UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
29, 2003
CREE, INC.
(Exact
(Exact name of registrant as specified in its charter)
North Carolina 0-21154 56-1572719
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification Number)
| North Carolina | 0-21154 | 56-1572719 | ||
(State or Other Jurisdiction of Incorporation) | (Commission File No.) | (I.R.S. Employer Identification Number) |
4600 Silicon Drive, Durham, North Carolina 27703
(Address
(Address of principal executive offices)
(919) 313-5300
(Registrant's
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.00125 par value
--------------------------------
(Title of Class)
Common Stock, $0.00125 par value |
| (Title of Class) |
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]x No [_]
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yesx No¨
The aggregate market value of common stock held by non-affiliates of the registrant as of August 1,December 29, 2002 was approximately $1,019,706,031$1,059,059,406 (based on the closing sale price of $14.49$17.13 per share).
The number of shares of the registrant'sregistrant’s Common Stock, $0.00125 par value per share, outstanding as of August 1, 2002September 5, 2003 was 72,728,948.
74,203,109.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held October 29, 200228, 2003 are incorporated by reference into Part III.
FORM 10-K
For the Fiscal Year Ended June 30, 2002
29, 2003
INDEX
PART I
Introduction
Cree, Inc., a North Carolina corporation, wasCorporation established in 1987, to
commercializedevelops and manufactures semiconductor materials and devices based on silicon carbide (SiC), group III nitrides (GaN), silicon, and related compounds. Our SiC and GaN materials technology is the basis for many of the core devices that we develop and produce. The physical and electronic properties of SiC and GaN, such as higher voltage and higher thermal conductivity, offer technical advantages over traditional silicon, gallium arsenide (GaAs), sapphire and other materials for certain electronic applications. We focus our expertise in SiC and GaN materials on four product areas: short wavelength light emitting diodes (LEDs), including blue, green and near ultraviolet (UV) products, power switching products, radio frequency (RF) and microwave devices, and near UV lasers. We have products commercially available in each of these categories except for near UV lasers. We also manufacture silicon RF transistors and modules.
As of the end of fiscal 2003, we derive the majority of our revenues from sales of our LED products. We also generate revenue from sales of SiC wafers and gemstone materials, and we earn revenue under government contracts that support certain of our research and development programs to the extent the contract funding exceeds our cost of performing those activities. In addition, we derive a small portion of revenues from our sales of devices for wireless infrastructure and power switching applications. We currently are working to develop near UV lasers that are targeted for future optical storage markets.
Most semiconductor devices are fabricated on wafers made from silicon carbide, or
SiC. Today, wecrystals. Silicon evolved as the dominant semiconductor material because it is relatively easy to grow into large, high quality single crystals that are suitable for fabricating many types of electronic devices. Alternative semiconductors such as GaAs were developed to enable the world-leader in developingfabrication of improved RF devices and manufacturing compound
semiconductor materialsoptoelectronic products such as red LEDs and electronic devices made fromlasers. Wide bandgap semiconductors, such as SiC and a leading
developerGaN, have emerged to provide improved capabilities for solid state devices. SiC is most commonly targeted for power and manufacturer ofRF devices, while GaN is generally targeted for optoelectronic applications such as blue, green or UV LEDs and electronic devices made from
gallium nitride, or GaN, and related materials. We also produce RF power
transistor components and modules for wireless infrastructure applications using
silicon-based bipolar and laterally diffused metal oxide semiconductor, or
LDMOS, process technologies. near UV lasers, as well as higher frequency microwave devices.
We operate our business in two segments, the Cree segment, which consists of our SiC-based products and research contracts, and the Cree Microwave segment, which consists ofincludes silicon-based RF transistors and RF transistor modules based on a silicon platform.
SiC and GaN-based devices offer technical advantages over competitive products
mademodules. Our Cree Microwave segment began operations with the December 2000 acquisition of theUltraRF business from silicon, gallium arsenide, or GaAs, sapphire and other materialsSpectrian Corporation (Spectrian). TheUltraRF acquisition was accounted for certain electronic applications.under the purchase method. We use our wide bandgap compound semiconductor
technology to make enabling products such as near ultra-violet (products with
wavelengths between 380 and 410 nanometers), or UV, blue and green light
emitting diodes, or LEDs. We sell our LEDs to customers who package them for use
in applications such as wireless handsets, backlighting for automotive
dashboards and other consumer products. Other applications for our LEDs include
indoor and outdoor full color displays, such as video boards in arenas and
stadiums, billboards and message signs. Our LEDs are also used in traffic
signals, indicator lights for consumer or industrial equipment and miniature
white lights used for illumination applications. We have developed several
generations of LED products, including our MegaBright(TM) and XBright(TM) LEDs
releasedrenamed theUltraRF businessCree Microwave during fiscal 2002. Based on our own measurements, we believe that our
XBright(TM) product family includes the highest brightness (which is defined as
the optical power output from a chip at 20 milliamps of drive current) UV, blue
and green LEDs commercially available. All of our SiC-based GaN UV, blue and
green LEDs offer benefits to our customers over competing products, which
include a vertical chip structure, improved resistance to electrostatic
discharge and small size. We also manufacture SiC material products, including
SiC wafers, which we sell for use in manufacturing LEDs and power devices and
for research directed to optoelectronics (which includes LEDs and laser diodes),
microwave and power devices, and bulk SiC material, which we sell for use in
gemstone applications. The remainder ofAdditionally, our Cree segment revenue is derived from
sales of laser diodes and power diodes, and sales from industrial contracts and
government contractsacquiredNitres, Inc (Nitres) in May 2000 in a business combination accounted for research work performed for the U.S. Government.
Our entry into the wireless infrastructure market as a component supplier
occurred with our acquisitionpooling of interests. Our Cree segment products are manufactured in December 2000 of the UltraRF business of
Spectrian Corporation, or Spectrian. We renamed the UltraRF businessDurham, North Carolina in a six-part process, which include: SiC crystal growth, wafering, polishing, epitaxial deposition, fabrication and testing. Our Cree Microwave during fiscal 2002. Cree Microwave operates its ownproducts are produced in Sunnyvale, California at our silicon wafer fabrication facility, that utilizeswhere we buy silicon substrates to create bipolarwafers from third parties, fabricate devices in a clean room environment and LDMOS devices to
produce high-power, high performance radio frequency, or RF, power
semiconductors for usetest/package finished products. Subcontractors located domestically and in wireless infrastructure equipment.
We have new product initiatives aimed at developing LEDs with higher luminous
efficiency to expand our existing family of optoelectronic devices. We believe
that if certain significant milestones are achieved, the LED chips currently in
development may enable our customers to produce white lamps designed to compete
in the lighting market. Someforeign countries also package some of our customers are already offering early
illumination products using our devices. We also have new product initiativesproducts.
Products and Products under Development
Cree Segment:
The Cree segment produces blue, green and UV LEDs, SiC wafers, materials used for gemstone applications and RF and microwave transistors and power devices using -3-
technology. We believe that these products may be useful in a
variety of applications, including power amplifiers for next generation wireless
infrastructure and solid state radar.materials. In addition, we currently are developing and
sampling high power rectifiers for power conversion and switching uses, which we
believe will allow for more efficient use of energy in certain applications over
alternative silicon-based semiconductor solutions. We are working on the
development of a high-powerednear UV laser diode for usedevices in next generation
high-density digital versatile disk, or DVD,this segment.
Blue, Green and other optical storage
applications. At Cree Microwave, we are developing higher performance LDMOS
devices for next generation power amplifiers for base station infrastructure
applications.
BACKGROUND
Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon is the dominant semiconductor material because the technology has
evolved to the point where it can be grown into large, high quality single
crystals that are suitable for fabricating many electronic devices. Alternative
materials, such as GaAs, have emerged to enable the fabrication of new devices
with characteristics that could not be obtained using silicon, including certain
RF, microwave,UV LEDs
Our LED laserproducts include blue, green and other semiconductor devices. However, GaAs,
silicon and other commercially available semiconductor materials have physical
and electronic characteristics that limit their usefulness in certain
applications. For example, conventional silicon and GaAs-based semiconductors
have not demonstrated the ability to enable short wavelength (UV, blue or green)
LED or laser devices. In addition, the power handling capabilities of silicon
and GaAs-based microwave transistors can limit the power and performance of
microwave systems used in certain commercial and military applications. With the
possibility of allowing higher power densities, SiC and GaN-based wireless
systems may use fewer transistors per base station with less complex circuitry,
which may result in a lower system cost. Furthermore, few silicon or GaAs
devices can operate effectively at temperatures above 400(degrees) Fahrenheit.
This is a significant limitation for applications such as advanced electronic
systems for high power electric motors and high frequency RF devices.
Substantial research and development efforts have been undertaken to explore the
properties of other potential semiconductor materials. These efforts have
identified few candidate materials that are capable of being grown as low defect
single crystals, a requirement in the production of most semiconductors. The
properties of SiC and GaN make them excellent materials for extending existing
semiconductor device technology where high power, high temperature or UV blue
and green wavelengths are important for performance.
SiC AND GaN OVERVIEW
Wide bandgap semiconductors are an emerging class of semiconductors that enable
a variety of capabilities for solid state devices. Two of the most common wide
bandgap semiconductors are SiC and GaN. SiC is most commonly targeted for power
devices and RF devices, while GaN is generally targeted for optoelectronic
applications, as well as higher frequency microwave power devices. SiC makes an
excellent substrate for growing layers of GaN due to its material properties.
For GaN optoelectronic devices, conductive SiC substrates allow the fabrication
of vertical devices (a single contact on top and bottom), as opposed to the use
of insulating sapphire substrates where devices need both diode contacts placed
on the top of the die. This allows GaN-on-SiC LEDs to be smaller in size than
the two top contact devices made on sapphire. For high power GaN RF devices, the
high thermal conductivity of SiC allows for very efficient heat dissipation.
This is important for the high power densities generated in these devices.
SiC has many physical characteristics that make it difficult to produce. For
example, in a typical semiconductor manufacturing process, the semiconductor
material is grown as a single crystal and sliced
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into wafers. The wafers are then polished and chemically etched, coated with
thin crystalline films containing controlled levels of impurities and fabricated
into devices. Because SiC can form many different atomic arrangements and must
be grown at process temperatures above 3,500(degrees) Fahrenheit to achieve our
desired crystal structure, it is difficult to grow large single crystals that
have a homogeneous structure. In addition, the high temperatures required to
grow SiC make the control of impurity levels in SiC crystals and thin films
difficult. "Micropipes", or small diameter holes, may appear in the crystals
during their growth, affecting the electrical integrity of the wafer and
reducing the usability of portions of the wafer for certain applications.
Slicing and polishing SiC wafers is hindered by the intrinsic hardness of the
material. Similarly, its inherent chemical resistance makes SiC a difficult
material to etch.
The characteristics discussed below distinguish SiC and GaN from conventional
silicon and GaAs-based semiconductor materials, resulting in significant
advantages if production hurdles can be overcome.
WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to ionize an
electron from the valence band to the conduction band. SiC and GaN are
classified as wide bandgap semiconductor materials, meaning that more energy is
required for ionization. Electronic devices made from these materials can
operate more efficiently and at much higher temperatures than devices made from
other common semiconductor materials. The wider energy bandgap also enables the
generation of shorter wavelength (UV, blue and green) light in optoelectronic
devices.
HIGH BREAKDOWN ELECTRIC FIELD. The "breakdown electric field" is the amount of
voltage per unit distance that a material can withstand and still effectively
operate as a semiconductor device. SiC and GaN have much higher breakdown
electric fields than silicon or GaAs. This characteristic allows wide bandgap
devices to operate at much higher voltage levels. Additionally, it allows SiC
power devices to be significantly smaller while carrying the same or greater
power levels than comparable silicon and GaAs-based devices. This same advantage
holds true for SiC and GaN RF power devices.
HIGH THERMAL CONDUCTIVITY. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This enables a SiC-based
device to operate at high power levels and still dissipate the excess heat
generated. It also enables efficient heat dissipation when used as a substrate
for GaN-based devices such as RF transistors.
HIGH SATURATED ELECTRON DRIFT VELOCITY. SiC and GaN have "saturated electron
drift velocities" higher than that of silicon or GaAs. The saturated electron
drift velocity is the maximum speed at which electrons can travel through a
material. This characteristic, combined with a high breakdown electric field,
allows the fabrication of SiC and GaN-based microwave transistors that operate
at RF frequencies with significantly higher power density levels than current
silicon and GaAs-based devices.
ROBUST MATERIAL. SiC has an extremely high melting point and is one of the
hardest known materials in the world. As a result, SiC can withstand much higher
electrical pulses and is more radiation-resistant than silicon or GaAs. SiC and
GaN are also extremely resistant to chemical breakdown and can operate in harsh
environments.
THE CREE SOLUTION
Some of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material a technical
challenge to produce. Through our 15 years of development and manufacturing
experience, we have succeeded in overcoming many of the difficulties involved in
processing SiC substrates for commercial use. We believe that our proprietary
process
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techniques and the inherent attributes of both SiC and GaN give our products
significant advantages over competing products for certain electronic
applications. These advantages include:
UV, BLUE AND GREEN LIGHT EMISSION. We produce high efficiency UV, blue and green
LEDs using GaN and other nitridesrelated materials grown on SiC substrates. Most other
manufacturers of nitride-based LEDs currently use sapphire substrates, other
than Osram Opto Semiconductors GmbH, a subsidiary of Osram GmbH, or Osram, which
has licensed the ability to manufacture SiC-based devices and buys SiC wafers
for use in their manufacturing process, from us. The conductive properties of
SiC enable us to fabricate a single top contact LED chip that is smaller than
the "two top contact" products made by competitors who use sapphire substrates.
Our chips made with SiC substrates can be packaged the same way as red, green
and amber LED chips made from other materials that are widely used in the LED
industry. We believe that the single top contact design of our chip affords our
customers flexibility for certain package types. We are also continuing
development of nitride-based UV laser diodes grown on SiC. The principal
advantages of SiC over sapphire substrate materials for UV laser diodes are the
high thermal conductivity attributes of the material and the ability for the
material to be easily cleaved, providing an excellent surface for laser light
emission.
ENABLING SUBSTRATE PROPERTIES. The inherent attributes of SiC as a substrate
enable researchers to work on developing new optoelectronic, microwave and power
devices that offer significant advantages over competing products and which
could not be produced as effectively on other substrate materials. We
manufacture SiC wafers for both internal use and for sale to external
development programs to further new product development. The majority of our
current production is on two-inch diameter (50 millimeter) material. We also
have released three-inch diameter (75 millimeter) wafers and demonstrated a
four-inch diameter (100 millimeter) prototype wafer.
HIGH POWER RF AND MICROWAVE OPERATION. We have demonstrated SiC RF and microwave
transistors that can operate at much higher voltages than silicon or GaAs
because of SiC's high breakdown electric field, allowing much higher power
operation at high frequencies. Similar advantages exist for microwave devices
made using GaN on SiC substrates, which can also operate at much higher
frequencies than SiC-only devices. In fiscal 2000 we first began shipping sample
quantities of SiC RF devices which have potential applications in wireless
infrastructure systems. We have continued development efforts directed to
improving the performance and reliability of our SiC RF devices which has
increased their attractiveness to wireless system manufacturers. As the
performance of silicon-based LDMOS products continued to improve, we determined
that near term wireless infrastructure power transistors were likely to be
manufactured with silicon-based products rather than our SiC-based devices. As a
result, we acquired the business now comprising Cree Microwave in December 2000
to participate in the RF power transistor market in the near term. We believe
our SiC transistors will likely be more desirable for broadband amplifiers that
can cover the entire DCS/PCS/UMTS frequency band of 1.8-2.2 gigahertz, or GHz.
Additional applications include wide bandwidth military radio and test and
instrumentation equipment. In addition, we continue to develop GaN-based devices
for high frequency wireless infrastructure and other commercial and defense
related applications. We are also pursuing the development of monolithic
microwave integrated circuit, or "MMIC", power amplifiers in both SiC and GaN
for a variety of military applications.
HIGH POWER, HIGH VOLTAGE OPERATION. We are producing small quantities of a
product family of SiC Schottky diodes that have a greater breakdown voltage than
Schottky diodes made from other semiconductor materials currently available. We
believe our Schottky diodes offer inherent system benefits beyond these
competitive products because of the significant reduction of reverse recovery
current at similar breakdown voltages. We believe that our SiC power diodes
operate with significantly lower switching losses than those made with silicon
or GaAs, for the same breakdown voltage. In
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addition, we believe that our SiC power transistors under development operate
with lower resistive losses and lower switching losses than those made with
silicon or GaAs.
PRODUCTS
We operate our business in two segments, the Cree segment, which consists of our
SiC and GaN-based products, and the Cree Microwave segment, which consists of
silicon-based RF power transistor components and modules.
THE CREE SEGMENT:
UV, BLUE AND GREEN LEDs LEDs are solid-state electronic components used in miniature packages in
everyday applications such as indicator lights on televisions, radios,consumer products, including stereos, printers, computers and other equipment. LEDs generallyalso are used to backlight handheld devices and automotive dashboards and groups of LEDs can make up single or full-color electronic displays. LEDs offer substantialseveral advantages over small incandescent bulbs, including longer life, lower maintenance cost and energy consumption, and smaller space requirements. GroupsWe currently sell our LEDs in chip form to customers who package them in a variety of applications. LEDs represented 75%, 58% and 65% of our revenue for the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, respectively.
