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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2001
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________
Commission File Number 0-24085
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AXT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3031310
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4281 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(510) 683-5900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 2001
----- -----------------------------
Common Stock, $.001 par value 22,192,174
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AXT, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at March 31, 2001 and
December 31, 2000
Condensed Consolidated Income Statements for the three
months ended March 31, 2001 and 2000
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000
Notes To Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AXT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data)
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
Assets:
Current assets
Cash and cash equivalents $ 52,638 $ 68,585
Short-term investments 20,205 30,852
Accounts receivable 26,383 27,773
Inventories 57,887 51,846
Prepaid expenses and other current assets 6,374 3,603
Deferred income taxes 3,947 --
--------- ---------
Total current assets 167,434 182,659
Property, plant and equipment 70,280 63,401
Investments 7,899 --
Other assets 2,198 3,312
Goodwill 1,389 848
--------- ---------
Total assets $ 249,200 $ 250,220
========= =========
Liabilities and Stockholders' Equity:
Current liabilities
Short-term bank borrowing $ 1,474 $ 1,353
Accounts payable 11,874 10,009
Accrued liabilities 22,451 16,651
Deferred income taxes -- 3,847
Current portion of long-term debt 2,365 4,355
Current portion of capital lease obligation 4,611 6,057
--------- ---------
Total current liabilities 42,775 42,272
Long-term debt, net of current portion 16,232 15,123
Long-term capital lease, net of current portion 9,454 7,278
Other long-term liabilities 1,441 200
--------- ---------
Total liabilities 69,902 64,873
--------- ---------
Stockholders' equity:
Preferred stock, $.001 par value; 2,000 shares authorized; 833
shares issued and outstanding 3,532 3,532
Common stock, $.001 par value per share; 40,000 shares authorized;
22,192 and 21,952 shares issued and outstanding 147,981 145,748
Deferred compensation (79) (107)
Retained earnings 38,974 33,980
Other comprehensive income (loss) (11,110) 2,194
--------- ---------
Total stockholders' equity 179,298 185,347
--------- ---------
Total liabilities and stockholders' equity $ 249,200 $ 250,220
========= =========
See accompanying notes to these unaudited condensed
consolidated financial statements.
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AXT, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
2001 2000
-------- --------
Revenue $ 40,103 $ 22,265
Cost of revenue 23,810 13,294
-------- --------
Gross profit 16,293 8,971
Operating expenses:
Selling, general and administrative 5,867 3,207
Research and development 2,703 1,909
-------- --------
Total operating expenses 8,570 5,116
-------- --------
Income from operations 7,723 3,855
Interest expense 629 769
Other income (709) (186)
-------- --------
Income before provision for income taxes 7,803 3,272
Provision for income taxes 2,809 1,244
-------- --------
Income from continuing operations 4,994 2,028
Loss from discontinued operations, net of tax benefits of $0 and $35 -- (56)
-------- --------
Net Income $ 4,994 $ 1,972
======== ========
Basic income (loss) per share:
Income from continuing operations $ 0.23 $ 0.11
Loss from discontinued operations -- (0.00)
Net income 0.23 0.11
Diluted income (loss) per share:
Income from continuing operations $ 0.22 $ 0.10
Loss from discontinued operations -- (0.00)
Net income 0.22 0.10
Shares used in per share calculations:
Basic 22,097 18,596
Diluted 22,790 20,074
See accompanying notes to these unaudited condensed
consolidated financial statements.
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AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
March 31,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income: $ 4,994 $ 1,972
Adjustments to reconcile net income to cash provided by operations:
Depreciation 1,778 1,503
Amortization of goodwill 71 149
Stock compensation 28 28
Changes in assets and liabilities:
Accounts receivable 1,390 (2,520)
Inventories (6,041) (5,001)
Prepaid expenses and other current assets (1,707) (1,657)
Other assets 355 (1,609)
Accounts payable 1,865 5,673
Accrued liabilities 5,800 2,093
Other long-term liabilities 127 63
-------- --------
Net cash provided by operating activities 8,660 694
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,215) (4,204)
Purchases of investments (18,722) --
Sale of investments 1,034 --
-------- --------
Net cash used in investing activities (24,903) (4,204)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of):
Proceeds from issuance of common stock 2,233 1,194
Payments of capital leases (712) (254)
Proceeds from short-term bank borrowings 121 1,530
Payments of long-term debt (881) (458)
-------- --------
Net cash provided by financing activities 761 2,012
Effect of exchange rate changes (465) 33
-------- --------
Net decrease in cash and cash equivalents (15,947) (1,465)
Cash and cash equivalents at the beginning of the period 68,585 6,062
-------- --------
Cash and cash equivalents at the end of the period $ 52,638 $ 4,597
======== ========
Non cash activity:
Purchase of PP&E through capital leases $ 1,442 $ 265
======== ========
See accompanying notes to these unaudited condensed
consolidated financial statements.
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AXT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements for the
three months ended March 31, 2001 and 2000 are unaudited. The accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, considered necessary to present fairly the financial
position, results of operations and cash flows of AXT, Inc. (the "Company") and
its subsidiaries for all periods presented. Certain prior period
reclassifications have been made to conform to the current period presentation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these condensed consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
The results of operations are not necessarily indicative of the results
to be expected in the future or for the full fiscal year. It is recommended that
these condensed consolidated financial statements be read in conjunction with
the Company's consolidated financial statements and the notes thereto included
in its 2000 Annual Report on Form 10-K.
