right to convert each Genus stock share into a 0.51 AIXTRON ADS. For this purpose the required AIXTRON ADS were contributed into the trust as part of the acquisition (see note 22).

In August 2005, the convertible bonds and the interest incurred since March 13, 2005 were completely settled by way of conversion into AIXTRON ADS. In this conversion 2,383,920 ADS from the trust were issued to the holder of the convertible bonds. As a result no liability from the Genus convertible bond existed at December 31, 2005 or December 31, 2006.

As part of the acquisition of Genus, liabilities for additional options over 60,409 ADS were assumed. These options were still outstanding as of December 31, 2005. The options were held by unrelated third parties. Their weighted-average exercise price was US$ 9.95 per ADS. The optio