Most manufacturers of nitride-based LEDs currently use sapphire substrates because historically SiC was perceived by the market to be more expensive than sapphire because of the external cost of the substrate. Sapphire devices have also traditionally offered a lower forward voltage than SiC based devices, which may extend battery lifetimes in handheld applications. We have continued to evolve our SiC-based products to offer lower forward voltage for our devices and believe that our current SiC-based devices are very competitive with sapphire-based devices. The conductive properties of SiC substrates also enable us to fabricate a less complex chip that is smaller than comparable LEDs grown on competing sapphire substrates. This feature allows SiC-based devices to have a greater number of potential chips per wafer, which can make up
single or full-color electronic displays. In 1989 we introducedresult in a lower cost for SiC-based devices compared to sapphire-based devices. Our LEDs offer other potential benefits such as an industry standard vertical chip structure and improved resistance to electrostatic discharge. We have continued to evolve our LED product line over time by offering higher performance devices and reducing the first
commercially viable blue LED made usingcost of our older products. As a SiC only design. Subsequently,result, we have developed and released several generations of GaN-based LED products including UV, bluethat cover a broad spectrum of applications.
Our LEDs currently are available in three brightness ranges, which we refer to as: standard brightness, mid-brightness and green LEDs made from GaN and related materials on SiC substrates. With the
initial release of our XBright(TM) LEDs in fiscal 2002, we believe we have
introduced the brightest commercially available UV, blue and green producthighest brightness range which comprises our XBright® family of LEDs. Our customers are currently in the qualification stages of
packaging XBright(TM) chips and some have encountered challenges in qualifying
their packaging process. We target a ramp-up to commercial production levels
during the first half of fiscal 2003.
We will continue to work to improve the brightness of our UV, blue and green
chips to achieve higher performance than currently available. Over the next five
to ten years or perhaps longer, we believe these yet to be developed products
could be used to produce white lamps to compete with conventional lighting
products for certain applications. We believe that LEDs made using SiC
substrates offer important benefits over competitive devices using sapphire
substrates including:
- an industry standard vertical chip structure requiring a single wire
bond that permits more efficient LED assembly;
- a smaller area chip size; and
- higher performance in terms of brightness.
Presently, our LED chips are used for backlighting purposes in applications such
as wireless handsets and automotive dashboard lighting. They are also used in
white light products designed for specialty indoor illumination and for the
illumination of outdoor buildings and structures and in landscape lighting. In
addition, they are used in consumer products and office equipment as indicator
lighting, in full color video displays, such as arena replay screens, billboards
and moving message advertising and informational signs and as the green light in
traffic signals.products. Our standard brightness LED products, offered in blue wavelengths only, are primarily used intarget applications requiring high quality and high volume availability at a lower price point. End customers use this product for applications where higher brightness is not a significant factor, such as for indoor applications, automotive designs or as indicator lights. In fiscal 2003, these products comprised 10% of our LED revenues.
Our mid-brightness range includes our MegaBright®, UltraBright™ and SuperBright™ LEDs. Our mid-brightness LEDs provide an option for applications where a higher level of brightness is required than our standard brightness LEDs. End user applications include the backlight source for mobile appliances, which includes mobile phones, personal digital assistants (PDA’s), digital cameras and other small hand-held devices, and automotive dashboards. Our customers also use mid-brightness LEDs in gaming displays, consumer products, office equipment, full color video displays, and as the green light in traffic signals. In the fourth quarter of fiscal 2003, we released our MegaBright Plus™ LED for customer products that require a higher amount of brightness available in the price range for MegaBright LED products. Our mid-brightness LEDs are offered in blue, traffic green, true green and UV wavelengths. In fiscal 2003, this category of product comprised 87% of our LED revenue.
Our first XBright LED products originally were introduced in fiscal 2002, and our customers have recently begun to incorporate them into their products. The XBright LEDs are strategically important to our business because the chips deliver increased brightness by approximately 40 percent over the MegaBright family of LEDs. Target applications for XBright LEDs include mobile appliances, miniature white lights, traffic signals and video screens. In the fourth quarter of fiscal 2003, we released our XBright Plus™ LED for customer products that require the maximum amount of brightness available to the marketplace. XBright Plus LEDs are only available in blue and are targeted primarily for white LED applications. We are in the process of expanding our product family of XBright LEDs to include blue, traffic green, true green and UV wavelengths. In fiscal 2003, this category of LEDs comprised 3% of our LED revenue.
Some of our customers manufacture solid-state LED components
that emituse our mid-brightness LEDs to create white light using ourfrom blue LEDs. Customers are also working to develop
white light components using our UV LEDs. By passing blue or UV LED light
through certain conversion materials such as phosphors, orLEDs by using blue in
combinationcombining them with LEDs of other appropriate colors, white light emission can be
obtained from lamps made with blue or UV LEDs. We currently sell blue LED chips
to customers who produce packaged components that emit white light. Current
commercial applications of white LEDs using Cree's blue
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LEDs include backlighting applications for automobile dashboards and
instrumentation, backlighting for wireless handsets and early general
illumination applications. During fiscal 2002, we received our QS 9000
registration, which signifies that our quality systems met a set of requirements
established by international auto manufacturers.phosphors. We believe that our products are well positionedone of the most significant opportunities over the next twelve months to take advantage of recent
trendsgrow revenue is to gain market share in the wireless handsetwhite LED market. Although the global market for wireless
handsets may be flat to declining due toIn particular, as mobile appliance manufacturers move towards offering a slow global economy, we believe our
sharegreater percentage of this market could increase as a result of changes in backlighting
applications. Handset manufacturers recently have begun to use blue or white
backlighting in new models, rather than traditional yellow-green backlighting
that has been common during the last several years. We believe that our chips
meet the blue and or white lighting characteristics that the market is now
demanding. In addition, we believe that the development oftheir products featuring full color displays, for mobile handsets will increase demand forwe anticipate that white LEDs will be used in ordermore of these products, including mobile phones and other handheld devices. We began offering our MegaBright Plus and XBright Plus LEDs to maximizeaddress this important market. Over the effectivenessnext twelve months our focus is to target our development efforts toward creating thinner chips while lowering the forward voltage of our LEDs to better serve the needs of the full color display.mobile appliance market. We are focusing current development efforts on further improving the efficiency
as well as lowering our cost to manufacture our LEDs and improving other
performance characteristics of the devices for certain markets, such as thinner
chips and lower forward voltages. Responding to a market trend towards devices
withbelieve that a lower forward voltage is desired to enable handheld products to have longer battery lifetimes. We also are developing LEDs with higher brightness with the goal of improving efficiency so that our LEDs can compete with incandescent and fluorescent lighting technology for conventional lighting markets in the future. In order to compete in these markets, the performance that our LEDs can achieve will need to increase significantly over what is currently available. Within the next few years, we undertook majordo not anticipate that our LEDs will be available in a cost competitive product that will compete with conventional lighting markets. However, our LEDs may be used today to enable initial illumination applications such as colored light replacements for neon tubes.
We also continue development initiatives during
fiscal year 2002 as we trailed sapphire-basedefforts with our XBright 900 Power Chip™ LED. The XBright 900 Power Chip is about ten times larger than industry standard size (300 x 300 microns) LEDs and is the first large area version of our XBright chip technology. Once development is complete, these chips are expected to deliver approximately 10 times the light output due to operation at a much higher input power than our standard XBright chips, and could be used in this important area fora new high-volume cell phonerange of lighting applications. The current "two top contact"
sapphire-based devices have certain advantages compared toThese chips will require our single top
contact design in terms of lower forward voltage and thinner chips. We believe
that increased brightness will continue to be necessarycustomers to develop new applicationspackages to support these higher-powered chips. The targeted application for these chips is the solid state illumination market.
SiC Materials Products
Our SiC materials products consist of SiC wafers and market opportunitiesbulk materials used for LEDs, and may eventually lead to
products marketed for commercial lightinggemstone applications. LED products represented
58%, 65% and 63% of our revenue for the fiscal years ended June 30, 2002, June
24, 2001 and June 25, 2000, respectively.
MATERIALS PRODUCTS
SiC Wafers. We manufacture SiC wafers for sale to corporate customers thatwho use the wafers in manufacturing products for optoelectronic and power device applications. Corporate, government and university programs also buy SiC wafers for research and development directed to optoelectronic, microwave and high power devices. OurWe may sell our SiC wafer products may be soldwafers as a bare wafer or a customized by addingwafer with additional epitaxial films of SiC or GaN materials, depending upon the nature of a customer’s needs. We currently sell both two-inch and three-inch wafers with the customer's
needs. Since the company's inception in 1987, we have worked continuously to
improve the qualitymajority of sales as two-inch. Wafer products represented 9%, 11% and 11% of our SiC wafers while also increasing wafer diameter. revenue for the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, respectively.
In October 1999, we introduced our first three-inch wafer and we have recently
expandedcontinued to expand our product line of three-inch wafers, which are better suited for the manufacture of power and microwave devices. We currently selluse our internal sales staff and distributors to market SiC wafers directly to Osramour customers. Over the past five years, we have continued to develop SiC wafers that are larger and Infineon
Technologies AG, or Infineon,have fewer defects to further improve the quality of our materials and lower the cost of devices made from our SiC wafers.
Bulk Materials Used for the production of LED and power products,
respectively.Gemstones. We manufacture SiC crystals in near colorless form for use in gemstone applications. Single crystalline SiC has characteristics that are similar to diamond, including properties relating to color, hardness and brilliance. We manufacture
SiC crystals in near colorless form for use in gemstone applications. We sell SiC in bulk crystal form to Charles & Colvard, or C&C; a company founded to
produceLtd. (C&C), which produces and marketmarkets gemstone products made from SiC crystals. C&C cuts and facets
theWe sell our SiC crystalsmaterials used in gemstone applications exclusively to fabricate gemstones targeted at customers who desire
alternative colorless, affordable, high-quality jewelry. Sales of gemstone
crystals have re-emerged as a stronger product line in the second half of fiscal
2002, due to heavier demand from C&C. Future demand for this product is
dependent on C&C's ability to cut, facet and effectively market its gemstone
products. Our SiC wafer products are marketed through executive sales while
materials usedsold for gemstone applications are exclusively sold to C&C. Waferrepresented 3%, 2% and other material products represented 13%, 14% and 26%3% of our revenue for the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, and June 25, 2000, respectively.
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POWER DEVICES
In fiscal 2002, we announced the commercial release of the first products in our
planned line of
SiC-based Power Devices
SiC-based power devices. devices can operate at significantly higher breakdown voltages than silicon-based power devices and provide faster switching speeds than comparable silicon-based power devices at similar breakdown voltages. These attributes create lower switching losses, which yield power savings due to higher efficiency that enable smaller, more efficient systems.
Our initialSiC-based power products are 600-volt Schottky diodes offered in limited quantities at 1, 4, 6, 10 and 10 amp ratings.
During the first quarter of fiscal 2003, we have released a 20 amp device.20-amp ratings for applications such as power supplies used in computer servers. We also offer 1200-volt Schottky diodes at 5 and 10-amp ratings targeted for motor control applications. We are marketing these products to manufacturers of power conditioning and power switching equipment as potential replacements for silicon-based power devices in certain applications. SiC-based power devices represented less than 1% of revenue for each of the fiscal years ended June 29, 2003 and June 30, 2002.
We are developing additional prototype SiC-based power devices that could have themany potential to handle
significantlyuses such as power conditioning and power switching applications. We are developing other types of SiC-based power devices, including PIN diodes and power MOSFETs, however, these devices are still at least several years away from being commercially available.
RF and Microwave Transistors
RF and microwave devices made from SiC can operate at higher voltages which allows for higher power densities as compared to silicon or GaAs based devices. Additionally, this characteristic allows SiC-based devices to be significantly smaller while carrying the same or greater power levels than existing silicon-based or GaAs-based devices. Currently, there is a higher cost associated with SiC than silicon or GaAs-based devices for RF and microwave transistors.
We currently offer a 10-watt transistor product, or MESFET product, made from SiC to our customers. During fiscal 2003, we introduced our second generation SiC MESFET process and introduced an improved 10-watt product with higher gain based on this new design. Additionally, we introduced the world’s first foundry service for wide bandgap monolithic microwave integrated circuits (MMIC). These SiC-based RF circuits can operate at significantly higher voltages with superior switching capabilities,
yielding power savings due to higher efficiency. Potential applications include
power factor correction and switch mode power supplies typicallybe used in telecommunicationsa variety of wide bandwidth communications applications, high-powered radar amplifiers, electronic warfare, and computer servers,wireless infrastructure. The MMIC foundry service allows a customer to design their own custom SiC RF circuit to be fabricated in our MMIC foundry, or have us provide custom MMIC design for the customer and heavy industrial uses. Other
applications include industrial motor controls, high frequencyfabricate the chips. We intend to focus future development efforts in this area on creating higher power suppliesSiC MESFETs and medical applications.
Revenue growth from these devices is dependent on the results of customer
evaluations of the Schottky diode deviceGaN RF devices. SiC MESFET and whether the products are designed
into customer applications. We believe that revenue growth will be slow
initially because our technology is not a "drop in" replacement and is currently
much more expensive than silicon devices. In addition, with the slowdown of the
global economy, we believe many companies have reduced their research and
development budgets, which has impacted our growth. Finally, our Schottky
devices are a new technology, and it will take time to penetrate existing
markets. PowerMMIC devices represented less than 1% of revenue for each of the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 20012001.
Near-UV Laser Diodes
We have demonstrated near UV lasers (sometimes referred to as blue lasers) that operate at power levels ranging from 3 milliwatts to greater than 30 milliwatts. Our development activity continues to focus on developing more reliable and June 25, 2000.
RF AND MICROWAVE TRANSISTORS
During fiscal year 2002, we offeredhigher performance devices. We target our first 30-milliwatt product to be released for customer sampling during calendar 2004. The primary target market for our lasers is optical disk drives for next generation digital versatile disk (DVD) and computer data storage applications. The shorter wavelength of near UV\blue lasers enables significantly higher storage capacity than the current generation of optical drives which employ red lasers. At this point, numerous standards are being proposed for the next generation of DVDs including Blu-ray and Advanced Optical Disk (AOD). Even if a commercially viable blue laser product were available in mass production, the new 10-watt transistor product made from
SiCsystems and standards are still in the development stage such that high volume component usage is forecasted to customers in prototype quantities. We believe that these products can be used in a variety of power amplifier applications, including wireless
infrastructure, home-based subscriber units, digital broadcast and military
broadband radio applications. Revenue growth from sales of these devices is
dependent on the results of customer evaluations of SiC RF products, further
improvements in device performance, further expansion of our SiC RF product
family, and whether the products are designed into customer applications.
THE CREE MICROWAVE SEGMENT:
RF AND MICROWAVE TRANSISTORS
We believe that silicon bipolar and LDMOS technology is complementary to our SiC
and GaN-based microwave devices. few years away.
Cree Microwave Segment:
Our Cree Microwave segment produces bipolar and LDMOSlaterally diffused metal oxide semiconductor (LDMOS) devices made from silicon.silicon substrates. These products enable us to provideoffer our customers an array of power amplifier semiconductor devicestransistors designed to meet a broad spectrum of the current and potential wireless infrastructure markets now and inmarkets.These products represent the future. Cree Microwave offers
products for use in a range of systems. These systems include Advanced Mobile
Phone Services, or AMPS, Time Division Multiple Access, or TDMA, Code Division
Multiple Access, or CDMA, Global System for Mobile Communications, or GSM,
Universal Mobile Telephone Service, or UMTS and Enhanced Data Rates for GSM
Evolution, or EDGE systems. Cree Microwave is one of only a few major
manufacturers of LDMOS RF devices.
The market for cellular communications services has grown substantially during
the past decade due to decreasing prices for wireless handsets, increasing
competition among service providers and a greater availability of high quality
services. In recent quarters, the cellular communications market has been
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declining due to the global economic slowdown, which has caused carriers to
reduce infrastructure spending. However, we believe that significant long-term
market opportunities exist.
A typical wireless communication system comprises a geographic region containing
a number of cells, each of which contains a base station. The cells are
networked to form a service provider's coverage area. Each base station houses
the equipment that sends telephone calls to and from the switching office of the
local wire line telephone company and transmits and receives calls to the
wireless users within the cell. Base stations may be configured as single
carrier or multi-carrier designs.
Digital systems, which convert voice transmission into bits of electronic
information, enable data transmission among other things. The four dominant
digital transmission modulation formats for cellular networks include GSM, TDMA,
CDMA and EDGE systems and operate in frequency ranges from 900 megahertz, or
MHz, to 2400 MHz. These systems have a call capacity of three to eight times
that of analog networks. The implementation of these digital networks has
resulted in increased demand for network infrastructure equipment. Cree
Microwave is able to produce both bipolar and LDMOS products that are used in
the manufacture of power amplifiers for both analog and digital base stations.
Cree Microwave produces themain semiconductor content of a power amplifier, which is used in a base station to boost the power of a signal so that it can reach a wireless phone or other device within a designated geography. During fiscal 2002, we developed an amplifier module that incorporates our
LDMOS-based transistors and is designed to simplify the design and assembly of
power amplifiers using the LDMOS products. We believe that this module product
can deliver a lower system cost to our customer due to less costly packaging, a
smaller design and relative ease of manufacture for our customer.Cree Microwave’s RF products represented 1%, 16% and 11% of our revenue for the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, respectively. The Cree Microwave business
segment was acquired from Spectrian in December 2000. The majority of
Prior to fiscal 2003, sales from
this segment were to Spectrian, during fiscalrepresented 99% of Cree Microwave’s revenue. In November 2002, and 2001. The loss of or a
decline in saleswe entered into an agreement with Spectrian to this customer would have a material adverse effect on this
segment.
PRODUCTS UNDER DEVELOPMENT
THE CREE SEGMENT:
LEDs WITH HIGHER OUTPUT POWER
Cree Lighting, based in Goleta, California, is engaged in the development of new
LED device technology, with the goal of developing higher efficiency LEDs to
compete with incandescent and fluorescent lighting technology for conventional
lighting markets.terminate our supply contract. During fiscal 2002,2003 we more than doubled the typical
brightnessdeveloped a new LDMOS device that is intended as a second source for parts currently available from one of our LED products with the introduction of our XBright(TM) and
MegaBright(TM) products. In order to compete with incandescent and fluorescent
lighting technology for conventional lighting markets, the brightness of our
products will need to increase significantly over the brightness of our products
available today. We do not anticipate that our products can achieve the
necessary level of brightness in a cost competitive product over the next few
years; however, we believe we can achieve a greater level of brightness to
enable interim illumination applications, such as miniature incandescent
lighting replacements. One such interim step during fiscal 2002 was the
introduction of our XBright(TM) 900 Power Chip LED. At 900 x 900 microns nominal
gross die size, the XBright(TM) Power Chip is significantly larger than industry
standard (300 x 300 microns) LEDs and is the first large area version of our
XBright(TM) chip technology. These chips deliver more than 10 times the light
output at a higher current than our standard XBright(TM) chips and we believe
these high-power LEDs could help
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enable a new range of lighting applications. These chips will require our
customers to develop new packages to support these higher-powered chips. The
targeted application for these devices is the solid state illumination market.