Note 2. Investments
The Company accounts for its cash equivalents and investments under
Statement of Financial Accounting Standards No. 115 or SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities. The Company classifies all
investments as available for sale and carried at fair market value, which is
determined based on quoted market prices, with net unrealized gains and losses
included in comprehensive income (loss), net of tax. The components of
investments at March 31, 2001 are summarized below (in thousands):
Aggregate Unrealized
Available for sale Cost Fair value Gain/(loss)
- ----------------------------------------------- -------- ---------- -----------
Money market $ 6,928 $ 6,928 $ --
Corporate bonds 14,855 14,857 2
Government agency bonds 3,029 3,040 11
Corporate equity securities 27,328 10,207 (17,121)
-------- -------- ---------
$ 52,140 $ 35,032 $ (17,108)
======== ======== =========
Recorded as:
Cash equivalents $ 6,928
Investments due within one year 20,205
Investments due in over one year 7,899
--------
$ 35,032
========
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Note 3. Inventories
The components of inventory are summarized below (in thousands):
March 31, December 31,
2001 2000
--------- ------------
Inventories, net:
Raw materials $ 22,315 $ 20,623
Work in process 25,075 26,795
Finished goods 10,497 4,428
-------- --------
$ 57,887 $ 51,846
======== ========
Note 4. Net Income Per Share
Basic earnings per common share is calculated by dividing net earnings
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common and common equivalent shares include the dilutive
effect of common stock equivalents outstanding during the period calculated
using the treasury stock method. Common stock equivalents consist of the shares
issuable upon the exercise of stock options.
A reconciliation of the numerators and denominators of the basic and
diluted net income per share calculations is summarized below (in thousands
except per share data):
Three Months Ended
March 31,
--------------------
2001 2000
------- -------
Numerator:
Net income $ 4,994 $ 1,972
======= =======
Denominator:
Denominator for basic earnings per share - weighted
average common shares 22,097 18,596
Effect of dilutive securities:
Common stock options 693 1,478
------- -------
Denominator for dilutive earnings per share $22,790 $20,074
======= =======
Basic earnings per share $ 0.23 $.0.11
Diluted earnings per share $ 0.22 $ 0.10
Options excluded from diluted net income per share as the impact is antidilutive 818 18
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Note 5. Comprehensive Income
The components of comprehensive income are summarized below (in
thousands):
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
Net Income $ 4,994 $ 1,972
Foreign currency translation gain (loss) (465) 33
Unrealized gain (loss) (12,839) --
-------- --------
Comprehensive income (loss) $ (8,310) $ 2,005
======== ========
Note 6. Segment Information
Selected industry segment information is summarized below (in
thousands):
Three Months Ended
March 31,
-------------------------
2001 2000
--------- ---------
Substrates Division
Net revenues from external customers $ 38,821 $ 19,125
Gross profit 17,934 8,682
Operating income 12,037 5,636
Identifiable assets 211,047 96,132
Visible Emitter Division
Net revenues from external customers $ 1,282 $ 3,140
Gross profit (loss) (1,641) 289
Operating income (loss) (4,314) (1,781)
Identifiable assets 36,960 25,516
Discontinued Consumer Products Division
Identifiable assets $ 1,193 $ 6,281
Total
Net revenues from external customers $ 40,103 $ 22,265
Gross profit 16,293 8,971
Operating income 7,723 3,855
Identifiable assets 249,200 127,929
The Company sells its products in the United States and in other parts
of the world. Also, the Company has operations in China and Japan. Revenues by
geographic location based on the country of the customer are summarized below
(in thousands):
Three Months Ended
March 31,
--------------------
2001 2000
------- -------
Net revenues:
United States $20,802 $10,933
Europe 7,480 2,523
Canada 1,254 --
Japan 4,001 2,122
Asia Pacific and other 6,566 6,687
------- -------
Consolidated $40,103 $22,265
======= =======
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Note 7. Discontinued Operations
On December 14, 2000, the Company's Board of Directors approved
management's plan to exit the Company's unprofitable consumer products business.
The Company expects to complete the plan by June 30, 2001. The remaining balance
in accrued liabilities for anticipated expenses of asset disposal and operating
losses through the estimated date of disposal is summarized below (in
thousands):
Utilized Balance
Reserve Cash Non-cash March 31, 2001
------- -------- -------- --------------
Asset disposal $ 353 $ 49 $ -- $ 304
Operating losses 750 226 -- 524
------- -------- -------- --------
$ 1,103 $ 275 $ -- $ 828
======= ======== ======== ========
Note 8. Restructuring costs
On December 14, 2000, the Company's Board of Directors approved
management's plan to exit its unprofitable 650 nm laser diode product line
within its visible emitter division. As a result, during the fourth quarter of
2000, the Company recorded a pre-tax restructuring charge of $8.2 million. The
restructuring charge included $2.1 million for incremental costs and contractual
obligations for such items as leasehold termination payments and other facility
exit costs incurred as a direct result of this plan.
Certain information with respect to restructuring costs is summarized
below (in thousands):
Utilized Balance
Reserve Cash Non-cash March 31, 2001
------- -------- -------- --------------
Inventory write-off $ 1,844 $ -- $ 1,844 $ --
Property, plant and equipment write-off 3,436 -- 3,436 --
Goodwill write-off 848 -- 848 --
Other restructuring costs 2,124 32 121 1,971
------- -------- -------- --------
$ 8,252 $ 32 $ 6,249 $ 1,971
======= ======== ======== ========
The fair value of assets determined to be impaired in accordance with
the guidance for assets to be held and used in SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
were the result of management estimates. The above noted exit costs were
determined in accordance with EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." The
restructuring actions, as outlined by the plan, are intended to be executed to
completion by July 31, 2001.
Note 9. Commitments
The Company has entered into contracts to supply several large customers
with GaAs wafers. The contracts guarantee the delivery of a certain number of
wafers between January 1, 2001 and December 31, 2001 valued at $96.2 million.
The contract sales prices are subject to review quarterly and can be adjusted in
the event that raw material prices change. In the event of non-delivery of the
determined wafer quantities in any monthly delivery period, the Company could be
subject to non-performance penalties between 5% and 10% of the value of the
delinquent monthly deliveries. Partial prepayments received for these supply
contracts totaling $9.9 million are included in accrued liabilities at March 31,
2001.