BLUE AND UV LASER DIODEScompetitors. We continue to focus on the development of blue and UV laser diodes. SiC has
inherent attributes, including its natural cleavability and high thermal
conductivity that make it an excellent substrate material for the development of
such short wavelength laser diodes. The storage capacity of optical disk drives
can be increased significantly by utilizing a laser diode capable of emitting
shorter wavelength light. We have shipped sample UV laser diodes, fabricated
from nitride materials deposited on SiC substrates, which have a shorter
wavelength than that of the red or infrared lasers used in applications today.
We believe that the shorter wavelength of UV light could potentially result in
storage capacity for optical disk drives that is significantly greater than the
capacity permitted by red light. We also believe that UV laser technology may be
used in miniature optical devices for compact sized electronics, such as digital
cameras. We have demonstrated a prototype UV laser with 3 milliwatts of power
and a projected lifetime of 10,000 hours. We believe that this laser meets the
current power requirement of a "read" laser; however, additional development is
required to commercialize this product. We continue to work on developing a
"read/write" UV laser, which will require approximately 30 milliwatts of
continuous wave, or CW, power, and we are targeting our first product to be
released for customer sampling during fiscal 2003. A consortium of DVD
manufacturers is currently creating standards for blue and UV laser devices
named the Blu-Ray Disc format. Once these standards are completed, we believe
that the demand for diodes that meet the standards may increase.
POWER DEVICES
We are developing additional prototype high power devices that we believe have
many potential uses. Such devices could be employed in applications involving
power conditioning as well as power switching. We intend to release higher
voltage Schottky products within the next fiscal year, targeted for motor
control and snubber applications. In fiscal 1999, we entered into a three-year
project with Kansai Electric Power Company, one of the largest power companies
in the world, for the development of SiC-based devices for use in power
transmission networks. This project was completed during fiscal 2002. During
this project we demonstrated record results with a 6 kV MOSFET
(metal-oxide-semiconductor field effect transistor) and a 5.5 kV junction field
effect transistor that had on-resistances that were 1/25th and 1/65th lower,
respectively, of the theoretical limit for an equivalent silicon device.
Additionally, high voltage SiC PIN diodes were demonstrated with blocking
voltages up to 19 kV, a 50% increase over our previous record and almost double
what is commercially available in silicon. We continue to work on higher power
devices such as Schottky and PIN diodes as well as power switches. However, we
are not planning to release PIN diodes or power switches suitable for power
transmission in the near term.
RF AND MICROWAVE DEVICES
We are currently developing additional SiC-based transistors that operate at
radio and microwave frequencies. We believe these devices will have applications
in future generation wireless base stations, solid-state broadcast systems, wide
bandwidth military radio, and radar search and detection equipment. These
SiC-based devices are targeted for frequencies from 30 MHz to 4 GHz. We believe
that future SiC transistors in development, with higher power density than
current silicon and GaAs-based devices, may allow wireless systems to operate
across a wider band and use fewer transistors per base station, resulting in
less complex circuitry, higher linearity, better efficiency and lower cost.
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We are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher gain and/or higher frequency applications including
cellular base stations and solid-state radar systems. In December 2001, we
reported CW performance for GaN of 108 watts at 2 GHz, which we believe to be
the highest publicly reported CW power output for a single device at this
frequency. This demonstrates its potential for infrastructure applications. We
developed GaN MMICs that demonstrated 24 watts of power at 16 GHz. This power
level is higher than that achieved with equivalent GaAs-based devices. We do not
anticipate that a commercial device capable of emitting power at this level will
be available in the near term.
THE CREE MICROWAVE SEGMENT:
RF AND MICROWAVE DEVICES
We continue to enhance the capabilities of our silicon-based LDMOS products and
are working towards the release of next generation devicesproduct family with module designs that we believe will
allowcombine our chips with additional circuit components to provide convenient building blocks for more linearity and increased power and be comparableamplifier manufacturers. We have recently introduced LDMOS products to the best in
class productsmilitary and avionics markets and aim to expand these offerings during fiscal 2004.
Financial Information about Segments and Geographic Areas of our competitors. We are targeting these products to be
available in fiscal 2003. We are also continuing to develop additional module
devices to meet advanced needs of our customers. The module configuration allows
us to produce more of the circuit for the power transistorCustomers and the product is
more competitively priced than our regular LDMOS devices because the module
configuration features a lower cost package compared with the traditional
ceramic package used for discrete devices. We are targeting these products to be
produced in commercial volumes in fiscal 2003. Additionally we are working with
certain customers on advanced modulation products.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS OF CUSTOMERS AND
ASSETS
Assets
For financial information about business segments please see Note 2, "Summary
of Significant Accounting Policies and Other Matters" to our consolidated
financial statements included in Item 8 of this report. For financial
information about the geographical areas of customers, please see Note 2, "Summary“Summary of Significant Accounting Policies and Other Matters"Matters” to our consolidated financial statements included in Item 8 of this report. All of our long-lived tangible assets currently are currently maintained in the United States.
GOVERNMENT CONTRACT FUNDING
Government Contract Funding
We derive a portion of our revenue from funding fromthat we receive pursuant to research contracts with various agencies of the U.S. Government. ForWe had 19, 18 and 13 government contracts in effect during the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, and
June 25, 2000, government funding represented 12%, 10% and 11% of total revenue,
respectively.
These contracts typically cover work performed over several months up to threefour years. These contracts may be modified or terminated at the convenience of the government. Therefore, these programs may begovernment and typically are subject to government budgetary fluctuations.appropriation and allocation of the required funding on an annual basis. The revenue that we recognize pursuant to these contracts represents reimbursement by various U.S. Government entities that aid in the development of new technology. The applicable contracts generally provide that we may elect to retain title toownership of inventions made in performing the course of research, withwork, subject to a non-exclusive license retained by the government obtaining a nonexclusive licenseU.S. Government to practice suchuse the inventions for government purposes.
RESEARCH AND DEVELOPMENT
Contract funding may be based on either a cost-plus or a cost-share arrangement. The amount of funding under each contract is determined based on cost estimates that include direct costs, plus an allocation for research and development expenses, general and administrative expenses and cost of capital expenses. The specific reimbursement provisions of the contracts, including the portion of our general and administrative expenses and other operating expenses that are reimbursed, vary by contract. Cost-plus funding is determined based on actual costs plus a set percentage margin. For the cost-share contracts, based on the terms of the contract, the actual costs relating to activities we are to perform under the contract, are divided between the U.S. Government and us. The U.S. Government’s cost share is then paid to us. The contracts typically require the submission of a written report that documents the results of the research, as well as some material deliverables.
The revenue and expense classification for contract activities is based on the nature of the contract. For contracts where we anticipate that the U.S. Government funding will exceed our direct costs relating to the
program over the life of the contract, funding is reported as contract revenue and all direct costs are reported as costs of contract revenue. For contracts under which we anticipate that direct costs of the activities subject to the contract will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses and related funding is reported as an offset of those expenses. For the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, U.S. Government funding represented 12%, 12% and 10% of total revenue, respectively.
We generally must compete with other companies for funding awards from the U.S. Government. In certain cases, such as when the value of a U.S. Government contract exceeds $100,000 and when highly technical research is required, the U.S. Government issues a request for proposal (RFP). In a typical RFP, the U.S. Government requests a product or service and solicits proposals from perspective contractors on how they intend to carry out that request, and at what price. Proposals received in response to an RFP can be subject to negotiation after they have been submitted. Many U.S. Government contracts are awarded on a type of RFP called a broad agency announcement (BAA). In a BAA, the U.S. Government requests a broad range of research and development services. Contractors submit bids for research in any of the technical areas mentioned in the BAA. Then the U.S. Government may select winners of the awards and negotiate contracts with those parties. The U.S. Government uses many methods to select contractors to receive awards. Some of these methods include choosing vendors who offer products or services that provide the best value, lowest price and highest level of technology. We also may be the recipients of a sole source contract from the U.S. Government if the U.S. Government determines that we are the only viable source for the work to be performed. In this case, the U.S. Government would publish their intent to award a sole source contract with us and if there are no viable challenges made to that publication, the U.S. Government may award the contract to us without a competitive bid process.
In June 2002, the Office of Naval Research (ONR), awarded us two contracts with a total value of approximately $14.4 million as part of the Wide Bandgap Semiconductor Technology Initiative of the Defense Advanced Research Projects Agency (DARPA). The first contract provided for up to $8.8 million in U.S. Government funding over an 18-month period, for work directed to microwave and related technologies. This effort is focused on the development of high quality 4-inch semi-insulating substrates, SiC MESFET and GaN HEMT epitaxial processes on large diameter wafers, and studies correlating material advances with device performance. The second ONR/DARPA contract provided for up to $5.6 million in U.S. Government funding over an 18-month period for work directed to SiC high voltage, high power switching devices for high power conversion and distribution technology. This contract is focused on the development of low defect density 4-inch, n-type 4H-SiC substrates, more uniform, thick SiC epitaxial processes, and power device development focused on high reliability, high voltage SiC PIN rectifiers and MOSFETs.
We may enter into a number of contracts for different projects with a single agency or enter into contracts addressing different parts of the same project with more than one agency. For example, we currently have several large contracts, with the ONR, and the Air Force Research Laboratories (AFRL). In July 2002, we were awarded U.S. Government contracts totaling $26.5 million, if fully funded, over a three-year period from ONR and AFRL for SiC MMIC process development. These contracts are jointly funded by the U.S. Navy, the Missile Defense Agency and the Department of Defense’s Title III program. Under our previously existing Title III contract with AFRL, the project added $3.2 million through a contract modification for additional tasks focused on improving yields of the three-inch diameter high purity semi-insulating SiC substrates to be used for MMIC devices. The remaining $23.3 million is being provided through the new contract with ONR. The goal of this contract is to provide enhanced producibility of SiC materials, both substrates and epitaxy, and cleanroom processing, in support of high-power MMIC amplifiers used in military radar applications. The majority of the work is directed to yield enhancement and cost reduction for MMICs fabricated on three-inch diameter SiC wafers. In fiscal 2003, revenues under the specific contracts (DARPA and producibility) with the ONR and AFRL combined were approximately 7% of total revenue.
Additionally, we were awarded with another contract in June 2002 funded by DARPA through the United States Army Robert Morris Acquisition Center to pursue the development of UV LEDs and lasers for a variety of military communications and bio-threat detection applications under DARPA’s SUVOS program. This DARPA SUVOS contract provides for up to $14.4 million in U.S. Government funding over a four-year period. In fiscal 2003, this DARPA SUVOS contract accounted for approximately 2.5% of total revenue.
The DARPA SUVOS contract as well as the contracts with ONR and AFRL are cost share arrangements. The contracts require us to conduct the research effort described in the statement of work section of the contract. The contracts also require that we pay a contractually agreed upon portion of the costs of the work with the U.S. Government paying the balance. There are no milestones to be reached for payments from the U.S. Government. We invoice the U.S. Government monthly for their share of the costs of the work performed based on costs incurred for that month.
Distributorship Agreement with Sumitomo Corporation
In April 2002, we entered into a distributorship agreement with Sumitomo Corporation (Sumitomo), which was amended in March 2003. Under the agreement, Sumitomo became our strategic partner and the exclusive distributor of our LED and wafer products in Japan for fiscal years 2003, 2004 and 2005. Prior to the beginning of each fiscal year, the distributorship agreement requires Sumitomo to commit in advance to purchase a specified dollar value of our products during the next fiscal year. For fiscal year 2003, Sumitomo’s advance purchase commitment was approximately $23 million, and Sumitomo’s actual purchases were $54.6 million. For fiscal year 2004, Sumitomo’s current advance purchase commitment is approximately $100 million. Sumitomo may vary its commitment under certain circumstances, and, therefore, we only account for eight-weeks of purchase orders from Sumitomo as firm backlog.In addition, the distributorship agreement provides that Sumitomo may decrease its advance purchase commitment and/or terminate the agreement if its inventory of Cree products reaches a specified level. If Sumitomo does not purchase at least half of its advance purchase commitment for any fiscal quarter as a result of this inventory limitation, we have the option of terminating the distributorship agreement.
The distributorship agreement also requires us to establish two rolling reserves at the time we ship LED products to Sumitomo, each based upon a percentage of the total purchase price of such products. We defer revenue recognition on the amounts added to both rolling reserves each fiscal quarter. These reserves are used to reimburse Sumitomo for certain sales costs incurred in selling our products and for managing its inventory, up to the balance in these reserves. If Sumitomo makes a valid claim against these reserves, we write off or reduce the amount of the claim against the applicable reserve. Except to the extent Sumitomo makes a valid claim against the reserves, amounts added to these reserves during a fiscal quarter will expire on a rolling basis by at least the end of the second following fiscal quarter, and we recognize revenue equal to the expired amount at that time.
Research and Development
We invest significant resources in research and development aimed at improving our semiconductor materials and developing new device and production technology. Our core SiC materials research is directed to improving the quality and diameter of our SiC substrates. We also are also working to improve the quality of the SiC and nitride epitaxial materials we grow to produce devices and to improve device -12-
power, power/higher linearity RF and microwave devices, UV laser devices and higher power diodes and diodes/switches as discussed above.
We spent $51.2recorded expenditures of $31.2 million in fiscal 2003, $28.0 million in fiscal 2002 $38.4and $13.0 million in fiscal 2001 and $20.0
million in fiscal 2000 for direct expenditures relating to research and development activities. Off-setting theseThe amount of recorded expenditures were $19.5is supplemented by funding received from our customers and the U.S. Government, in certain
cases, which is recorded as a reduction in research and development expenditures. When we receive payments from our customers for sponsoring research and development programs, we offset those payments against direct research and development expenditures. In addition, when we receive payments from the U.S. Government under contracts where direct expenses of the contract are estimated to exceed the funding award over the life of the program, we offset the payment against reported research and development expenditures. Customer funding that offset research and development costs was $500,000, $9.0 million and $11.9 million for fiscal 2003, 2002 and 2001, respectively. The majority of this funding was received from companies in which we have made investments. For example, in fiscal 2003, the entire customer funding we received came from an affiliate of Lighthouse Technologies, Inc. (Lighthouse), in which we hold a private company equity investment. In fiscal 2002, $19.0Microvision, Inc. (Microvision), the Lighthouse affiliate and Xemod, Inc. (Xemod) funded $4.4 million, $3.0 million and $492,000, respectively, of our research and development. We held an investment in fiscal 2001each of these companies at the time that they provided research and $12.7 milliondevelopment funding to us. In addition, Spectrian, our largest customer for our Cree Microwave segment, also participated in fiscal 2000funding our research and development programs for $1.1 million. When customers participate in funding our research and development programs, we record the amount funded as a reduction of
U.S. Government funding for direct and indirect research and development expenses. In addition, certain customers have also sponsored research activities
related to the development of new products. Customers contributed $9.0 million
in fiscal 2002, $11.9 million in fiscal 2001 and $5.5 million in fiscal 2000
towards our productWe do not expect funding for research and development activities.
SALES AND MARKETING
during fiscal 2004 at this time from these or any other customers or third parties in which we invested. U.S. Government funding that offset costs included as research and development was $0, $276,000 and $1.3 million for fiscal 2003, 2002 and 2001, respectively.
Sales and Marketing
We actively market our LED, wafer, RF, microwave and power products through targeted promotions, telemarketing, select advertising and attendance at trade shows. We
have a smallOur direct sales force and senior management actively workswork with customers around the world. We believe that this approach is preferable in view
of our current customer base and product mix, particularly since theThe production of lamp and display products incorporating LED chips is concentrated among a relatively small number of LED packaging manufacturers. Additionally, theOur sales and marketing team has been expandedis primarily based in fiscal 2002 to includeour Durham, North Carolina facility with additional sales support offices in Hong Kong and Japan.
In June 2002, we opened an office in Tokyo, Japan, throughJapan.
Supported by our subsidiary Cree
Japan Inc., to bring our technology and engineering support closer to the
Japanese customer base. In connection with the opening of our new office, Sumitomo Corporation, or Sumitomo, was named asis our strategic partner to
distribute our products in Japan. Sumitomo has exclusive distribution rights in
Japanpartner for our nitride LED chip products and SiC wafer products for a minimum of
three years. Our personnelwafers in Japan will work with and support the sales
activities of the Sumitomo team dedicated to our product line.Japan. We also use sales representativesdistributors to market our LED products in Hong Kong, China, Taiwan and South Korea. However, as a result of the introduction of many
new products during fiscal 2002, we perceived the need for more frequent
interactionKorea in coordination with our customers. As a result, we opened a Southeast Asian sales support office in Kowloon, Hong Kong, throughKong. We use a separate network of sales representatives to market our subsidiary Cree Asia-Pacific, Inc.,RF and microwave devices in North America, Europe, Asia and Japan. We have also started to facilitate business transactionsbuild a network of sales representatives in Europe and act as the liaison betweenAsia to market our Asia Pacific
customers and our U.S. corporate office. Territorial responsibilities for the
Cree-Asia Pacific sales office include Hong Kong, China, Taiwan and Malaysia. In
addition, the Hong Kong sales office oversees the day-to-day administration of
our sales agentsSiC power devices in Hong Kong and Taiwan as well as assisting our direct
customers in the region.
selected areas.
We sell SiC crystal materials for use in gemstone applications directly to C&C under an exclusive supply agreement. We
Customers
During fiscal 2003, revenues from Sumitomo (which represent sales to approximately 20 Japanese LED customers as well as 60 additional wafer customers) accounted for 24% of our total revenue. Sumitomo imports, handles orders and distributes our products and manages our accounts receivable for our Japanese customer base. For fiscal 2003, three of our top ten end customers were located in Japan and their sales, as well as sales to our other Japanese customers, are using both directreported as sales to Sumitomo. Cree Japan’s sales and engineering group is actively involved with Sumitomo in the sales representative arrangementsprocess to market RF productsaccounts in Japan. Our relationship with our end customers in Japan is critical to our future success. Sales to Osram Opto Semiconductors GmbH (Osram) and Agilent Technologies (Malaysia) Sdn Bhd, (Agilent) were 21% and 10%, of revenue, respectively.
Sumitomo, Osram and Agilent were our only customers that comprised 10% or more of our revenue for Cree Microwave, includingfiscal 2003. Revenue from the U.S. Government, representing funding from several agencies, made up 12%
of total revenue for fiscal 2003. As our U.S. Government contracts are with multiple agencies, the U.S. Government does not act as a single customer, and we do not regard it as such. Our purchase agreement with Osram expires in September 2003, and we are currently negotiating a new distributorpurchase agreement signed with Arrow Manufacturing in fiscal 2002.
CUSTOMERSOsram. The loss of Osram, Agilent or any of Sumitomo’s large customers could have a material adverse effect on the Company. During fiscal 2002, revenues from fourthree customers, Osram, Spectrian, and Sumitomo (which represents sales to several Japanese customers)were 19%, 16% and 14%, of total revenue, respectively. Revenue from the U.S. Government, each accounted for more than 10%representing funding from several agencies, made up 12% of total revenue.revenue for fiscal 2002. During fiscal 2002, we signed
new supply agreements with Osram and Sumitomo, which extend into fiscal 2003.
Spectrian is a customer of the Cree Microwave segment. During fiscal 2001,
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each accounted for
more than 10%were 25%, 22% and 11%, of total revenue, respectively. Prior to fiscal 2003, sales to Spectrian were 99% of Cree Microwave’s revenue. We continue to pursue new customers for our Cree Microwave business and have had some recent success on small unit volumes. Due to long design qualification cycles that are typical to this industry, revenue reported at our Cree Microwave segment may remain low for several quarters.
For the year ended June 25, 2000, revenue from
Osram, Sumitomo, C&C and the U.S. Government each accounted for more than 10% of
total revenue. Forfurther financial information about foreign and domestic sales, please see Note 2, "Summary“Summary of Significant Accounting Policies and Other Matters"Matters” to our consolidated financial statements included in Item 8 of this report.
BACKLOG
Backlog
As of June 29, 2003, we had a backlog of approximately $68.0 million consisting of approximately $24.4 million of product orders and $43.6 million under research contracts signed with the U.S. Government, for which a portion of the contracted funds have not yet been appropriated. As of June 30, 2002, we had a backlog believed to be firm of approximately $138.7 million consisting of approximately $86.9 million of product orders and $51.8 million under research contracts signed with the U.S. Government, for which a portion of the contracted funds have not yet been appropriated. This
compares to a firmOur backlog as of June 24, 2001, of approximately $86.5 million
consisting of approximately $69.9 million of product orders and $16.6 million
under research contracts signed with the U.S. Government, a portion which had
not yet been funded through appropriations. Backlog could be adversely affected if the U.S. Government exercises its rights to terminate the government contracts or does not appropriate and allocate all of the funding contemplated by the contracts. We believe theestimate our entire backlog could be filled during fiscal 2003,2004, with the exception of approximately $9.7 million of product orders and
$23.9$19.6 million in U.S. Government funded contracts.
In April 2003, we signed an agreement with Sumitomo, which supplements our existing distributor agreement with Sumitomo and covers shipments through June 2004. For fiscal year 2004, Sumitomo’s current advance purchase commitment is approximately $100 million, subject to adjustment and cancellation provisions and end customer demand. Sumitomo may vary its commitment under certain circumstances, and, therefore, we only account for eight-weeks of purchase orders from Sumitomo as firm backlog. The reported backlog amounts
include $16.2 million ordered from Spectrian under their supply agreement. Iforders cover demand for our products in Japan and represent sales to over 20 LED packagers including Stanley Electronics, Citizen Electronics, Sharp Corporation and Rohm, Inc. In addition, we are not able to produce LDMOS 8 products that meet qualification specifications,
this amountcurrently negotiating a new contract with Osram, since the present contract expires at the end of revenue may be reduced or may not be realized at all.
MANUFACTURING
Our SiC products are manufactured in a seven-part process, which include: SiC
crystal growth, wafer slicing, polishing, epitaxial deposition, fabrication,
testing and packaging. SiC crystals are grown using a high temperature process
designed to produce uniform crystals in a single crystalline form. Crystals used
for gemstones exit the manufacturing process at this stage. Crystals used for
other products are then sliced into wafers. The wafers are polished and then
processed using our epitaxial deposition processes, which require that we grow
thin layers of SiC, GaN or other materials on the polished wafer, depending on
the nature of the device under production. SiC wafer products may leave the
manufacturing process either after polishing or epitaxy. Following epitaxy, LED,
power and RF chips are fabricated in a clean room environment. The final step
includes testing and sawing prior to shipment to the customer. Power chips are
then forwarded to a third party where they are assembled into industry standard
packages and returned to us prior to shipment to our customers. SiC RF
transistors are currently packaged and tested in our Durham, North Carolina
facility. However, we believe that this process will be transferred to the Cree
Microwave facility in Sunnyvale, California during fiscalSeptember 2003. In manufacturingaddition, Agilent orders have short lead times and therefore not a significant component of our products, we depend substantially on our custom-manufactured equipment and
systems, somereported backlog.
Sources of which are manufactured internally and some of which we acquire
from third parties and customize ourselves.
Cree Microwave produces both silicon LDMOS and silicon bipolar junction
transistor, or BJT, structures at its wafer fabrication facility in Sunnyvale,
California. Both product families use silicon wafers that are acquired from
third parties and the devices are fabricated in a clean room environment. The
clean room steps employ multiple stages of photolithography, diffusion, thin
film metal deposition and both wet and dry etch process in the manufacturing
cycle. Finished wafers are electrically tested and may be shipped to customers
at this point. Transistor die from wafers, which continue in the manufacturing
process, are assembled into thermally conductive packages or modules and tested
prior to shipment to customers.
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SOURCES OF RAW MATERIALS
Raw Materials
We depend on a limited number of suppliers for certain raw materials, components and equipment used in our products, including certain key materials and equipment used in our crystal growth, wafering, polishing, epitaxial deposition, device fabrication and device assembly processes. We generally purchase these limited source items pursuant to purchase orders and have limited guaranteed supply arrangements with our suppliers. In addition, the availability of these
materials, components and equipment to us is dependent in part
Competition
Our success depends on our ability to provide our supplierskeep pace with accurate forecaststhe rapidly evolving technology standards of our future requirements. We
endeavor to maintain ongoing communication with our suppliers to guard against
interruptions in supply and, to date, generally have been able to obtain
adequate supplies in a timely manner from our existing sources. However, any
interruption in the supply of these key materials, components or equipment could
have a significant adverse effect on our operations.
COMPETITION
The semiconductor industry is intensely competitive and isindustries that we serve. These industries are characterized by rapid technological change, price erosionfrequent introduction of new products, short product life cycles, and substantial foreign competition.
We believechanges in end-user and customer requirements. If we are unable to keep pace with the rapidly changing technology standards, or competitors could invent
new technologies, industry standards or end user or customer requirements that could have potential to replace or provide lower cost or high performance alternatives to our Cree segment currently enjoys a favorable position in the
existing markets for SiC-based products and materials. We also believe that our
Cree Microwave segment can become competitive in the market for silicon-based
LDMOS devices if it succeeds in qualifying its most recently introduced LDMOS
devices for volume production. However, we face actual and potential competition
from a number of established domestic and international compound semiconductor
companies. Manyor future products. The evolving nature of these companiesindustries may render our existing or future products obsolete, noncompetitive or unmarketable. Any of these developments could have greater engineering, manufacturing,
marketingan adverse effect on our business, results of operations and financial resources than we have.
Ourconditions.
Blue, Green and Near-UV LEDs
The primary competition for our optoelectronicLED chip products comes from companies that manufacture and or sell nitride basednitride-based LED chips. We consider Nichia Corporation or Nichia,(Nichia) and Toyoda Gosei Co. Ltd. (Toyoda), or Toyoda, and Lumileds Lighting
LLC, a joint venture between Agilent Technologies and Philips Lighting to be our primary competitors. Nichia primarily sells packaged LEDs and most often competes directly with our chip customers. Toyoda sells both packaged LEDs and LED chips. These companies currently market LED products made using nitride materials on sapphire substrates, and Nichia markets short wavelength
nitride-based laser diodes.substrates. In addition, American Xtal Technology, Epistar,
Arima, UEC and other Asian based companies in recent years a number of other Asian-based companies have begun the production of blue, green and UV blue and green LEDs, all on sapphire substrates. We attempt to closely
monitor the progress of Taiwanesesubstrates and are becoming more significant competitors. We believe that theseThese new competitors sell chip level products and have had some success in securing new business over the last few quarters and could potentially become significant competitorsyears, especially in the future.
Historically, some of our existingkeypad backlight market for mobile appliances. These competitors have been more successfulcompete with us on pricing in the market for outdoor display applications because, priorstandard to the releasemid-brightness range of our
MegaBright(TM) and XBright(TM) products, some sapphire devices were brighter
than our LEDs. We believe our new MegaBright(TM) and XBright(TM) devices will
enable us to compete successfully in this market.products. We believe our approach to manufacturing UV; blue, green and greenUV LEDs using SiC substrates enables us to also offer a cost-effective chip design. design as compared to our competitors who primarily use sapphire as their substrate. SiC materials are conductive and as a result, allow us to make vertical devices with a top and bottom contact to conduct electrical flow. Sapphire materials are insulating and therefore devices made from these materials require two contacts on one side to conduct electrical flow. The SiC single top contact device allows us to utilize less chip area for electrical contact generally resulting in a smaller chip size and thus more potential die per wafer than sapphire devices, which may allow our devices to be manufactured for a lower cost.
Our customers'
desired product attributes forcustomers’ generally purchase nitride LEDs based LEDs are generally price andon the brightnesscombination of the deviceslowest price for thea certain level of brightness, for their intended applications.application. At times other factors such as chip size, or forward voltage, of theESD resistance or device arestability also can be competitive factors. In addition to being a large customer of our LED chips, Osram, which licensed certain LED technology from us in 1995, currently is currently producing LEDs using nitride materials on SiC substrates. Shin-Etsu Handotai Co.
Ltd. also licensed certain LED technology from ussubstrates for use in 1996 but never began
commercial production under this license.
their packages. Lumileds sells high power packaged LEDs that compete with our target customers for power chip devices for solid state illumination markets and selectively sell some chip products in the market.
SiC Materials Products
The market for SiC wafers also is becoming more competitive, as other companies in recent years have begun to offer SiC wafer products or have announced plans to do so, including Sterling Semiconductors,Semiconductor, which is now operated by Dow Corning, II-VI, Sixon, Nippon Steel and other small manufacturers. To our knowledge, none of these competitors are currently -15-
offeringoffer SiC wafers that are being used for device production. We sell SiC wafers to Osram and Infineon, which compete with us in the LED and power diode markets, respectively. We are not aware of any other company who produces SiC materials for use in device production, as their materialsgemstones although we believe there are generally not considered to have production level quality. some companies pursuing research and development in this area.
SiC-based Power Devices
Our SiC-based power devices
which are currently available in limited quantities, compete with similar devices offered by Infineon. There are also a number of other companies developing SiC based power devices. Our products also compete with existing silicon-based power devices offered by a variety of manufacturers.
RF and Microwave Transistors
Currently, there are no companies offering products that compete directly with the Cree Segment’s SiC MESFET products and MMIC foundry service although a few companies have products under development. Although there are no direct competitors, there is competition from existing silicon and GaAs based products. We do not currently offer GaN microwave devices, but we are working to develop these products. In the GaN microwave area, there are a number of companies working to develop these products.
The markets served by Cree Microwave'sMicrowave’s LDMOS and bipolar products are highly competitive. Currently Motorola Incorporated, or Motorola, Infineon,dominates this marketplace, which recently
acquired LDMOS capabilities from Telefonaktiebolaget LM Ericsson, and Royal
Philips Electronic NV, or Phillips, currently manufacture competing products.
Currently, we believe Motorola dominates the marketplace with over 80% market
shareis due to superiorthe performance and pricing. Cree Microwavepricing of its products in comparison to our products and others currently available in the market.
Near-UV Laser Diodes
We currently do not offer any laser products commercially. The major competitors in the near UV laser market are Nichia and Sony and a number of other companies have announced development activities in this area. The market for blue laser products is targetingjust beginning to releaseemerge. In addition to our development efforts, there are also a new linenumber of improved LDMOS products during the first quarter of fiscal
2003 that is intended to be comparable with the performance of Motorola parts at
a competitive price.
PATENTS AND PROPRIETARY RIGHTS
companies working on developing near UV laser diodes.
Patents and Proprietary Rights
We seek to protect our proprietary technology by applying for patents where appropriate and in other cases by preserving the technology and related know-how and information as trade secrets. We have also from time to time acquired, through license grants or assignments, rights to patents on inventions originally developed by others. At June 30, 2002,As of August 26, 2003, we owned or held exclusive rights licensed under a total of 133207 issued U.S. patents, subject in some cases to nonexclusive license rights held by third parties. These patents expire between 2007 and 2020. Two2021. Thirty-three of these patents are jointly owned with a third party. Twenty-sixThirty-one of these patents relate primarily to our Cree Microwave segment. In addition, we own or hold exclusive license rights under corresponding patents and patent applications in various foreign countries.
Among the patent licenses we hold are exclusive licenses granted by North Carolina State University, or NCSU, to U.S. and corresponding foreign patents and patent applications that relate to SiC materials and device technology and to GaN growth technology. These licenses include rights under patents and patent applications relating to processes for growing single crystal SiC and low defect GaN materials. The licenses are worldwide, exclusive licenses to manufacture, use and sell products and processes covered by the claims of patents issued on applications filed by NCSU relating to the licensed inventions. The U.S. Government holds a non-exclusive licenselicenses from us to practiceuse for government purposes for certain of theour inventions for government purposes.that were developed under contracts with them. The licenses relating to the growth of bulk single crystal SiC and to other SiC materials and device technology are fully-paid, while the licenses relating to growth of low defect GaN materials require us to pay NCSU royalties on sales of products made using the licensed processes.
The patents that we have licensed from NCSU relating to bulk SiC growth expire beginning in 2007, and we may face increased competition in the market for SiC materials as these patents expire. In addition, in the event our licenses to the U.S. patents owned by NCSU relating to SiC growth were to be terminated under the terms of our license agreement, we could potentially be enjoined from practicing the patented process. In that event the business of our entire Cree segment could be disrupted since the segment is critically dependent on our ability to manufacture bulk single crystal SiC material. Similarly, if our license to the patents relating to growth of low defect GaN materials were to be terminated, it could have a material adverse effect on our ability to produce GaN-based laser diodes or other future products manufacturedwe expect to manufacture using the patented process.
processes.
We also have also entered into license agreements with the licensing agencies of other universities, and with other companies, under which we have obtained exclusive or non-exclusive rights to practice inventions claimed in various patents and applications issued or pending in the U.S. and other foreign countries. We do not believe the financial obligations under any of these agreements, or the loss of the licensed rights under any of these agreements, would have a material adverse effect on our business, financial condition or -16-
One of theseThese license agreements includesinclude a patent cross-license agreement covering gallium nitride-based optoelectronic technology that we entered into with Nichia Corporation in November 2002 in connection with a settlement of patent and related litigation then pending between the parties in the United States and Japan. These license agreements also include license rights granted to our Cree Lighting subsidiaryus by the Trustees of Boston University, or Boston University, under certain U.S. patents and corresponding foreign patents and patent applications which relate to the manufacture of certain GaN-based structures on sapphire and other substrates. The license agreement with Boston University grants Cree Lightingus an exclusive, worldwide royalty-bearing license under these patents and patent applications, subject to royalty payments and other obligations under the license agreement. As described in Item 3, "Legal
Proceedings", at page 27, at June 30, 2002,“Legal Proceedings,” Cree Lighting and Boston University are parties to pending litigation in which they have alleged that Nichia and its
subsidiary, Nichia America Corporation, areAXT, Inc. is infringing one of the licensed patents. Termination of the license to this patent by Boston University would end Cree Lighting'sour right to assert the patent against future infringements.
For proprietary technology whichthat is not patented or otherwise published, we seek to protect the technology and related know-how and information as trade secrets and to maintain it in confidence through appropriate non-disclosure agreements with employees and others to whom the information is disclosed. There can be no assurance that these agreements will provide meaningful protection against unauthorized disclosure or use of our confidential information or that our proprietary technology and know-how will not otherwise become known or independently discovered by others. We also rely upon other intellectual property rights such as trademarks and copyright where appropriate.
Environmental Regulation
We have
registered "Cree" and the Cree logo as a trademark for certain products in the
U.S. We have also applied for registration of several trademarks for our
products in the U.S. and other countries.
Because of rapid technological developments in the semiconductor industry, the
intellectual property position of any semiconductor materials or device
manufacturer, including Cree is subject to uncertainties and may involve complex
legal and factual issues. There can be no assurance that patents will be issued
on any of the pending applications owned or licensed to us or that claims
allowed in any patents issued or licensed to us will not be contested or
invalidated. There is likewise no assurance that patent rights owned or
exclusively licensed to us will provide significant commercial protection since
issuance of a patent does not prevent other companies from using alternative,
non-infringing technology. Further, we earn a material amount of our revenues in
overseas markets. While we hold and have applied for patent protection for
certain of our technologies in these markets, there can be no assurance that we
will obtain protection in all commercially significant foreign markets or that
our intellectual property rights will provide adequate protection in all such
markets.