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Note 10. Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standard No. 133, or SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 established accounting and reporting standards for
derivative instruments including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. In June 2000, SFAS 133 was amended by SFAS 138. The Company has
implemented SFAS 133 as amended by SFAS 137 during the quarter. The adoption of
the provisions of SFAS 133 did not and does not have a material effect on the
Company's financial position or results of operations.
Note 11. Foreign Exchange Contracts and Transaction Losses
The Company uses short-term forward exchange contracts for hedging
purposes to reduce the effects of adverse foreign exchange rate movements. The
Company has purchased foreign exchange contracts to hedge against certain trade
accounts receivable denominated in Japanese yen. The change in the fair value of
the forward contracts is recognized as part of the related foreign currency
transactions as they occur. As of March 31, 2001, the Company's outstanding
commitments with respect to the foreign exchange contracts, which were
commitments to sell Japanese yen, had a total contract value of approximately
$3.2 million.
The Company incurred a foreign transaction exchange loss of $223,000 for
the three months ended March 31, 2001 and a loss of $21,000 for the three months
ended March 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "future," "intends," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. This
discussion should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000 and
the condensed consolidated financial statements included elsewhere in this
report.
Results of Operations
The following table sets forth certain information relating to the
operations of the Company expressed as a percentage of total revenues for the
periods indicated:
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Three Months Ended
March 31,
--------------------
2001 2000
------ ------
Revenues 100.0% 100.0%
Cost of revenues 59.4 59.7
------ ------
Gross profit 40.6 40.3
Operating expenses:
Selling, general and administrative 14.6 14.4
Research and development 6.7 8.6
------ ------
Total operating expenses 21.3 23.0
------ ------
Income from operations 19.3 17.3
Interest expense 1.6 3.5
Other income (1.8) (0.8)
------ ------
Income before provision for income taxes 19.5 14.7
Provision for income taxes 7.0 5.6
------ ------
Income from continuing operations 12.5 9.1
Loss from discontinued operations -- (0.3)
------ ------
Net Income 12.5% 8.9%
====== ======
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Revenue from continuing operations. Revenue increased $17.8 million, or
80.1%, to $40.1 million for the three months ended March 31, 2001 compared to
$22.3 million for the three months ended March 31, 2000. Revenue from our
substrate division which represents 96.8% of total revenue for the three months
ended March 31, 2001 increased $19.7 million, or 103.0%, to $38.8 million
compared to $19.1 million for the three months ended March 31, 2000. Total GaAs
substrate revenue increased $13.4 million, or 77.9%, to $30.6 million for the
three months ended March 31, 2001 compared to $17.2 million for the three months
ended March 31, 2000. Sales of 5" and 6" GaAs subtrates increased $9.1 million,
or 650.0%, to $10.5 million for the three months ended March 31, 2001 compared
to $1.4 million for the three months ended March 31, 2000. InP substrate revenue
increased $5.7 million, or 317.0%, to $7.5 million for the three months ended
March 31, 2001 compared to $1.8 million for the three months ended March 31,
2000. The increase in GaAs and InP substrate sales was a result of increased
sales volume to existing and new customers due in part to strong growth in the
fiber optic and wireless handset markets. Sales at our visible emitter division
decreased $1.9 million, or 59.2% to $1.3 million due to a decrease in sales of
laser diodes, offset by an increase in sales of HBLEDs and VCSELs. The decrease
in laser diode sales is the result of exiting the 650 nm product line in the
fourth quarter of 2000.
International revenue decreased to 48.1% of total revenue for the three
months ended March 31, 2001 compared to 50.9% of total revenue for the three
months ended March 31, 2000. The decrease in the percentage of international
revenue to total revenue was primarily the result of increased substrate sales
in the United States.
Gross margin. Gross margin increased to 40.6% of total revenue for the
three months ended March 31, 2001 compared to 40.3% of total revenue for the
three months ended March 31, 2000. The gross margin at the substrate division
increased to 46.2% of substrate revenue for the three months ended March 31,
2001 compared to 45.4% of substrate revenue for the period ended March 31, 2000.
The increase was primarily due to higher volume and the realization of lower
labor and manufacturing overhead costs as a result of expanding our wafer
production capacity in China. Gross margin at the visible emitter division
decreased to negative 128.0% of visible emitter revenue for the three months
ended March 31, 2001 compared to 9.2% of visible emitter revenue for the three
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months ended March 31, 2000. The decrease was primarily due to increased costs
associated with the start-up of HBLED and VCSEL product production and decreased
sales of laser diodes.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.7 million, or 82.9%, to $5.9 million for
the three months ended March 31, 2001 compared to $3.2 million for the three
months ended March 31, 2000. As a percentage of total revenue, selling, general
and administrative expenses were 14.6% for the three months ended March 31, 2001
compared to 14.4% for the three months ended March 31, 2000. The increase in
selling, general and administrative expenses was primarily due to increases in
personnel and related expenses required to support current and future increases
in sales volume.
Research and development expenses. Research and development expenses
increased $794,000, or 41.6%, to $2.7 million for the three months ended March
31, 2001 compared to $1.9 million for the three months ended March 31, 2000. As
a percentage of total revenue for these three-month periods, research and
development expenses were 6.7% in 2001 and 8.6% in 2000. The increase was
primarily the result of increases in personnel and related expenses and
materials to support HDLED and VCSEL research and development at the visible
emitter division and 6" GaAs and 4" InP substrate research and development at
the substrate division.
Interest expense. Interest expense decreased $140,000, or 18.2%, to
$629,000 for the three months ended March 31, 2001 compared to $769,000 for the
three months ended March 31, 2000 due to the repayment of debt.
Other income and expense. Other income increased $523,000 to $709,000
for the three months ended March 31, 2001 compared to income of $186,000 for the
three months ended March 31, 2000. The increase was primarily due to interest
earned on cash and investments.
Provision for income taxes. The effective tax rate decreased to 36.0%
for the three months ended March 31, 2001 compared to 38.0% for the three months
ended March 31, 2000. The decrease is primarily the result of shifting
production to China.