Frequent claims and litigation involving patents and intellectual property
rights are common in the semiconductor industry. As of June 30, 2002, we were
parties to complex intellectual property litigation in the United States and
Japan with one of our competitors in the LED business, as described in Item 3
"Legal Proceedings", at page 27. We may become parties to other litigation in
the future to enforce our intellectual property rights or to defend against
claims of infringement. Such litigation can be protracted and costly and divert
the attention of key personnel. There can be no assurance that third parties
will not attempt to assert infringement claims against us with respect to our
current or future products. We from time to time receive correspondence
asserting that our products or processes are or may be infringing patents or
other intellectual property rights of others. Our practice is to investigate
such claims to determine whether the assertions have merit and, if so, we take
appropriate steps to seek to obtain a license or to avoid the infringement.
However, we cannot predict whether past or future assertions of infringement may
result in litigation or the extent to which such assertions may require us to
seek a license under the rights asserted or whether a license would be available
or available on acceptable terms. Likewise, we cannot predict the occurrence of
future assertions of infringement that may prevent us from selling products,
result in litigation or require us to pay damage awards.
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ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state and local provisions enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These include statutory and regulatory provisions under which we are responsible for the management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes. Failure to comply with such provisions, whether intentional or inadvertent, could result in fines and other liabilities to the government or third parties, injunctions requiring us to suspend or curtail operations or other remedies, and could have a material adverse effect on our business.
EMPLOYEES
Employees
As of June 30, 2002,29, 2003, we employed 8931,121 people, including 678865 in manufacturing operations, 146168 in research and development and 6988 in sales and general administration. None of our employees are represented by a labor union or subject to collective bargaining agreements.
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
Available Information
We maintain a website at the address www.cree.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. These reports may be accessed by following the link under “News and Investors—SEC Filings” on our website.
Certain Business Risks and Uncertainties
Described below are various risks and uncertainties that may affect our business. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us, that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general may also affect our business. If any of the risks described below actually occurs, our business, financial condition or results of future operations could be materially and adversely affected.
Our operating results and margins may fluctuate significantly.
Although we experienced significant revenue and earnings growth in the past years,year, we may not be able to sustain such growth or maintain our margins, and we may experience significant fluctuations in our revenue, earnings and margins in the future. For example, historically, the prices of our LEDs have declined based on market trends. We have attemptedattempt to maintain our margins by constantly developing improved or new products which command higher prices or lowerby lowering the cost of our LEDs. If we are unable to do so, our margins will decline. Our operating results and margins may vary significantly in the future due to many factors, including the following:
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These or other factors could adversely affect our future operating results and margins. If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price may decline.
If we experience poor production yields, our margins could decline and our operating results may suffer.
Our SiC material products and our LED, power and RF device products are manufactured using technologies that are highly complex. We manufacture our SiC wafer products from bulk SiC crystals, and we use these SiC wafers to manufacture our LED products and our SiC-based RF and power semiconductors. Our Cree Microwave subsidiary manufactures its RF semiconductors on silicon wafers purchased from others. During our manufacturing process, each wafer is processed to contain numerous "die,"“die,” which are the individual semiconductor devices, and the RF power devices are further processed by incorporating them into a package for sale as a packaged component. The number of usable crystals, wafers, die and packaged components that result from our production processes can fluctuate as a result of many factors, including but not limited to the following:
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We refer to the proportion of usable product produced at each manufacturing step relative to the gross number that could be constructed from the materials used as our manufacturing "yield."yield. Since many of our manufacturing costs are fixed, if our yields decrease, our margins could decline and our operating results would be adversely affected. In the past, we have experienced difficulties in achieving acceptable yields on new products, which has 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 some instances, we may offer products for future delivery at prices based on planned yield improvements. Reduced yields or failure to achieve planned yield improvements could significantly affect our future margins and operating results.
Litigation and SEC matters could adversely affect our operating results and financial condition.
On June 12, 2003, Eric Hunter, and his wife, Jocelyn Hunter filed a lawsuit in United States District Court for the Middle District of North Carolina in Greensboro, North Carolina naming us and Neal Hunter, Eric Hunter’s brother and our current chairman, as defendants. The complaint alleged claims for defamation and harassment, as well as violations of employment and federal securities laws related to transactions with C&C, and other matters. In addition, between June 16 and August 18, 2003, nineteen purported class action lawsuits were filed in the United States District Court for the Middle District of North Carolina by alleged purchasers of our common stock. The lawsuits name us, certain of our officers and current or former directors as defendants. These complaints allege, among other things, violations of federal securities laws, including violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5. In addition, among other claims, one or more of the complaints allege that we made certain false and misleading statements in connection with our acquisition of the UltraRF division of Spectrian, our supply agreement with Spectrian, our investment in World Theater, Inc. and our agreements with C&C. These cases are still in their early stages, and we intend to defend them vigorously.
Defending against existing and potential securities and class action litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which will adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially adversely effect our results of operations and financial condition.
In addition, the Securities and Exchange Commission (SEC) in July 2003 initiated an informal inquiry of us and requested us voluntarily to provide certain information. We are cooperating voluntarily with this
informal inquiry and have provided the SEC with written responses and documents. If the SEC elects to pursue a formal investigation of us, responding to any such investigation could require significant diversion of management’s attention and resources in the future as well as significant legal expense. In addition, if the SEC elects to pursue an enforcement action against us, the defense against this type of action could be costly and require additional management resources. If we were unsuccessful in defending against any potential action that may arise, we may face civil or criminal penalties or fines that would materially adversely affect results of operations and financial condition.
Special Committee Investigation.
On June 14, 2003, our board of directors created a special committee, comprised of independent directors Dr. Robert J. Potter and Mr. William J. O’Meara. The scope of the special committee’s investigation encompasses allegations of corporate wrong doing made by the Hunters in court filings or otherwise brought to our attention by the Hunters. The board of directors granted the special committee the authority to: (i) retain and consult with independent and qualified legal counsel or other experts or advisers to participate and assist in such investigation, and to direct payment of corporate funds to compensate legal counsel and other experts and advisors; (ii) have full access to any and all books, records and files of Cree and any independent auditors heretofore utilized by Cree, and the opportunity to interview and question the directors, any employees and officers of Cree, either past or present; (iii) consult with any other independent specialists in appropriate fields of expertise or such other persons as may be deemed necessary or advisable in conducting an objective and informed investigation; and (iv) employ such other persons as may be necessary for the proper conduct of such investigation. Should the Special Committee conclude that corporate wrong doing has occurred, our business results of operations and financial conditions could be materially adversely affected.
Our business and our ability to produce our products may be impaired by claims we infringe intellectual property of others.
Vigorous protection and pursuit of intellectual property rights characterize the semiconductor industry. These traits have resulted in significant and often protracted and expensive litigation. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to:
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There can be no assurance that third parties will not attempt to assert infringement claims against us with respect to our current or future products. From time to time we consider it necessaryreceive correspondence asserting that our products or desirable, weprocesses are or may seek licenses underbe infringing patents or other intellectual property rights.rights of others. Our practice is to investigate such claims to determine whether the assertions have merit and, if so, we take appropriate steps to seek to obtain a license or to avoid the infringement. However, we cannot be certain that
licensespredict whether past or future assertions of infringement may result in litigation or the extent to which such assertions may require us to seek a license under the rights asserted. We also cannot determine whether a license will be available or that we would find the terms of licensesany license offered acceptable or commercially reasonable. Failure to obtain a necessary license could cause us to incur substantial liabilities and costs and to suspend the manufacture of products. In addition, if adverse results in litigation made it necessary for us to
seek a license or to develop non-infringing products or processes, there is no assurance we would be successful in developing such products or processes or in negotiating licenses upon reasonable terms or at all. Our results of operations, financial condition and business could be harmedadversely affected if such problems were not resolved in a timely manner.
Our distributor in Japan is presently a party to patent litigation in Japan
brought by Nichia, in which the plaintiff claims that certain of our LED
products infringe Japanese patents it owns. The complaints in the proceedings
seek injunctive relief that would prohibit our distributor from further sales of
these products in Japan. The district court ruled in our favor in both lawsuits,
but Nichia has appealed these rulings. An adverse result in either of these
cases would impair our ability to sell the particular LED products at issue in
Japan and could cause customers not to purchase other LED products from us in
Japan and elsewhere. Subject to contractual limitations, we have an obligation
to defend and indemnify our distributor for patent infringement claims.
We have also initiated patent infringement litigation in the United States
District Court for the Eastern District of North Carolina against Nichia and one
of its subsidiaries, asserting patent infringement with respect to certain
Nichia nitride-based semiconductor products, including laser diode products.
Nichia has responded with counterclaims alleging, among other things, patent
infringement claims against us based on four U.S. patents directed to nitride
semiconductor technology. In addition, Nichia alleges trade secret
misappropriation and related claims against Cree Lighting and a former Nichia
researcher who is now employed by Cree Lighting on a part-time basis and Cree.
The court has directed that the claims against Cree Lighting be transferred to
the United States District Court for the Central District of California. The
court has orally granted our motion for summary judgment in which we requested
dismissal of Nichia's trade secret and related claims against Cree. An adverse
result under Nichia's patent infringement counterclaims, which remain in the
case, may impair our ability to sell our LED and laser diode products and could
include a substantial damage award against us.
We also have been named as a defendant to a counterclaim of Nichia in a lawsuit
pending in the U.S. District Court for the Eastern District of Pennsylvania. The
complaint in the underlying action, which was brought by Rohm Co., Ltd., or Rohm
against Nichia Corporation and Nichia America Corporation, alleges that Nichia
is infringing certain U.S. patents owned by Rohm. Nichia's counterclaim alleges
that Rohm and we violated antitrust laws by conspiring to exclude Nichia from
the U.S. market for high brightness LEDs. The counterclaim seeks actual and
treble damages, attorneys' fees and court costs. We have moved to dismiss the
counterclaim for lack of personal jurisdiction.
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Our Cree Lighting subsidiary has also initiated litigation, now pending in the
United States District Court for the Eastern District of North Carolina against
Nichia and one of its subsidiaries asserting patent infringement with respect to
gallium nitride-based semiconductor technology useful in manufacturing certain
LEDs and laser diode devices. The lawsuit seeks damages and an injunction
against infringement.
We believe the claims asserted against our products in the Japanese cases and
the claims asserted against us in the U.S. cases are without merit, and we
intend to vigorously defend against the charges. However, we cannot be certain
that we will be successful, and litigation may require us to spend a substantial
amount of time and money and could distract management from our day-to-day
operations. Litigation costs to date in these cases have been substantial, and
variability in these costs could adversely affect our financial results. If any
of these cases were decided against us, the result would have a material adverse
effect on our operations and financial condition.
There are limitations on our ability to protect our intellectual property.
Our intellectual property position is based in part on patents owned by us and patents exclusively licensed to us by NCSU,North Carolina State University, Boston University and others. The licensed patents include patents relating to the SiC crystal growth process that is central to our SiC materials and device business. We intend to continue to file patent applications in the future, where appropriate, and to pursue such applications with U.S. and foreign patent authorities. However, we cannot be sure that patents will be issued on such applications or that our existing or future patents will not be successfully contested by third parties. Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents (or patents issued to others and licensed to us) will provide significant commercial protection.
protection, especially as new competitors enter the market.
In addition to patent protection, we also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing activities. We try to protect this information through appropriate efforts to maintain its secrecy, including requiring employees and third parties to sign confidentiality agreements. We cannot be sure that these efforts will be successful or that the confidentiality agreements will not be breached. We also can not be sure that we would have adequate remedies for any breach of such agreements or other misappropriation of our trade secrets, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.
Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights, but there is no assurance that we will be
successful in anyrights. For example, on June 10, 2003, our Cree Lighting subsidiary and the Trustees of Boston University filed a patent infringement action against AXT, Inc. seeking enforcement of a patent relating to semiconductor devices manufactured using a GaN-based buffer technology. Any such litigation. Moreover, litigation may require us to spend a substantial amount of time and money and could distract management from our day-to-day operations. Moreover, there is no assurance that we will be successful in any such litigation.
If we are unable to produce and sell adequate quantities of our MegaBright(TM)mid-brightness and XBright(TM)XBright LED products and improve our yields, our operating results may suffer.
We believe that achievingour ability to gain customer acceptance of our mid-brightness and XBright LED products, including our new MegaBright Plus and XBright Plus products, and to achieve higher volume production and lower production costs for our MegaBright(TM) and XBright(TM) LEDthose products will be important to our future operating results. We must reduce costs of these products to avoid margin reductions from the lower selling prices we may offer due to our competitive environment and/or to satisfy prior contractual commitments. Achieving greater volumes and lower costs requires improved production yields for these products. We recently redesignedbegan to manufacture our XBright(TM)improved XBright LED product to address certain
difficulties in packaging the devices identified by some customers following the
introduction of the product,limited volumes, and we are planningcontinuing to manufacture the redesigned
products in
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volume. make improvements to this product to help meet our customers’ design requirements.We may encounter manufacturing difficulties as we ramp up our capacity to make thesethis product, as well as the MegaBright Plus and XBright Plus products. Our failure to produce adequate quantities and improve the yields of any of these products could have a material adverse effect on our business, results of operations and financial condition. In addition,Some of our customers may encounter difficulties with their manufacturing processes using our XBright(TM)XBright devices due to die attachment issues, which could increase product returns and impact customer demand, each of which would have a material adverse effect on our business, results of operations and financial condition. In addition, our customer’s inability to secure an efficient phosphor for use in converting blue or near UV LEDs to white could limit our potential sales of high brightness LED chips for these applications.
Our operating results are substantially dependent on the development of new products based on our core SiC technology.
Our future success will depend on our ability to develop new SiC solutions for existing and new markets. We must introduce new products in a timely and cost-effective manner, and we must secure production orders from our customers. The development of new SiC products is a highly complex process, and we have historically experienced delays in completing the development and introduction of new products. Products currently under development include larger, highhigher quality substrates and epitaxy, high power RF and microwave devices in both SiC and GaN, power devices, blue laser diodes and higher brightness and thinner LED products. The successful development and introduction of these products depends on a number of factors, including the following:
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If any of these or other factors become problematic, we may not be able to develop and introduce these new products in a timely or cost-efficient manner.
We face risks of reduced revenue under our contract with Spectrian if we cannot
complete product qualification on a timely basis or ramp up production ofmust generate new customer demand for our LDMOS 8 products.
products in order to offset expenses of our Cree Microwave segment.
Revenues of our Cree Microwave segment are dependentwill depend on our amended Supply
Agreementability to attract new customers for our LDMOS8 products. Prior to the termination of our supply agreement with Spectrian. If we are unableSpectrian, Spectrian accounted for 99% of the revenues of our Cree Microwave segment. Due to complete the full productcurrent market environment for microwave devices and the lengthy customer design-in and qualification process and ramp up production of our recently released LDMOS 8
products adequately, Spectrian may reduce the amount it purchases during the
applicable quarter under the agreement, subject to the satisfaction of certain
conditions. Consequently, our results of operations could be adversely affected
by further delays in qualifyingfor our LDMOS 8 products.products, it may take many quarters to develop new customers for our Cree Microwave segment and we may not succeed in doing so. Until we develop sufficient new business for Cree Microwave’s products, our expenses for this segment will exceed its revenues. In addition, if we are unable to supply othergenerate sufficient customer orders for these products that meet orand expenses continue to exceed the specifications of
certain competitive parts designated by Spectrian, Spectrianrevenues for this segment, we may purchase those
products from other vendors. In that case, the purchased quantities will be
deducted from the minimum quantities required to be purchased from us under the
Supply Agreement. The resulting reduction in revenue could have an adverse
effect on our results of operations.
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We depend on a few large customers.
customers and are subject to contract terms with them.
Historically, a substantial portion of our revenue has come from large purchases by a small number of customers. For example, for fiscal 2002 our top five
customers (excluding government contracts and including Sumitomo, which
represents several Japanese customers) accounted for 64% of our total revenue. Accordingly, our future operating results depend on the success of our largest customers and on our success in selling large quantities of our products to them. The concentration of our revenues with a few large customers makes us particularly dependent on factors affecting those customers. For example, if demand for their products decreases, they may limit or stop purchasing our products and our operating results will suffer. Our purchase agreement with Osram expires in September 2003, and we are currently negotiating a new purchase agreement with Osram. If we lose a large customer such as Osram and fail to add new customers to replace lost revenue, our operating results may not recover. WhenIn addition, we often enter into contracts with large customers provide only limited advance noticewhich may give rise to customer rights to reduce purchase commitments, return products, obtain reimbursement of firm orders,certain costs, or terminate contracts. For example, our businessSumitomo contract provides that Sumitomo may decrease its purchase commitment or terminate the contract if its inventory of our products reaches a specified level. The contract also requires us to establish two rolling
reserves based upon a percentage of the total purchase price of our products. We defer revenue recognition on the amounts added to reserves. If claims are made against reserves, we may recognize lesser amounts of revenue or no revenue on substitute sales to Sumitomo and results of operationsany product returned may not be adversely affected by changes in customer
demand.saleable at the same price or at all. We sellalso face risks related to our largest LED customer based on a rolling forecast ofcontract terms with other large customers, which only a
limited period reflects firm orders. Any change in this customer's demand or
forecast could have a material adversenegative impact on our business as the timing and
quantities of our production may not match demand or our overall demand may
decline. For example, we may be left with additional inventory on hand or we may
not have sufficient capacity to satisfy all of our contractual commitments,
which could have adverse consequences under our existing contracts.
Recently, we have experienced a trend towards smaller customers gaining design
wins from our larger customers for finished products incorporating our LEDs.