Liquidity and Capital Resources
Cash and cash equivalents decreased $15.9 million to $52.6 million at
March 31, 2001 compared to $68.6 million at December 31, 2000.
Net cash provided by operating activities of $8.7 million for the three
months ended March 31, 2001 was comprised primarily of net income adjusted for
non-cash items of $1.9 million, and by $1.8 million provided by working capital
and other activities. Net cash provided by working capital and other activities
resulted primarily from increases in prepaid expenses and inventory, offset by
increases in accounts payable and accrued liabilities.
Net cash used in investing activities of $24.9 million primarily
reflects $17.7 million in investments and $7.2 million in purchases of property
and equipment. These capital expenditures were made to increase crystal growth
and wafer processing capacity at the substrate division and to increase HBLED
and VCSEL epitaxy growth and wafer processing capacity at the visible emitter
division.
We are currently constructing an additional 32,000 square foot building
in Beijing, China to expand substrate wafer processing capacity and a 27,000
square foot building in El Monte, California to expand HBLED and VCSEL
production. We are also constructing improvements to our existing production
facilities in Fremont, California to increase crystal growth and wafer
processing capacity. We expect to invest approximately $33.6 million in
additional facilities and equipment over the next 9 months.
Net cash provided by financing activities of $761,000 consisted of
proceeds of $2.2 million from the sale of common stock and a $121,000 increase
in short term bank borrowings offset by $881,000 used for principal and interest
payments on long-term debt and $712,000 used for capital lease payments.
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We currently have a $20.0 million line of credit with a commercial bank
bearing interest at 175 basis points above LIBOR. This line of credit is secured
by all of our assets, other than equipment, and expires on May 31, 2002. At
March 31, 2001, there was no balance outstanding under the line of credit.
We generally finance equipment purchases through secured equipment loans
and capital leases over five-year terms at interest rates ranging from 6.0% to
9.0% per annum. Some of our manufacturing facilities have been financed by
long-term borrowings, which were refinanced by taxable variable rate revenue
bonds in 1998. These bonds mature in 2023 and bear interest at 200 basis points
below the prime rate. The bonds are traded in the public market. Repayment of
principal and interest under the bonds on a quarterly basis is supported by a
letter of credit from our bank. We have the option to redeem the bonds in whole
or in part during their term. At March 31, 2001, $10.2 million was outstanding
under these bonds.
We anticipate that the combination of existing cash on hand and the
borrowings available under our current credit agreements will be sufficient to
fund working capital and capital expenditure requirements for the next 12
months. However, our future capital requirements will be dependent on many
factors including the rate of revenue growth, our profitability, the timing and
extent of spending to support research and development programs, the expansion
of our manufacturing facilities, the expansion of our selling and marketing and
administrative activities and market acceptance of our products. We may need to
obtain additional equity and debt financing in the future, which may not be
available on acceptable terms or at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since our Japanese and some Taiwanese invoices are denominated in
Japanese yen, doing business in Japan and Taiwan subjects us to fluctuations in
exchange rates between the U.S. dollar and the Japanese yen. We incurred a
foreign transaction exchange loss of $223,000 for the three months ended March
31, 2001 and a loss of $21,000 for the three months ended March 31, 2000. We
purchase foreign exchange contracts to economically hedge against certain trade
accounts receivable in Japanese yen. The outstanding commitments with respect to
such foreign exchange contracts had a total contract value of approximately $3.2
million as of March 31, 2001. Many of the contracts were entered into six months
prior to the due date and the dates coincide with the receivable terms on
customer invoices. By matching the receivable collection date and contract due
date, we attempt to economically minimize the impact of foreign exchange
fluctuations.
The fair market value of long-term fixed and variable interest rate debt
is subject to interest rate risk. The effect of an immediate 10% change in
interest rates would not have a material impact on our future operating results
or cash flows.
Investments are valued at fair market value at March 31, 2001. There is
no assurance that we will realize this value when we sell these investments in
the future.
Risks Related to Our Business
Unpredictable fluctuations in our operating results could disappoint analysts or
our investors, which could cause our stock price to decline.
We may not be able to sustain our historical growth rate, and we may
experience significant fluctuations in our revenue and earnings in the future.
Our quarterly and annual revenue and operating results have varied significantly
in the past and may vary significantly in the future due to a number of factors,
including:
- fluctuations in demand for our products;
- expansion of our manufacturing capacity;
- expansion of our operations in China;
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- limited availability and increased cost of raw materials;
- integration of Lyte Optronics and its business, operations and facilities
with our operations;
- the volume and timing of orders from our customers;
- fluctuation of our manufacturing yields;
- decreases in the prices of our competitors' products;
- costs incurred in connection with any future acquisitions of businesses or
technologies;
- increases in our expenses, including expenses for research and
development; and
- our ability to develop, manufacture and deliver high quality products in a
timely and cost-effective manner.
Due to these factors, we believe that period-to-period comparisons of
our operating results may not be a meaningful indicator of our future
performance. It is possible that in some future quarter, our operating results
may be below the expectations of securities analysts or investors. If this
occurs, the price of our common stock would likely decline.
If we fail to expand our manufacturing capacity, we may not be able to meet
demand for our products, lower our costs or increase revenue.
In order to increase production, we must build new facilities, expand
our existing facilities and purchase additional manufacturing equipment. If we
do not expand our manufacturing capacity, we will be unable to increase
production, adversely impacting our ability to reduce unit costs, margins and
improve our operating results.
We are currently constructing additional capacity and facilities in
California and China. Our expansion activities subject us to a number of risks,
including:
- unforeseen environmental or engineering problems;
- unavailability or late delivery of production equipment;
- delays in completing new facilities;
- delays in bringing production equipment on-line;
- work stoppages or delays;
- unanticipated cost increases; and
- restrictions imposed by requirements of local, state or federal regulatory
agencies.
If any of these risks occurs, construction may be costlier than
anticipated and completion could be delayed, which could hurt our ability to
expand capacity and increase our sales. In addition, if we experience delays in
expanding our manufacturing capacity, we might not be able to timely meet
customer requirements, and we could lose future sales. We are also making
substantial investments in equipment and facilities as part of our capacity
expansion. To offset the additional fixed operating expenses, we must increase
our revenue by increasing production and improving yields. If demand for our
products does not grow or if our yields do not improve as anticipated, we may be
unable to offset these costs against increased revenue, which would adversely
impact our operating results.
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We have limited experience with some of our new products, and we may not be able
to achieve anticipated sales of these products.
To date, we have limited experience producing and selling our HBLED and
VCSEL products, and we may be unable to successfully market and sell these
products. To market and sell our HBLED and VCSEL products, we will have to
develop additional distribution channels. In addition, we must apply our
proprietary VGF technique to new substrate products and successfully introduce
and market new opto-electronic semiconductor devices, including LED and VCSEL
products.
If we do not successfully develop new products to respond to rapidly changing
customer requirements, our ability to generate sales and obtain new customers
may suffer.
Our success depends on our ability to offer new products that
incorporate leading technology and respond to technological advances. In
addition, our new products must meet customer needs and compete effectively on
quality, price and performance. The life cycles of our products are difficult to
predict because the markets for our products are characterized by rapid
technological change, changing customer needs and evolving industry standards.
If our competitors introduce products employing new technologies, our existing
products could become obsolete and unmarketable. If we fail to offer new
products, we may not generate sufficient revenue to offset our development costs
and other expenses or meet our customers' requirements. Other companies,
including IBM, are actively developing substrate materials that could be used to
manufacture devices that could provide the same high-performance, low-power
capabilities as GaAs-based devices at competitive prices. If these substrate
materials are successfully developed and semiconductor device manufacturers
adopt them, demand for our GaAs substrates could decline and our revenue could
suffer.
The development of new products can be a highly complex process, and we
may experience delays in developing and introducing new products. Any
significant delays could cause us to fail to timely introduce and gain market
acceptance of new products. Further, the costs involved in researching,
developing and engineering new products could be greater than anticipated.
Our operating results depend in large part on further customer acceptance of our
existing substrate products and on our ability to develop new products based on
our core VGF technology.
A majority of GaAs substrates are manufactured from crystals grown using
the traditional Liquid Encapsulated Czochralski, or LEC, or
Horizontal-Bridgeman, or HB, techniques. In order to expand sales of our
products, we must continue to promote our VGF technique as a preferred process
for producing substrates, and we must offer products with superior prices and
performance on a timely basis and in sufficient volumes. If we fail to gain
increased market acceptance of our VGF technique, we may not achieve anticipated
revenue growth.
Intense competition in the markets for our products could prevent us from
increasing revenue and sustaining profitability.
The markets for our products are intensely competitive. We face
competition for our substrate products from other manufacturers of substrates,
such as Freiberger, Hitachi Cable, Japan Energy, Litton Airtron and Sumitomo
Electric and from semiconductor device manufacturers that produce substrates for
their own use, and from companies, such as IBM, that are actively developing
alternative materials to GaAs. We believe that at least one of our competitors
has recently begun shipping GaAs substrates manufactured using a technique
similar to our VGF technique. Other competitors may develop and begin using
similar technology. If we are unable to compete effectively, our revenue may not
increase and we may not continue to be profitable. We face many competitors that
have a number of significant advantages over us, particularly in our compound
semiconductor device products, including:
- greater experience in the business;
- more manufacturing experience;
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- broader name recognition; and
- significantly greater financial, technical and marketing resources.
Our competitors could develop new or enhanced products that are more
effective than the products that we have developed or may develop. For example,
some competitors in the HBLED market offer devices that are brighter than our
HBLEDs. Some of our competitors may also develop technologies that enable the
production of commercial products with characteristics similar to or better than
ours, but at a lower cost.
We expect the intensity of competition to increase in the future.
Competitive pressures could reduce our market share, require us to reduce the
prices of our products, affect our ability to recover costs or result in reduced
gross margins.
If we have low product yields, the shipment of our products may be delayed and
our operating results may be adversely impacted.
Our products are manufactured using complex technologies, and the number
of usable substrates and devices we can produce can fluctuate as a result of
many factors, including:
- impurities in the materials used;
- contamination of the manufacturing environment;
- substrate breakage;
- equipment failure, power outages or variations in the manufacturing
process; and
- performance of personnel involved in the manufacturing process.
Because many of our manufacturing costs are fixed, our revenue could
decline if our yields decrease. We have experienced product shipment delays and
difficulties in achieving acceptable yields on both new and older products, and
delays and poor yields have adversely affected our operating results. We may
experience similar problems in the future and we cannot predict when they may
occur or their severity. In addition, many of our manufacturing processes are
new and are still being refined, which can result in lower yields, particularly
as we focus on producing higher diameter substrates and new opto-electronic
semiconductor devices. For example, we recently began manufacturing six-inch
GaAs wafers and have also made substantial investments in equipment and
facilities to manufacture blue, green and cyan HBLEDs. If we are unable to
produce adequate quantities of our high-brightness LEDs and VCSELs, we may not
be able to meet customer demand and our revenue may decrease.
Demand for our products may decrease if our customers experience difficulty
manufacturing, marketing or selling their products.
Our products are used as components in our customers' products.
Accordingly, demand for our products is subject to factors affecting the ability
of our customers to successfully introduce and market their products, including:
- the competition our customers face in their particular industries;
- the technical, manufacturing, sales and marketing and management
capabilities of our customers;
- the financial and other resources of our customers; and
- the inability of our customers to sell their products if they infringe
third party intellectual property rights.
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If demand for the products offered by our customers decreases, our
customers may reduce purchases of our products.
We purchase critical raw materials from single or limited sources, and could
lose sales if these sources fail to fill our needs.