While in the short term, this trend may lead to increased sales to smaller
customers and an increase in the portion of our revenue that they represent, the
long term effects of this trend are uncertain. In addition, smaller customers
typically do not commit up front to purchase a specified volume over a long
period of time, which reduces our ability to predict and maintain a steady
stream of orders and revenue as sales to smaller customers increase as a
percentage of revenue.
financial results.
The markets in which we operate are highly competitive.
competitive and have evolving technology standards.
The markets for our LED, laser, and RF and microwave, and power semiconductor products are highly competitive. New firms have begun offering UV, blue and green LEDs. In the RF power semiconductor field, the products manufactured by Cree Microwave compete with products offered by substantially larger competitors whichwho have dominated the market to date based on product quality and pricing. The market for SiC wafers is also becoming competitive as other firms have in recent years begun offering SiC wafer products or announced plans to do so. We also expect significant competition for products we are currently developing, such as those for use in microwave communications and power switching.
We expect competition to increase. This could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Or competitors could invent disruptive technologynew technologies that may make our products obsolete. Any of these developments could have an adverse effect on our business, results of operations and financial condition.
We face significant challenges managing our growth.
We have experienced a period of significant growth that has challenged our management and other resources. We have grown from 248 employees on June 28, 1998 to 8931,121 employees on June 30, 200229, 2003 and from revenues of $44.0 million for the fiscal year ended June 28, 1998 to $155.4$229.8 million for the fiscal year ended June 30, 2002.29, 2003. To manage our growth effectively, we must continue to:
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We will spend substantial amounts of money in supporting our growth and may have additional unexpected costs. Our systems, procedures or controls may not be adequate to support our operations, and we may not be able 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 operating results and financial condition could be adversely affected.
Performance of our investments in other companies could negatively affect our financial condition.
From time to time, we have made investments in public and private companies that engage in complementary businesses. Should the value of theseany such investments we hold decline, the related write-down in value could have a material adverse effect on our financial condition as reflected in our balance sheets. In addition, if the decline in value is determined to be "other“other than temporary"temporary”, the related write-down could have a material adverse effect on our reported net income. For example, in the fourth quarter of fiscal 2002 we recorded a non-operating charge of $30.1$22 million (pre-tax) relating to the declines in the value of equity investments determined to be "other“other than temporary"temporary” as a result of continued depressed market conditions. We no longer hold any investments in public companies, but we continue to hold interests in
certain private companies. Each of these investments is subject to the risks inherent in the business of the company in which we have invested and to trends affecting the equity markets as a whole. Our private company investments are subject to additional risks relating to the limitations on transferability of our interests due to the lack of a public market and to other transfer restrictions. Our public company investments are subject to market risks and
also can be subject to contractual limitations on transferability. As a result, we may not be able to reduce the size of our positions or liquidate our investments when we deem appropriate to limit our downside risk.
Our operating results could be adversely affected if we encounter difficulty transitioning production to a larger wafer size.
We are in the process of gradually shifting production of some LED products from two-inch wafers, to two and one quarter and three-inch wafers. We must first qualify our production processes on systems designed to accommodate the larger wafer size, and some of our existing production equipment must be refitted for the larger wafer size. Delays in this process could have an adverse effect on our business. In addition, in the past we have experienced lower yields for a period of time following a transition to a larger wafer size until use of the larger wafer is fully integrated in production and we begin to achieve production efficiency. We anticipate that we will experience similar temporary yield reductions during the transition to the two and one quarter and three-inch wafers, and we have factored this into our plan for production capacity. If this transition phase takes longer than we expect or if we are unable to attain expected yield improvements, our operating results may be adversely affected.
We rely on a few key suppliers.
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We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our products, including key materials and equipment used in critical stages of our manufacturing processes. We generally purchase these limited source items with purchase orders, and we have no guaranteed supply arrangements with such suppliers. If we were to lose such key suppliers, our manufacturing operations could be interrupted or hampered significantly.
If government agencies or other customers discontinue or curtail their funding for our research and development programs our business may suffer.
In the past, government agencies and other customers have funded a significant portion of our research and development activities. Government contracts are subject to the risk that the government agency may not appropriate and allocate all funding contemplated by the contract. In addition, our government contracts generally permit the contracting authority to terminate the contracts for the convenience of the government, and the full value of the contracts would not be realized if they are prematurely terminated. Furthermore, we may be unable to incur sufficient allowable costs to generate the full estimated contract values, and there is some risk that any technologies developed under these contracts may not have commercial value. If government and customer funding is discontinued or reduced, our ability to develop or enhance products could be limited, and our business, results of operations and financial condition could be adversely affected.
If our products fail to perform or meet customer requirements, we could incur significant additional costs.
The manufacture of our products involves highly complex processes. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases our products may contain undetected defects or flaws that only become evident after shipment. We have experienced product quality, performance or reliability problems from time to time. Defects or failures may occur in the future. If failures or defects occur, we could:
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We are subject to risks from international sales.
Sales to customers located outside the U.S. accounted for aboutapproximately 80%, 65%, 69% and 69% of our revenue in fiscal 2003, 2002 2001 and 2000,2001, respectively. We expect that revenue from international sales will continue to be a significant part of our total revenue. International sales are subject to a variety of risks, including risks arising from currency fluctuations, trading restrictions, tariffs, trade barriers and taxes. Also, U.S. Government export controls could restrict or prohibit the exportation of products with defense applications. Because all of our foreign sales are denominated in U.S. dollars, our products become less price competitive in countries with currencies that are low or are declining in value against the U.S. dollar. Also, if we experience substantial changes in the
U.S. dollar currency exchange as compared to the Japanese yen, our sales
opportunities may be reduced as our primary competitors may offer more favorable
pricing. Also, we cannot be sure that our international customers will continue to place orders denominated in U.S. dollars. If they do not, our reported revenue and earnings will be subject to foreign exchange fluctuations.
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If we fail to integrate acquisitions successfully, our business will be harmed.
We completed two strategic acquisitions during calendar year 2000. We will
continue to evaluate strategic opportunities available to us, and we may pursue
other product, technology or business acquisitions. Such acquisitions can
present many types of risks, including the following:
- we may fail to successfully integrate the operations and personnel of
newly acquired companies with our existing business;
- we may experience difficulties integrating our financial and operating
systems;
- our ongoing business may be disrupted or receive insufficient
management attention;
- we may not cost-effectively and rapidly incorporate acquired
technology;
- we may not be able to recognize cost savings or other financial
benefits we anticipated;
- acquired businesses may fail to meet our performance expectations;
- we may lose key employees of acquired businesses;
- we may not be able to retain the existing customers of newly acquired
operations;
- our corporate culture may clash with that of the acquired businesses;
and
- we may incur undiscovered liabilities associated with acquired
businesses that are not covered by indemnification we may obtain from
the seller.
We may not successfully address these risks or other problems that arise from
our recent or future acquisitions. In addition, in connection with future
acquisitions, we may issue equity securities that could dilute the percentage
ownership of our existing shareholders, we may incur debt and we may be required
to amortize expenses related to intangible assets that may negatively affect our
results or operations.
We depend on design trends in mobile phones to drive a large percentage of LED demand.
Our results of operations could be adversely affected by reduced customer demand for LED products for use in wireless handsets. We derive a significant portion of our LED product revenue from sales to customers who use our LED products in wireless handsets, and customer demand is dependent upon trends in the wireless market. We believe the growth for the global market for wireless handsets has
slowed and may be declining. As a result, ourOur ability to maintain or increase our LED product revenue depends in part on the number of models into which customers design our products. Also, design cycles in the handset industry are short and demand is volatile, which makesmake production planning difficult to forecast.
If we fail to evaluate strategic opportunities successfully, our business will be harmed.
From time to time we evaluate strategic opportunities available to us for product, technology or business acquisitions. If we choose to make an acquisition, we face certain risks, such as failure of the acquired business in meeting our performance expectations, diversion of management attention, retention of existing customers of the acquired business, and difficulty in integrating the acquired business’s operations, personal and financial and operating systems into our current business. We may not successfully address these risks or other problems that arise from our recent or future acquisitions. For example, we experienced some of these risks in connection with our UltraRF acquisition. Any failure to successfully evaluate such strategic opportunities and address risks or other problems that arise related to any acquisition could adversely affect our business, results of operations and financial condition.
These or other factors could adversely affect our future operating results and margins. If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price may decline.
We own our facilities in Durham, North Carolina where the business for our Cree segment is conducted. In November 1997, we acquired our present manufacturingWe presently maintain approximately 48 acres of developed land, with total facility a 30-acre industrial site in Durham, North Carolina, which originally
consistedsquare footage of a 139,000 square foot production building and 33,000521,747. This includes 289,772 square feet offor production, 81,751 square feet for service and warehouse buildings. In fiscal 2000warehousing, and fiscal 2002, we completed
two expansions that increased the size of these facilities by 42,000150,224 square feet and 147,000 square feet, respectively. During fiscal 1999 we purchasedfor administrative support. We also own approximately 80 acres of undeveloped land near our production facilities potentially for potential expansion purposes. future expansion.
We have installedmaintain a small electrical substation on
this site for use in transmitting power to our production facilities but have
not otherwise developed the
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land. During fiscal 2000, we purchased a 120,000 square foot building on 17.5
acres of land near our existing production site. We subsequently upfitted
approximately two-thirds of the building for use as meeting rooms and
administrative offices and as an employee services center.
We lease a separate building in Durham, North Carolina that was recently used by
our Cree segment for production of SiC-based RF and microwave devices and
related research and development. We have relocated these operations to our main
production site and no longer use the space. This lease expires in September
2002 and will not be renewed.
Wethree-year lease through our Cree Japan subsidiary a sales and marketingfor an office in Tokyo, Japan that is used to support our Japan distributor'sfor sales of Cree
segment products. This three-year lease agreementand marketing activities that expires in June 2005. We also contract throughthe use of a facility for sales and marketing efforts for our Cree Asia-Pacific subsidiary office space in Kowloon, Hong Kong that is used in our Cree segment to provide sales and marketing
support in Southeast Asia. The agreement for use of this space expires in February 2003 unless renewed by the parties.
July 2004.
The Cree Microwave facility used for our Cree Microwave segment is approximately 49,600 square feet of administrative and manufacturing space located in Sunnyvale, California. We
sublease the premises from Spectrian through ourOur Cree Microwave subsidiary which entered into thecurrently maintains this space under a sublease agreement with Spectrianthat expires in December 2000 in
connection with our acquisition of the Cree Microwave business. Spectrian leased
the facility from its landlord in November 1996 for a 15-year term under lease
terms that included three options to extend the lease for up to an additional
fifteen years. Under the sublease between Cree Microwave and Spectrian, if
Spectrian exercises its option to extend the term of its master lease with its
landlord, Cree Microwave may also exercise an option to extend the sublease.2011. We have guaranteed the obligations of our subsidiary under the sublease.
We lease a facility for our Santa Barbara Technology Center in Goleta, California (formerly Cree Lighting leases two facilities in Goleta, CaliforniaCompany) for our Cree segment. OneThe facility, which covers 35,840 square feet, has a five-year lease that was signed in August 2000 with an option to extend the lease for another five-year period. This facility is used for research and development and administration. Cree has guaranteed the obligations of its subsidiary under this lease. Cree
Lighting has sub-leasedWe have subleased 10,217 square feet of this facility to a third party.
Thisparty under a two-year sub-leasesublease agreement was entered into in October 2000 and was
terminated in July 2002. A new two-year sub-lease for 10,217 square feet with a
new tenantthat was entered into in July 2002 and will expire in July 2004. Cree
Lighting also leases an additional facility on a month to month basis that is
used for research and development. We have given notice to terminate this lease
in August 2002.
Item 3. Legal Proceedings
Foreign Legal Proceedings
Nichia Corporation v. Sumitomo Corporation: In December 1999, one of our
distributors, Sumitomo, was named in a lawsuit filed by Nichia in Japan in the
Tokyo District Court. The complaint in the proceeding was directed to our
standard brightness LED products and alleged that these products infringe a
Japanese patent owned by Nichia, Japanese Patent No. 2,918,139. The suit sought
a permanent injunction against further distribution of the products in Japan. We
intervened in the proceeding and filed a response denying the allegations of
infringement. In May 2001 the Tokyo District Court ruled in favor of Cree and
Sumitomo, finding no infringement, and dismissed the complaint. Nichia has
appealed the ruling to the Tokyo High Court.
In April 2000, Nichia commenced two additional lawsuits against Sumitomo in
Tokyo District Court in which it alleged that our high brightness LED products
infringe a second Japanese patent owned by
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Nichia, Japanese Patent No. 2,778,405. The suits sought preliminary and
permanent injunctions against further distribution of the products in Japan. We
intervened in the proceeding and filed responses denying the allegations of
infringement. In October 2001, following an adverse ruling in a separate case on
the validity of the patent, Nichia dismissed the complaint seeking a preliminary
injunction, leaving the complaint for a permanent injunction pending. In
December 2001 the Tokyo District Court ruled in favor of Cree and Sumitomo in
the remaining lawsuit, finding no infringement, and dismissed the complaint.
Nichia has appealed the ruling to the Tokyo High Court.
Rohm Co., Ltd. v Nichia Corporation: In July 2001, Rohm Co., Ltd., or Rohm,
filed a complaint against Nichia in the Tokyo District Court. Rohm seeks a
ruling that sales of its products that incorporate our standard brightness LED
products do not infringe the patent that was the subject of Nichia's December
1999 lawsuit, Japanese Patent No. 2,918,139. We intervened in this proceeding in
December 2001 to assist in showing that our standard brightness LED products do
not infringe the patent. The case remains pending before the district court.
Domestic Legal Proceedings
North Carolina State University and Cree, Inc. v. Nichia Corporation and others:
On September 22, 2000, NCSU and Cree commenced a patent infringement lawsuit
against Nichia and its subsidiary, Nichia America Corporation, or Nichia
America, in the U.S. District Court for the Eastern District of North Carolina.
The complaint seeks enforcement of a patent, U.S. Patent No. 6,051,849, relating
to GaN-based semiconductors manufactured using lateral epitaxial overgrowth
technology, which permits the growth of high quality GaN-based materials useful
in manufacturing certain laser diodes and other devices. The patent was issued
to NCSU in April 2000 and is licensed to Cree on an exclusive basis under an
agreement executed in June 1999.
In their answer to the complaint, Nichia and Nichia America denied infringement
and asserted a counterclaim seeking a declaratory judgment that the subject
patent is invalid and not infringed. Nichia further alleged in its counterclaim
that we are infringing four of its U.S. patents relating to nitride
semiconductor technology, U.S. Patent Nos. 5,306,662; 5,578,839; 5,747,832; and
5,767,581. Nichia also asserted misappropriation of trade secrets and related
claims against Cree and a former Nichia researcher now employed by one of our
subsidiaries, Cree Lighting, on a part-time basis. In addition, as subsequently
amended, Nichia's counterclaim named Cree Lighting as a counterclaim defendant
on trade secret and related claims and asserted claims under the Computer Fraud
and Abuse Act against the Cree Lighting employee.
We have replied to the patent infringement claims of Nichia's amended
counterclaim, denying any infringement and asserting a claim seeking a
declaratory judgement that the four Nichia patents at issue are invalid,
unenforceable and not infringed. The Cree Lighting employee and we have also
replied to the trade secret and related claims in the amended counterclaim,
denying any liability. We included with our reply a claim for damages in which
we have alleged that Nichia's actions in bringing the counterclaim for patent
infringement were not taken for any legitimate purpose and constitute unfair
competition in violation of North Carolina law.
In response to Nichia's amended counterclaim, the Cree Lighting employee named
as a counterclaim co-defendant also moved to dismiss the claims against him
under the Computer Fraud and Abuse Act. The court granted the motion in April
2002 and dismissed the claims, finding that Nichia had failed to state
claims upon which relief could be granted. Cree Lighting also moved to dismiss,
or in the alternative to transfer, Nichia's claims against it for lack of proper
venue. In March 2002 the court found that it lacked
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venue over the claims Nichia had asserted against Cree Lighting and directed
that the claims be transferred to the U.S. District Court for the Central
District of California.
In December 2000 Nichia America filed a motion for summary judgement seeking
dismissal of the patent infringement claims Cree and NCSU have asserted. In
support of the motion Nichia argued that the relevant claims of the patent, U.S.
Patent No. 6,051,849, which relate to certain lateral epitaxial overgrowth
technology, were invalid as a matter of law on grounds of indefiniteness. The
North Carolina district court denied the motion April 2002, and the claims NCSU
and we asserted under this patent remain pending.
In January 2002, Cree and the Cree Lighting employee named as a counterclaim
co-defendant moved for summary judgment dismissing Nichia's trade secret
misappropriation and related claims. The motion sought dismissal on the ground
that Nichia had failed to specify any trade secrets that would support the
claims. At a hearing in July 2002, the North Carolina district court orally
informed counsel that the court was granting the motion. Although a written
order confirming the ruling has not yet been entered, we understand that the
trade secret misappropriated claims against Cree and the Cree Lighting employee,
and at least some of the related non-patent claims, have been or will be
dismissed upon entry of a written order confirming the court's oral ruling.
Also in January 2002, Nichia moved to strike certain of our defenses to its
patent infringement claims and to preclude us from obtaining or using any
evidence concerning those defenses. Nichia alleged in support of the motion that
the defenses were based upon information improperly disclosed by the Cree
Lighting employee and counterclaim co-defendant. Nichia filed an amended motion
to strike in May 2002 in which it sought the same relief. At a hearing in July
2002, the court advised counsel orally that the motion to strike was denied. As
a result our patent infringement defenses Nichia challenged remain available to
us to prove in future proceedings in the case.
Although there can be no assurances of success, we believe the counterclaims
asserted in the North Carolina case are without merit and we intend to defend
against them vigorously.
Trustees of Boston University and Cree Lighting Company v. Nichia Corporation
and others: AXT, Inc.
On May 3, 2001,June 10, 2003, the Trustees of Boston University and Cree Lighting Company commenced a patent infringement lawsuit against NichiaAXT, Inc., a manufacturer of gallium nitride-based LEDs and Nichia Americaother products, by filing a complaint in the U.S. District Court for the Northern District of California. The defendants moved to
transferIn the case to the U.S. District Court for the Eastern District of North
Carolina, and the case was transferred to the North Carolina district court in
October 2001.