We depend on a limited number of suppliers for certain raw materials,
components and equipment used in manufacturing our products, including key
materials such as gallium, arsenic and quartz. We generally purchase these
materials through standard purchase orders and not pursuant to long-term supply
contracts and none of our suppliers guarantees supply of raw materials to us. If
we lose any of our key suppliers, our manufacturing efforts could be
significantly hampered and we could be prevented from timely producing and
delivering products to our customers. We have experienced delays obtaining
critical raw materials, including gallium, due to shortages of these materials.
We may experience delays due to shortages of materials and may be unable to
obtain an adequate supply of materials. These shortages and delays could result
in higher materials costs and cause us to delay or reduce production of our
products. If we have to delay or reduce production, we could fail to meet
customer delivery schedules, and our revenue and operating results could suffer.
If we fail to comply with environmental regulations, we may be subject to
significant fines or cessation of our operations.
We are subject to federal, state and local environmental laws and
regulations. These laws, rules and regulations govern the use, storage,
discharge and disposal of hazardous chemicals during manufacturing, research and
development and sales demonstrations. If we fail to comply with applicable
regulations, we could be subject to substantial liability for clean-up efforts,
personal injury and fines or suspension or cessation of our operations. We are
cooperating with the California Occupational Safety and Health Administration,
or Cal-OSHA, in an investigation primarily regarding impermissible levels of
potentially hazardous materials in certain areas of our manufacturing facility
in Fremont, California. In May 2000, Cal-OSHA levied a fine against us in the
amount of $313,655 for alleged health and safety violations. In March 2001, we
settled on an amount of $200,415, and have put in place engineering,
administrative and personnel protective equipment programs to address these
issues. Our ability to expand or continue to operate our present locations could
be restricted or we could be required to acquire costly remediation equipment or
incur other significant expenses. In addition, existing or future changes in
laws or regulations may require us to incur significant expenditures or
liabilities, or may restrict our operations.
The loss of one or more of our key substrate customers would significantly hurt
our operating results.
A small number of substrate customers have historically accounted for a
substantial portion of our total revenue. Our five largest customers accounted
for 32.9% of our total revenue from continuing operations for the three months
ended March 31, 2001 and 22.1% for the three months ended March 31, 2000. No
customer accounted for more than 10.0% of our total revenue. Our substrate
revenue accounted for 96.8% of our total revenue from continuing operations for
the three months ended March 31, 2001 and 85.9% for the three months ended March
31, 2000. We expect that a significant portion of our future revenue will
continue to be derived from a limited number of substrate customers. Our
customers are not obligated to purchase a specified quantity of our products or
to provide us with binding forecasts of product purchases. In addition, our
customers may reduce, delay or cancel orders at any time without any significant
penalty. If we lose a major customer or if a customer cancels, reduces or delays
orders, our revenue would decline. In addition, customers that have accounted
for significant revenue in the past may not continue to generate revenue for us
in any future period.
Defects in our products could diminish demand for our products.
Our products are complex and may contain defects. In the past we have
experienced quality control problems with some of our LED and consumer products,
which caused customers to return products to us. If we continue to experience
quality control problems, or experience these problems in our other products,
customers may cancel or reduce orders or purchase products from our competitors.
Defects in our products could cause us to incur higher manufacturing costs and
suffer product returns and additional service expenses, all of which could
adversely impact our operating results.
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We are also developing new products and product enhancements, including
substrates and compound semiconductor device products. If our new products
contain defects when released, our customers may be dissatisfied and we may
suffer negative publicity or customer claims against us, lose sales or
experience delays in market acceptance of our new products.
Cyclicality in the semiconductor industry could cause our operating results to
fluctuate significantly.
Our business depends in significant part upon manufacturers of
semiconductor devices, as well as the current and anticipated market demand for
such devices and the products using such devices. The semiconductor industry is
highly cyclical. The industry has in the past, and will likely in the future,
experience periods of oversupply that result in significantly reduced demand for
semiconductor devices and components, including our products. When these periods
occur, our operating results and financial condition are adversely affected.
Our substrate and opto-electronic semiconductor device products have a long
sales cycle that makes it difficult to plan our expenses and forecast our
results.
Customers typically place orders with us for our substrate and
opto-electronic semiconductor device products three months to a year or more
after our initial contact with them. The sale of our products may be subject to
delays due to our customers' lengthy internal budgeting, approval and evaluation
processes. During this time, we may incur substantial expenses and expend sales,
marketing and management efforts while the customers evaluate our products.
These expenditures may not result in sales of our products. If we do not achieve
anticipated sales in a period as expected, we may experience an unplanned
shortfall in our revenue. As a result, we may not be able to cover expenses,
causing our operating results to vary. In addition, if a customer decides not to
incorporate our products into its initial design, we may not have another
opportunity to sell products to this customer for many months or even years. We
anticipate that sales of any future substrate and opto-electronic semiconductor
device products under development will also have lengthy sales cycles and will,
therefore, be subject to risks substantially similar to those inherent in the
lengthy sales cycle of our current substrate and opto-electronic semiconductor
device products.
If we fail to manage our potential growth, our operations may be disrupted.
We have experienced a period of rapid growth and expansion that has
strained our management and other resources, and we expect this rapid growth to
continue. Our acquisition of Lyte Optronics, together with expansion of our
manufacturing capacity, has placed and continues to place a significant strain
on our operations and management resources. If we fail to manage our growth
effectively, our operations may be disrupted. To manage our growth effectively,
we must implement additional and improved management information systems,
further develop our operating, administrative, financial and accounting systems
and controls, add experienced senior level managers, and maintain close
coordination among our executive, engineering, accounting, marketing, sales and
operations organizations.
We will spend substantial sums to support our growth and may incur
additional unexpected costs. Our systems, procedures or controls may not be
adequate to support our operations, and we may be unable to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development and
administrative support. If we cannot attract qualified people or manage growth
effectively, our business and operating results could be adversely affected.
Any future acquisitions may disrupt our business, dilute stockholder value or
distract management attention.
As part of our strategy, we may consider acquisitions of, or significant
investments in, businesses that offer products, services and technologies
complementary to ours, such as our acquisition of Lyte Optronics in May 1999.
Acquisitions entail numerous risks, including:
- we may have difficulty assimilating the operations, products and personnel
of the acquired businesses;
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- our ongoing business may be disrupted;
- we may incur unanticipated costs;
- our management may be unable to manage the financial and strategic
position of acquired or developed products, services and technologies;
- we may be unable to maintain uniform standards, controls and procedures
and policies; and
- our relationships with employees and customers may be impaired as a result
of any integration.
For example, we incurred substantial costs in connection with our
acquisition of Lyte Optronics, including the assumption of approximately $10.0
million of debt, much of which has been repaid or renegotiated, resulting in a
decline of cash available. We incurred one-time charges and merger-related
expenses of $2.8 million and an extraordinary item of $508,000 relating to the
early extinguishment of debt in the quarter ended June 30, 1999 as a result of
the acquisition.
To the extent that we issue shares of our stock or other rights to
purchase stock in connection with any future acquisitions, dilution to our
existing stockholders will result and our earnings per share may suffer. Any
future acquisitions may not generate additional revenue or provide any benefit
to our business.
If any of our facilities is damaged, we may not be able to manufacture our
products.
The ongoing operation of our manufacturing and production facilities in
California and China is critical to our ability to meet demand for our products.
If we are not able to use all or a significant portion of our facilities for
prolonged periods for any reason, we will not be able to manufacture products
for our customers. For example, a natural disaster, fire or explosion caused by
our use of combustible chemicals and high temperatures during our manufacturing
processes would render some or all of our facilities inoperable for an
indefinite period of time. Actions outside of our control, such as earthquakes,
could also damage our facilities, rendering them inoperable. All of our crystal
growth is currently performed at our Fremont, California facilities, which are
located very near to an active seismic fault line. If we are unable to operate
our facilities and manufacture our products, we will lose customers and revenue
and our business will be harmed.
If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to successfully manage our business or achieve our
objectives.
Our success depends upon the continued service of Morris S. Young,
Ph.D., our president, chairman of the board and chief executive officer, as well
as other key management and technical personnel. We do not have long-term
employment contracts with, or key person life insurance on, any of our key
personnel.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. The competition for these
employees is intense, especially in Silicon Valley, and we cannot assure you
that we will be successful in attracting and retaining new personnel. The loss
of the services of any of our key personnel, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers, could make it difficult for us to manage our business
and meet key objectives, including the timely introduction of new products.
If we are unable to protect our intellectual property, we may lose valuable
assets or incur costly litigation.
We rely on a combination of patents, copyrights, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect our proprietary technology. However, we believe
that, due to the rapid pace of technological innovation in the markets for our
products, our ability to establish and maintain a position of technology
leadership also depends on the skills of our development personnel.
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Despite our efforts to protect our intellectual property, a third party
could develop products or processes similar to ours. Our means of protecting our
proprietary rights may not be adequate and our competitors may independently
develop similar technology, duplicate our products or design around our patents.
We believe that at least one of our competitors has begun to ship GaAs
substrates produced using a process similar to our VGF technique. Our
competitors may also develop and patent improvements to the VGF, LED and VCSEL
technologies upon which we rely, and thus may limit any exclusivity we enjoy by
virtue of our patents.
It is possible that pending or future United States or foreign patent
applications made by us will not be approved, that our issued patents will not
protect our intellectual property, or that third parties will challenge the
ownership rights or the validity of our patents. In addition, the laws of some
foreign countries may not protect our proprietary rights to as great an extent
as do the laws of the United States and it may be more difficult to monitor the
use of our intellectual property. Our competitors may be able to legitimately
ascertain non-patented proprietary technology embedded in our systems. If this
occurs, we may not be able to prevent the development of technology
substantially similar to ours.
We may have to resort to costly litigation to enforce our intellectual
property rights, to protect our trade secrets or know-how or to determine their
scope, validity or enforceability. Enforcing or defending our proprietary
technology is expensive, could cause us to divert resources and may not prove
successful. Our protective measures may prove inadequate to protect our
proprietary rights, and if we fail to enforce or protect our rights, we could
lose valuable assets.
We might face intellectual property infringement claims that may be costly to
resolve and could divert management attention.
Other companies may hold or obtain patents on inventions or may
otherwise claim proprietary rights to technology necessary to our business. The
markets in which we compete are comprised of competitors who in some cases hold
substantial patent portfolios covering aspects of products that could be similar
to ours. We could become subject to claims that we are infringing patent,
trademark, copyright or other proprietary rights of others. Litigation to
determine the validity of alleged claims could be time-consuming and result in
significant expense to us and divert the efforts of our technical and management
personnel, whether or not the litigation is ultimately determined in our favor.
If a lawsuit is decided against us, we could be subject to significant
liabilities, requiring us to seek costly licenses or preventing us from
manufacturing and selling our products. We may not be able to obtain required
licensing agreements on terms acceptable to us or at all.
We derive a significant portion of our revenue from international sales, and our
ability to sustain and increase our international sales involves significant
risks.
Our revenue growth depends in part on the expansion of our international
sales and operations. International sales represented 48.1% of our total revenue
from continuing operations for the three months ended March 31, 2001 and 40.3%
for the three months ended March 31, 2000. We expect that sales to customers
outside the U.S. will continue to represent a significant portion of our
revenue.
Our dependence on international sales involves a number of risks, including:
- changes in tariffs, import restrictions and other trade barriers;
- unexpected changes in regulatory requirements;
- longer periods to collect accounts receivable;
- changes in export license requirements;
- political and economic instability;
- unexpected changes in diplomatic and trade relationships; and
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- foreign exchange rate fluctuations.
Our sales are denominated in U.S. dollars, except for sales to our
Japanese and some Taiwanese customers, which are denominated in Japanese yen.