In their complaint Boston University and Cree Lighting allege that Nichia and
Nichia America infringe a patent,AXT is infringing U.S. Patent No. 5,686,738, relating to
GaN-based semiconductor technology useful in manufacturing certain LED and other
semiconductor devices. The patent was issued to Boston University in 1997 and is
licensed to Cree Lighting under a March 2001 agreement. In the complaint, Cree
Lighting and Boston University allege that the defendants are infringing the
patententitled “Highly Insulating Monocrystalline Gallium Nitride Thin Films,” by, among other things, importing, selling andand/or offering for sale in the
United States certain GaN-based light emitting devicesgallium nitride-based LEDs covered by one or more claims of the patent. Effective June 29, 2003, Cree Lighting Company was merged into Cree, Inc. The ‘738 patent is owned by Boston University and is licensed to the Company on an exclusive basis. The complaint seeks damages and an injunction against infringement.
Rohm Co. Ltd, v. Nichia Corporationinfringements. On July 23, 2003, AXT filed an answer and others:counterclaim. In November 2001, we were served
with pleadings in which Cree was named as a defendant toits answer, AXT denies infringement and alleges that the patent is invalid. AXT also filed a counterclaim alleging among other things that the lawsuit is objectively baseless and was brought for improper purposes. AXT further alleges various antitrust, unfair competition, interference with contract and related claims. AXT’s counterclaim seeks damages, declaratory relief and an injunction against acts in violation of Nichiacertain antitrust and Nichia America inother laws. The plaintiffs’ replies to AXT’s counterclaim denying the allegations were filed on August 29, 2003. We intend to pursue this complaint vigorously.
Eric Hunter and Jocelyn Hunter v. Cree, Inc. and F. Neal Hunter
On June 12, 2003, Eric Hunter, and his wife Jocelyn Hunter, filed a lawsuit pending in the U.S.United States District Court for the EasternMiddle District of Pennsylvania.North Carolina in Greensboro, North Carolina naming us and Neal Hunter, Eric Hunter’s brother and our current chairman, as defendants. The complaint alleged claims for defamation and harassment as well as violations of employment and federal securities laws related to transactions with C&C, and other matters. The Hunters sought personally to recover damages in the underlying action,
which was brought by Rohm against Nichia and Nichia America, alleges that Nichia
is infringing certain U.S. patents owned by Rohm. Nichia's counterclaim, as
amended in December 2001,
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names both Rohm and us as counterclaim defendants and alleges that we violated
antitrust laws by conspiring with Rohm to exclude Nichiaexcess of $3 billion for unspecified harm resulting from the U.S. market
for high brightness LEDs. The counterclaim seeks actual and treble damages,
attorneys' fees and court costs. We have movedalleged conduct, as well as a preliminary injunction against future harassment. On June 26, 2003, we filed a motion to dismiss the counterclaimlawsuit and requested a hearing on the motion. On the same date, the Hunters filed a motion to amend their complaint to add additional state law claims. The Hunters subsequently sought to file three further amendments to their complaint to add additional allegations and parties, including Bank of America N.A., CIBC Worlds Markets, Prudential Securities, Soundview Technology Group, Inc., Morgan Keegan & Company, Inc. and Ernst & Young. In a hearing on August 14, 2003, the court denied the Hunters’ motion for lack of personal jurisdiction. Rohm has separately moveda preliminary injunction, finding that there was not enough evidence presented by the Hunters to even infer that Cree or Neal Hunter was responsible for the harassment that the Hunters alleged to have occurred. The court granted the Hunters’ motions to amend, but indicated that no further amendments would be allowed unless the Hunters could show extremely exceptional or unusual circumstances. On September 19, 2003, we filed a renewed motion to dismiss certain
countsthe Hunters’ complaint, as amended, and we will continue to vigorously defend the litigation. As a result of the counterclaims,commencement of the litigation, on June 14, 2003, our Board of Directors created a litigation
committee, comprised of directors Mr. Dolph W. von Arx and Mr. James E. Dykes, to direct the litigation and any related litigation, including those asserted against us, for failure to
state a claim on which relief can be granted. Both motions remain pending.
Although there can be no assurances of success, we believe the claims assertedshareholder class action lawsuits described below.
Shareholder Class Action Lawsuits
Between June 16 and August 18, 2003, nineteen purported class action lawsuits were filed in the Pennsylvania case are without meritUnited States District Court for the Middle District of North Carolina by certain alleged purchasers of our stock. The lawsuits name us, certain of our officers and current and former directors as defendants. These complaints allege, among other things, violations of federal securities laws, including violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5. In addition, among other claims, one or more of the complaints allege that we made certain false and misleading statements in connection with our acquisition of the UltraRF division of Spectrian, our supply agreement with Spectrian, our investment in World Theater, Inc. and our agreements with C&C. The complaints seek unspecified damages, plus costs and expenses, including attorney fees and experts’ fees. As is usual in these types of cases, we anticipate that all of the pending class actions will be consolidated and that an amended consolidated complaint will be filed, to which we will respond in due course. We intend to defend against themthe cases vigorously.
Other Litigation:
Regulatory Investigations
In July 2003, the SEC initiated an informal inquiry of us and requested that we voluntarily provide certain information. We are alsocooperating with the SEC in this informal inquiry and have provided the SEC with written responses and documents. At this time, we are unable to determine whether this informal inquiry may lead to potentially adverse action, although we do not believe that grounds justifying any enforcement action exist.
On August 7, 2003, the Nasdaq Stock Market, Inc. (“Nasdaq”) requested information from us regarding the informal inquiry being conducted by the SEC and our pending litigation. We are cooperating with this request and have provided Nasdaq with written responses and documents. At this time, we are unable to determine whether this request may lead to potentially adverse action.
Other Matters
We are currently a party to certain other pending litigation
arisinglegal proceedings incidental to our business. If an unfavorable resolution occurs in these other legal proceedings or on matters described above the normal courseCompany’s business, results of business. While we cannot predict the final
outcome of such litigation with certainty, we believe, based on consultation
with legal counsel, that the outcome of such other matters would not materially
affect ouroperations and financial condition or results of operations.
could be materially adversely affected.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.
2003.
PART II
Item 5. Market Price for Registrant'sRegistrant’s Common Equity and Related StockholderShareholder Matters
Common Stock Market Information.Information. Our common stock is traded in the Nasdaq National Market and is quoted under the symbol "CREE"“CREE”. The following table sets forth, for the quarters indicated the high and low sales prices as reported by Nasdaq. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may not represent actual transactions.
FY 2002 FY 2001*
------- --------
High Low High Low
---- --- ---- ---
First Quarter $ 27.500 $ 14.090 $ 81.719 $ 42.375
Second Quarter 29.730 13.761 64.125 27.750
Third Quarter 33.320 12.400 40.500 14.870
Fourth Quarter 14.340 10.350 36.650 12.210
*As adjusted for the two-for-one split effective on December 1, 2000.
commissions.
| FY 2003 | FY 2002 | |||||||||||
| High | Low | High | Low | |||||||||
First Quarter | $ | 17.720 | $ | 10.870 | $ | 27.500 | $ | 14.090 | ||||
Second Quarter | 25.420 | 8.989 | 29.730 | 13.761 | ||||||||
Third Quarter | 20.640 | 14.701 | 33.320 | 12.400 | ||||||||
Fourth Quarter | 26.880 | 15.500 | 14.340 | 10.350 | ||||||||
Holders and Dividends.Dividends. There were approximately 718772 holders of record of our common stock as of August 1, 2002.
September 5, 2003.
We have never paid cash dividends on our common stock and do not anticipate that we will do so in the foreseeable future. There are no contractual restrictions in place that currently materially limit, or are likely in the future to materially limit, us from paying dividends on our common stock, but applicable -30-
Sale of Unregistered Securities. There were no sales of unregistered securities during fiscal 2002.
Equity Compensation Plan information will be provided under Item 12.
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Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to the years ended June 29, 2003, June 30, 2002 and June 24, 2001 and June 25, 2000 and the consolidated balance sheet data at June 30, 200229, 2003 and June 24, 200130, 2002 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this report and should be read in conjunction with those financial statements and notes thereto. The consolidated statement of operations data for the years ended June 27, 199925, 2000 and June 28, 199827, 1999 and the consolidated balance sheet data at June 24, 2001, June 25, 2000 and June 27, 1999 and June 28,
1998 are derived from audited consolidated financial statements not included herein. All consolidated statement of operations and consolidated balance sheet data shown below are adjusted to reflect the acquisition of Nitres, nowlater known as Cree Lighting, effective May 1, 2000. This transaction was accounted for under the "pooling“pooling of interests"interests” method. We acquired the business comprising the Cree Microwave segment in December 2000. This transaction was accounted for under the purchase method. All share amounts have been restated to reflect our two-for-one stock splits effective July 26, 1999 and December 1, 2000.
Selected Consolidated Financial Data
(In
(In thousands, except per share data)
Years Ended
----------------------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $ 136,230 $159,533 $ 96,742 $ 53,424 $ 34,891
Contract revenue, net 19,204 17,694 11,820 8,977 9,071
------- ------- ------- ------ ------
Total revenue 155,434 177,227 108,562 62,401 43,962
Net (loss) income ($101,723) $ 27,843 $ 30,520 $ 12,448 $ 6,243
Net (loss) income per share, basic ($ 1.40) $ 0.39 $ 0.46 $ 0.21 $ 0.11
Net (loss) income per share, diluted ($ 1.40) $ 0.37 $ 0.43 $ 0.20 $ 0.11
Weighted average shares outstanding:
Basic 72,718 72,243 65,930 58,030 55,452
Diluted 72,718 75,735 70,434 60,864 57,974
As of
----------------------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
2002 2001 2000 1999 1998
-------- -------- -------- -------- -------
Balance Sheet Data:
Working capital $151,851 $244,178 $265,957 $ 59,889 $28,265
Total assets 504,195 615,123 486,202 145,933 74,379
Long-term obligations -- -- -- 4,650 11,046
Shareholders' equity 482,104 589,097 463,142 131,003 55,905
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| Years Ended | ||||||||||||||||
June 29, 2003 | June 30, 2002 | June 24, 2001 | June 25, 2000 | June 27, 1999 | ||||||||||||
Statement of Operations Data: | ||||||||||||||||
Product revenue, net | $ | 202,962 | $ | 136,230 | $ | 159,533 | $ | 96,742 | $ | 53,424 | ||||||
Contract revenue, net | 26,860 | 19,204 | 17,694 | 11,820 | 8,977 | |||||||||||
Total revenue | 229,822 | 155,434 | 177,227 | 108,562 | 62,401 | |||||||||||
Net income (loss) | $ | 34,901 | $ | (101,723 | ) | $ | 27,843 | $ | 30,520 | $ | 12,448 | |||||
Net income (loss) per share, basic | $ | 0.48 | $ | (1.40 | ) | $ | 0.39 | $ | 0.46 | $ | 0.21 | |||||
Net income (loss) per share, diluted | $ | 0.46 | $ | (1.40 | ) | $ | 0.37 | $ | 0.43 | $ | 0.20 | |||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 73,196 | 72,718 | 72,243 | 65,930 | 58,030 | |||||||||||
Diluted | 75,303 | 72,718 | 75,735 | 70,434 | 60,864 | |||||||||||
| As of | ||||||||||||||||
June 29, 2003 | June 30, 2002 | June 24, 2001 | June 25, 2000 | June 27, 1999 | ||||||||||||
Balance Sheet Data: | ||||||||||||||||
Working capital | $ | 181,064 | $ | 151,851 | $ | 244,178 | $ | 265,957 | $ | 59,889 | ||||||
Total assets | 563,694 | 504,195 | 615,123 | 486,202 | 145,933 | |||||||||||
Long-term obligations | — | — | — | — | 4,650 | |||||||||||
Shareholders’ equity | $ | 535,371 | $ | 482,104 | $ | 589,097 | $ | 463,142 | $ | 131,003 | ||||||
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
All statements, trend analysis and other information contained in the following discussion relative to future markets for our products and trends in and anticipated levels of revenue, gross margins, and anticipated expense levels,expenses, as well as other statements includingcontaining words such as "may," "will," "anticipate," "believe," "plan," "estimate,"
"expect,"“may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect,” and "intend"“intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Certain“Certain Business Risks and Uncertainties"Uncertainties” in Item 1 of this report, as well as other risks and uncertainties referenced in this report.
Business Overview
We are the world leaders in developingdevelop and manufacturingmanufacture compound semiconductor materials and electronic devices made from SiCsilicon carbide (SiC) and a leading developer and
manufacturer of optoelectronic and electronic devices made from GaN and related
materials on SiC substrates.Group III nitrides (GaN). We derive the largest portion of our revenue from the sale of blue, green and near ultra-violet, or UV, blue and greenultraviolet (UV) light emitting diodes or
LEDs.(LEDs). We currently offer LEDs at three brightness levels:
- XBright(TM)UV,
Our LED devices are utilizedused by end usersmanufacturers as a lighting source for wireless
handsets,mobile appliances, automotive dashboard lighting, indicator lamps, miniature white lights, indoor and outdoor full color displays and signs, traffic signals and other lighting applications. We recognize product revenue at the time of
shipment in accordance with the terms of the relevant contract. When our
inventory is maintained at a consigned location, revenue is recognized when our
customer pulls products for their use. LED products represented 58%75% of our revenue in fiscal 20022003 and 65%58% in fiscal 2001.
During fiscal 2002 and fiscal 2001, approximately 16% and 11%, respectively, of
our revenue came from the sales of RF and microwave devices from our Cree
Microwave segment. These RF power transistors are the semiconductor content for
power amplifiers that are used in base stations for cellular networks. 2002.
We also derive revenue from the sale of advanced materialssemiconductor wafers made from SiC that are used by our customers for manufacturing LEDs and power devices by our customers, or for research and development for new semiconductor applications.development. Sales of SiC materialwafer products represented 13%9% of our revenue in fiscal 20022003 and approximately 14% during11% of our revenue in fiscal 2001.2002. We also sell SiC materials in bulk crystal form for use in gemstones to Charles & Colvard (C&C). Sales of SiC crystals for gemstones represented 3% of our revenue in fiscal 2003 and 2% of our revenue in fiscal 2002. Our other products include SiC-based power and radio frequency (RF) devices. We received no significantless than 1% of total revenues from sales of power devices or SiC based RF devices in fiscal 2003 and fiscal 2002.
Through our Cree Microwave segment, we also develop and manufacture RF power transistors and modules using silicon technologies. During fiscal 2003 and fiscal 2002, or fiscal 2001.
approximately 1% and 16%, respectively, of our revenue came from the sale of RF devices from our Cree Microwave segment. These RF power transistors are a key semiconductor component for power amplifiers that are used in base stations for wireless networks.
The balance of our revenue, 12% for fiscal 20022003 and 10% in12% for fiscal 20012002 is derived from contract research funding. Under various programs, U.S. Government entities furtherassist us in the development of ournew technology by funding our research and development efforts. Contract revenue includes funding for direct research and development costs and a portion of our general and administrative expenses and other operating expenses for contracts under which we expect funding to exceed direct costs over the life of the contract. For contracts under which we anticipate that direct costs will exceed amounts to be funded over the life of -33-
Fiscal 20022003 Overview
We reported record revenue in fiscal 2003 primarily due to customer demand for our LED products for the mobile appliance and automotive markets. Our LED revenue and units sold increased 90% and 111%, respectively, in fiscal 2003 over the previous fiscal year. We saw the most significant increase in product sales in our mid-brightness LEDs, which our customers estimate, were used mostly in the keypads of handheld mobile appliances as well as dashboards for automobiles. We completed the introduction of our MegaBright(TM)mid-brightness MegaBright LED product line during fiscal 2002
with the commercial release of three new products: the MegaBright(TM) UV device,
the traffic signal green device and the true green device used for display signs
and other lighting applications. The MegaBright(TM) blue device was released in
the fourth quarter of fiscal 2001. The UV device offers an alternative path to
white light compared to the MegaBright(TM) blue LED. Some customers prefer a
blue LED covered with a yellow-emitting phosphor to create white light. Other
customers believe the UV LED with red, green and blue-emitting phosphors
provides a preferable white light emission. Combining a red, green and blue LED,
or a blue and yellow LED, in an appropriate package are other means of creating
white light solid state lamps. A traffic signal made of green LEDs offers lower
power consumption at 6-12 watts versus 85-150 watts for an incandescent bulb in
certain cases. Consequently, municipalities and other government organizations
are choosing to install LED traffic signals due to reduced energy consumption
resulting in lower electricity bills and reduced maintenance costs due to the
longer lifetimes of LEDs. Applications for the true green device target full
color indoor and outdoor video displays including sports stadiums and large
advertising panels. The use of blue and green LEDs in full-color outdoor signs
is a well-established market, and one2002. Much of the primary applications for nitrideincrease in our LED revenue was attributable to this product line, which offers higher brightness, as well a competitive pricing of our other mid-brightness devices. Mid-brightness products made up 87% of our LED revenue in fiscal 2003.
We continue to work with our customers toward design wins using our XBright LEDs. The MegaBright(TM)XBright product line was an important revenue stream forfamily, which we initially introduced in fiscal 2002, and has replaced some demand for our older high brightness products. Our
high brightness product line had the biggest percentage decline in revenue
compared to fiscal 2001. For fiscal 2003, we will combine results for our
MegaBright(TM), UltraBright(TM) and high brightness devices for reporting
purposes and reflect these sales as our mid-brightness products. During the
fourth quarter of fiscal 2002, our mid-brightness chips comprised 88% of LED
sales.