Thus, increases in the value of the U.S. dollar could increase the price of our
products in non-U.S. markets and make our products more expensive than
competitors' products in these markets. Also, denominating some sales in
Japanese yen subjects us to fluctuations in the exchange rates between the U.S.
dollar and the Japanese yen. The functional currencies of our Japanese and
Chinese subsidiaries are the local currencies. We incur transaction gains or
losses resulting from consolidation of expenses incurred in local currencies for
these subsidiaries, as well as in translation of the assets and liabilities of
these assets at each balance sheet date. If we do not effectively manage the
risks associated with international sales, our revenue and financial condition
could be adversely affected.
If our expansion in China is more costly than we expect, our operating results
will suffer.
As part of our planned expansion of our manufacturing capacity, we are
building new facilities and expanding existing facilities in China. If we are
unable to build and expand our Chinese facilities in a timely manner, we may not
be able to increase production of our products and increase revenue as planned.
If our expansion in China proves more costly than we anticipate or we incur
greater ongoing costs than we expect, our operating results would be adversely
affected. If we do not realize expected cost savings once our expansion is
complete in China, our margins may be negatively impacted and our operating
results may suffer.
Changes in China's political, social and economic environment may affect our
financial performance.
Our financial performance may be affected by changes in China's
political, social and economic environment. The role of the Chinese central and
local governments in the Chinese economy is significant. Chinese policies toward
economic liberalization, and laws and policies affecting technology companies,
foreign investment, currency exchange rates and other matters could change,
resulting in greater restrictions on our ability to do business and operate our
manufacturing facilities in China. Any imposition of surcharges or any increase
in Chinese tax rates could hurt our operating results. The Chinese government
could revoke, terminate or suspend our license for national security and similar
reasons without compensation to us. If the government of China were to take any
of these actions, we would be prevented from conducting all or part of our
business. Any failure on our part to comply with governmental regulations could
result in the loss of our ability to manufacture our products in China.
China has from time to time experienced instances of civil unrest and
hostilities. Confrontations have occurred between the military and civilians.
Events of this nature could influence the Chinese economy, result in
nationalization of foreign-owned operations such as ours, and could negatively
affect our ability to operate our facilities in China.
Our stock price has been and may continue to be volatile.
Our stock price has fluctuated significantly since we began trading on
the Nasdaq National Market. For the three months ended March 31, 2001, the high
and low closing sales prices of our common stock were $44.56 and $14.50. A
number of factors could cause the price of our common stock to continue to
fluctuate substantially, including:
- actual or anticipated fluctuations in our quarterly or annual operating
results;
- changes in expectations about our future financial performance or changes
in financial estimates of securities analysts;
- announcements of technological innovations by us or our competitors;
- new product introduction by us or our competitors;
- large customer orders or order cancellations; and
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- the operating and stock price performance of comparable companies.
In addition, the stock market in general has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of our common stock, regardless of our actual operating
performance.
We may need additional capital to fund expansion of our manufacturing capacity
and our future operations, which may not be available.
We may need additional capital to fund expansion of our manufacturing
and production capacity and our future operations or acquisitions. If we raise
additional capital through the sale of equity or debt securities, the issuance
of such securities could result in dilution to existing stockholders. These
securities could have rights, preferences and privileges that are senior to
those of holders of our common stock. For example, in December 1998 we issued
debt securities for the purchase and improvement of our facilities in Fremont,
California.
If we require additional capital in the future, it might not be
available on acceptable terms, or at all. If we are unable to obtain additional
capital when needed, we may be required to reduce the scope of our planned
expansion of our manufacturing capacity or of our product development and
marketing efforts, which could adversely affect our business and operating
results.
Provisions in our charter, bylaws or Delaware law may delay or prevent a change
in control of our company.
Provisions in our amended and restated certificate of incorporation and
bylaws may have the effect of delaying or preventing a merger, acquisition or
change of control of us, or changes in our management. These provisions include:
- the division of our board of directors into three separate classes, each
with three year terms;
- the right of our board to elect a director to fill a space created by a
board vacancy or the expansion of the board;
- the ability of our board to alter our bylaws;
- the ability of our board to authorize the issuance of up to 2,000,000
shares of blank check preferred stock; and
- the requirement that only our board or the holders of at least 10% of our
outstanding shares may call a special meeting of our stockholders.
Furthermore, because we are incorporated in Delaware, we are subject to
the provisions of Section 203 of the Delaware General Corporation Law. These
provisions prohibit large stockholders, in particular those owning 15% or more
of the outstanding voting stock, from consummating a merger or combination with
a corporation unless:
- 66 2/3% of the shares of voting stock not owned by these large
stockholders approve the merger or combination, or
- the board of directors approves the merger or combination or the
transaction which resulted in the large stockholder owning 15% or more of
our outstanding voting stock.
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We and our suppliers rely on a continuous power supply to conduct operations,
and California's current energy crisis could disrupt our business and increase
our expenses
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for California fall below 1.5%, California has on
some occasions implemented, and may in the future continue to implement, rolling
blackouts throughout California.
Some of our suppliers are located in California. As a result of this
crisis, these suppliers may be unable to manufacture sufficient quantities of
product to meet our needs, or they may increase the fees they charge us for
their services. We do not have long-term contracts with these suppliers. The
inability of our suppliers to provide us with adequate supplies of products
would cause a delay in our ability to fulfill our customers' orders, which would
hurt our business, and any increase in their fees could adversely affect our
financial condition.
In addition, certain critical operations are located in California. We
currently do not have sufficient backup power generation capacity to maintain
full manufacturing capacity in the event of a blackout. If blackouts interrupt
our power supply, we would be temporarily unable to continue operations at our
facilities. Any such interruption in our ability to continue operations at our
facilities could damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which may substantially harm our business and results of operation.
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PART II OTHER INFORMATION
Item 1. Exhibits and reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AXT, INC.
Chief Executive Officer
Dated: May 3, 2001 By: /s/ Morris S. Young
-------------------------------
Morris S. Young
Chief Financial Officer
Dated: May 3, 2001 By: /s/ Donald L. Tatzin
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Donald L. Tatzin
Corporate Controller
Dated: May 3, 2001 By: /s/ John Drury
-------------------------------
John Drury
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