We also introduced the XBright(TM) family of LEDs during fiscal 2002. This new
product family delivers to our customers increased brightness by approximately
40 percent over the MegaBright(TM) family of LEDs. Targettargets applications for the
XBright(TM) devicesthat include miniature white lights, traffic signals and video screens. The XBright(TM)XBright LED technology incorporates a flip chipjunction down design and utilizes the optical benefits of SiC while maintaining the vertical structure advantages of a single top contact. This design allows for a standard size chip similar to our other devices.LED devices, however, it does present significant packaging challenges for many of our traditional customers. We offerare making progress working with our customers to address die attachment issues in the packaging process which they encountered using our XBright products. As a completeresult, XBright LEDs comprised 3% of LED revenue during fiscal year 2003. We are working to develop a lower temperature die attach compatible product family of XBright(TM) LEDs:
UV, blue, traffic green and true green. During the fourth quarter of fiscal
2002, we continued to work through packaging difficulties encountered byaddress some of our customers in usingneeds and we project that XBright products will be a greater percentage of our XBright(TM) products. As a result, XBright(TM) LEDs
comprised only 1% of LED revenue in the quarter. We modified the chip after its
initial introduction in response to customer packaging suggestions, and we
target to increase the sales volume of this product in the first half ofduring fiscal 2003. Customer interest in the product remains strong, as we believe the
XBright(TM) chip is the brightest (which is defined as the optical power output
from a chip at 20 milliamps of drive current based on our internal measurement)
nitride LED currently available in the marketplace.
2004.
Shipments of our standard brightness devices remained stable in fiscal 20022003 in comparison to fiscal 20012002 and were supported by automotive and indicator light designs. During the fourth quarterdesigns from a number of customers, including Osram Opto Semiconductors GmbH (Osram). For fiscal 2002,2003, standard brightness products were approximately 11%10% of our LED revenue.
Revenue from Cree Microwave was $24.8 million during
During fiscal 2002. Our biggest
challenge for Cree Microwave will be to diversify our Spectrian-concentrated
business. However, due to the weak economic environment for microwave devices
and the long qualification process for our products, we believe that this
diversification will develop over many quarters. In the near term, our goal is
to complete qualification of the new laterally diffused metal oxide
semiconductor, or LDMOS 8 products during the
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first quarter of fiscal 2003. If we fail to attain this goal, revenue from this
segment will likely decline in future quarters. Our Supply Agreement with
Spectrian, Cree Microwave's largest customer, allows the customer to reduce its
purchase obligations significantly.
Overall, for fiscal 2002,2003, SiC materials revenue declined 19%increased 11% over the prior year due to a 57% reduction in gemstone sales and a 6% decrease in wafer sales. Sales of
material for use in gemstones were lower19% increase in the current year as Charles &
Colvard, or C&C, our sole customer for such materials, had built up inventory in
fiscal 2001 as theiraverage sales slowed. During fiscal 2002, wafer volumeprice received for our material sales increased 8% whilewafers. The higher average sales prices declined 12% year over
year dueprice resulted from increased sales to greater sales toresearch and development customers, who generally purchase higher priced wafers than volume customers using our product for commercial applications. Revenue from sales of SiC materials for use in gemstones was 190% higher in fiscal 2003 as C&C, our sole customer for such material, increased its demand, yet it still remained at 3% of our overall revenue.
Revenue from microwave products declined 88% in fiscal 2003 over fiscal 2002 as we entered into an agreement in November 2002 terminating our supply agreement with Spectrian. Prior to the termination of the supply agreement with Spectrian, revenue from Spectrian comprised 99% of our revenue for the Cree Microwave segment. In the second quarter of fiscal 2003, we received a $5.0 million one time payment from Spectrian associated with the termination of the supply agreement between Cree Microwave and Spectrian. This one time payment was recorded as “other operating income” on the statement of operations.
Government contract revenue increased 9%40% in fiscal 20022003 over the prior year as we received several new contract awards during fiscalin 2002. Our government
contract backlog exceeds $51.0In June 2002, we were awarded two contracts by the Office of Naval Research (ONR), with a total value of approximately $14.4 million as part of the Wide Bandgap Semiconductor Technology Initiative of the Defense Advanced Research Projects Agency, or DARPA. The first contract provides for up to $8.8 million in government funding over an 18-month period for work directed to microwave and related technologies. The second ONR/DARPA contract provides for up to $5.6 million in government funding over an 18-month period for work directed toward SiC high voltage, high power switching devices for high power conversion and distribution technology. Additionally, we were awarded with another contract in June 30, 2002 funded by DARPA, through the Army Research Laboratory (ARL) to pursue the development of UV LEDs and lasers for a variety of military communications and bio-threat detection applications under DARPA’s SUVOS program. This cost share contract provides for up to $14.4
million in U.S. Government funding over a four-year period. In July 2002, we target
contract revenue to increase duringwere awarded government contracts totaling $26.5 million, if fully funded, over a three-year period from ONR and the Air Force Research Laboratories (AFRL) for SiC microwave monolithic integrated circuit (MMIC) process development. These contracts are jointly funded by the U.S. Navy, the Missile Defense Agency and the Department of Defense’s Title III program.
In fiscal 2003 due to these new awards, subject
to the government's ability to terminate or reduce funding under the contracts.
During the past year,2004, we utilized a greater proportionanticipate that one of our equipmentbest growth opportunities will be for blue LEDs that our customers would convert to white LEDs for mobile appliance and infrastructure to perform research and development work to support the
commercialization of new products as reflectedother applications. Based on trends in the introduction of our
MegaBright(TM) and XBright(TM) products. Weindustry, we believe that, over the next several
quarters, this production capacitythere will be requiredan increase for using white LEDs as a backlight for the keypad and for full color screens in mobile phones and other handheld electronics. We recently have introduced our MegaBright Plus, XBright Plus, and RazerThin products to support the growth in
demand generated by our customers' recent design wins incorporating our
products. During fiscal 2003, we target to increase our throughput, subject to
the acceptance of our products by our customersthese and market conditions. As volume
throughput rises, our cost of LED chips and unit wafer costs are anticipated to
decline as fixed costs are spread over more units.
other applications.
Critical Accounting Policies.
Policies
The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing our financial statements, we must make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies include those policies that are reflective of significant judgments and uncertainties, which potentially could produce materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill.Goodwill. We have approximately $330.3$354.3 million of long-lived assets as of June 30, 2002,29, 2003, including approximately $211.7$258.4 million related to fixed assets and $64.2capitalized patents, $58.8 million in long-term investments held to maturity.maturity and $37.1 million of other long term assets that includes net investments in privately held companies of $15.6 million and deferred taxes of $20.9 million. In addition to the original cost of these assets, their recorded value is impacted by a number of management estimates that are determined based on our policy
elections,judgment, including estimated useful lives, salvage values and, in 2002, impairment charges. In accordance with SFAS 121, "AccountingStatement of Financial Accounting Standards (SFAS) #144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"of”, or SFAS 121,144, we record impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets have been impaired. In making these determinations, the Company utilizeswe utilize certain assumptions, including, but not limited to: (i) estimations of the fair market value of the assets, and (ii) estimations of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company'sour operations
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In addition, during
During the third quarter of fiscal 2002, we completed an impairment analysis of the intangible assets and goodwill related to the acquisition of Cree Microwave. This analysis was performed due to significant changes in business conditions at the operating segment. First, Cree Microwave amended its supply agreement with Spectrian effective March 31, 2002, which resulted in a significant reduction in quarterly revenue expectations. In addition, Cree Microwave'sMicrowave’s outlook for acquiring additional customers in the near term weakened due to delays in the development of laterally diffused metal oxide semiconductor (LDMOS) technology, the overall deteriorating economic conditions and long product qualification cycles. Also, many of the principal products that Spectrian indicated it would purchaseconsider purchasing from Cree Microwave in the future have
were not yet beenfully qualified and, subsequently not released to production. Underproduction at the amended supply
agreement, if Cree Microwave is not able to produce LDMOS 8 devices qualified
for Spectrian's applications in a timely manner, revenue from Spectrian may be
significantly reduced after the June 2002 quarter.time. As a result of this impairment analysis, we estimated that the future cash flows of the Cree Microwave business would not be sufficient to provide for recovery of the carrying value of its intangible assets and goodwill. Therefore, the remaining balance of intangible assets and goodwill of $76.5 million was deemed fully impaired and was written off.
off in March 2002. In November 2002, we entered into an agreement terminating our supply contract with Spectrian, and, due to the changed circumstances, management performed an impairment analysis of the tangible assets at Cree Microwave as of December 29, 2002 and June 29, 2003 in accordance with SFAS 144. Based on estimations of the fair market value of the assets, and estimations of future cash flows, we determined that the estimated undiscounted cash flow exceeded the amount of the book value of the long-term tangible assets. As a result, no additional Cree Microwave assets were determined to be impaired or written down at that time.
Accounting for Marketable and Non-Marketable Equity Securities. From time to time, we evaluate strategic opportunities and potential investments in complimentary businesses and as a result may invest in marketable equity securities. At June 29, 2003, we held no marketable equity securities. During the second quarter of fiscal 2003, we sold our entire position in two publicly traded companies. We sold 356,000 common shares in Microvision, Inc. (Microvision) for $1.8 million, with a net loss on the sale of $36,000 recognized during the second quarter of fiscal 2003. We also sold 691,000 common shares in Emcore Corporation (Emcore) for $2.1 million, with a net loss on the sale of $2.0 million recognized during the second quarter of fiscal 2003.
We classify our marketable securities that are not trading or "held-to-maturity"“held-to-maturity” securities as "available-for-sale"“available-for-sale”. We carry these investments at fair value, based on quoted market prices, and unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of shareholders'shareholders’ equity. Realized gains and losses are recognized when realized upon sale or disposition or when declinesdisposition. Declines in value that are deemed to be other than temporary in accordance with SFAS 115, "Accounting“Accounting for Certain Debt and Equity Securities".Securities” are also recorded in the income statement. We have a policy in place to review our equity holdings on a regularperiodic basis to evaluate whether or not each security has experienced an "other-than-temporary"“other-than-temporary” decline in fair value. Our policy requires, among other things, a review of each of the companies'company’s cash position, earnings/earnings and revenue outlook, stock price performance, liquidity, ability to raise capital and management/ownership.management and ownership changes. Based on this review, if we believe that an "other-than-temporary"“other-than-temporary” decline exists in the value of one of our marketable equity securities, it is our policy to write down these equity investments to the market value. In addition, we record a write-down for investments in publicly held companies for an “other than temporary” impairment any time the market price of the security has remained below the Company’s average cost for two consecutive fiscal quarters, unless strong positive evidence exists that makes it clear that an “other than temporary” write-down would be inappropriate under the guidance of SFAS 115. The related write-down will then be recorded as an investment loss on our consolidated statements of operations. During fiscal 2003, we recorded a recognized loss of $2 million related to available for sale marketable securities as we sold our investments in Microvision and Emcore. During fiscal 2002, we recorded an "other-than-temporary"“other-than-temporary” investment loss of $22.0 million related to our available-for-sale marketable securities based primarily on sustained reductions in stock price performance.
We also make strategic investments in the equity securities of privately held companies.companies from time to time. Since we do not have the ability to exercise significant influence over the operations of these companies, these investment balances are carried at cost and accounted for using the cost method of accounting. Since theThe shares of stock we received in these investments are not presently publicly traded and there is no other established market value for these securities. We have a policy in place to review the fair value of these investments on a regular basis to evaluate the carrying value of such investments. This policy includes, but is not limited to, reviewing each of the companies'companies’ cash position, financing needs, earnings/earnings and revenue outlook, operational performance, management/management or ownership changes, and competition. The evaluation
process is based on information that we request from theare provided by these privately held companies. This information isSince these companies are not subject to the same disclosure regulations as U.S. public companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. If we
believe that the carrying value of an investment is at an amount in excess of our estimate of fair value, and we have determined that the decline is “other than temporary”, it is our policy to record a write-down of the investment. This write-down is estimated based on the information described above, and it is recorded as an investment loss on our consolidated statements of operations. During fiscal 2002, we recorded a write-down on these investments of $20.4 million, representing our best estimate of "other-than-temporary"“other-than-temporary” declines in value based on a review of those factors described above. Estimating the fair value of non-marketable
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Inventories. Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out method for finished goods and work in process accounts and the average cost method is used for raw materials for the Cree segment. The Cree microwave segment uses a standard cost method. We evaluate our ending inventories for excess quantities, impairment of value and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand based upon input received from our customers, sales team and management estimates. We generally reserve for inventories on hand that are greater than twelve months old, unless there is an identified need for the inventory. In addition, we write off inventories that are considered obsolete based upon changes in customer demand, manufacturing process changes that result in existing inventory obsolescence or new product introductions, which eliminateeliminates demand for existing products. Remaining inventory balances are adjusted to approximate the lower of our manufacturing cost or market value. If future demand or market conditions are less favorable than our projections,estimates, additional inventory write-downs may be required and would be reflected inincrease cost of salesrevenue in the period the revision is made. We evaluate the adequacy of these reserves quarterly.
During the fourth quarter of fiscal 2003, we reserved $159,000 related to SiC wafer inventory that was slow moving as our customer demand for this type of product had slowed. As a result of the termination of the supply agreement with Spectrian in the second quarter of fiscal 2003, we recorded a $1.3 million reserve in the Cree Microwave segment for inventory that was slow moving or specifically identified to be sold to Spectrian, including customized parts. We also reserved an additional $522,000 of inventory at Cree Microwave during the first quarter of fiscal 2003. This inventory charge was taken because of change in demand from Spectrian. Spectrian initially indicated that they would have strong demand for this type of transistor and later determined that the demand had significantly weakened. During the three months ended December 29, 2002, we reserved $784,000 in the Cree segment for slow moving LED and wafer inventory. In addition, during the first quarter of fiscal 2003, we wrote down $185,000 of certain LEDs to an estimated market value calculation. In the third quarter of fiscal 2002, we recorded a $4.5 million reserve at our Cree Microwave segment for non-LDMOS and older LDMOS devices as a result of contract negotiations with Spectrian that identified these devices as obsolete. All of these adjustments were recorded through cost of revenue. In addition, we also wrote off $1.0 million of costs associated with initial XBright products and $417,000 of costs associated with LDMOS8 devices as research and development expenses in the fourthfirst quarter of fiscal 2002,2003. The $1.0 million write down was attributable to early generation XBright devices that were later determined to be non-saleable because of design deficiencies. The $417,000 write-down was associated with LDMOS8 products that were on hand and determined not to be saleable for similar reasons. In both cases, our customers had initially accepted the devices and we recorded inventory
write-downs of $690,000 related to ourproduced initial shipmentsamounts of the XBright(TM)
familyproduct. Based on history with our customers, normally once products are accepted, they are ultimately qualified. Thus we concluded that capitalizing the cost of these items, as inventory was appropriate. However, in both cases, our customers later rejected the products. Therefore, we wrote off the entire amount of inventory as research and development expenses, because the materials were never qualified as completed devices or ultimately sold to customers. In the case of the LED devices, our customers returned all products due to a packaging issue identified by someshipped of our customers.
that technology.
Revenue Recognition and Accounts Receivable.Receivable. Revenue on product sales is recognized when persuasive evidence of an arrangementa contract exists, such as when a purchase order or contract is received from the customer, the price is fixed, title toof the goods has changedtransferred and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment. The majority of our products have shipping terms that are FOB or FCA shipping point, which means that we fulfill the obligation to deliver when the goods are handed over and into the charge of the carrier at our shipping dock. This means that the buyer bears all costs and risks of loss of or damage to the goods from that point. The difference between FOB and FCA is that under FCA terms, the customer designates a shipping carrier of choice to be used. In somecertain cases, we ship our product Cost Insurance Freight (CIF). Under this arrangement, revenue is recognized under FOB shipping point shipping terms, however, we are responsible for the cost of insurance to transport the product as well as the cost to ship the product. For all of our sales other than those with CIF terms, we invoice our customers only for shipping costs necessary to physically move the product from our place of business to the customer’s location. The costs primarily consist of overnight shipping charges. We incur the direct shipping costs on behalf of the customer and invoice the customer to obtain direct reimbursement for such costs. We account for our shipping costs as a part of cost of revenue and record the reimbursement of such costs by our customer as a direct offset and reduction to cost of revenue. Beginning in fiscal year 2004, we will record the amount of freight that is invoiced to our customers as revenue, with the corresponding cost recorded as cost of revenue. We estimate that this change will amount in an insignificant contribution to revenues. If inventory is maintained at a consigned location, in that situation, revenue is recognized aswhen our customer pulls inventoryproduct for theirits use. We provide our customers with a
limited rightrights of return.return for non-conforming shipments and warranty claims for up to 36 months for Cree Microwave products. Revenue is recognized from our customers at shipment or when product is
pulled from consigned inventory, andshipment. For certain customers we record a reservedefer revenue for certain sales returns. We
make estimates of potential future product returns related to current period
product revenue. We analyze historical returns, current economic trends and
changescosts incurred in customer demand and acceptance ofselling our products when evaluatingand for managing our inventory, up to the adequacybalance of the allowancedeferred revenue. This deferred revenue amounted to $5.5 million and $741,000 as of June 29, 2003 and June 30, 2002, respectively. Please see discussion in Item 1 of this report under “Distributorship Agreement with Sumitomo Corporation”, for sales returns. further information.
Significant judgments and estimates made by management are used in connection with establishing the allowance for sales returns. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. The allowance for sales returns at June 30, 200229, 2003 was $455,000.
$644,000.
Revenue from government contracts is recorded on the percentage-of-completion method as contract expenses are incurred. Contract revenue represents reimbursement by various U.S. Government entities to aid in the development of new technology. The applicable contracts generally provide that we may elect to retain ownership of inventions made in performing the work, subject to a non-exclusive license retained by the government to practice the inventions for government purposes. The contract funding may be based on either a cost-plus or a cost-share arrangement. The amount of funding under each contract is determined based on cost estimates that include direct costs, plus an allocation for research and development, general and administrative and the cost of capital expenses. Cost-plus funding is determined based on actual costs plus a set percentage margin. For the cost-share contracts, the actual costs relating to the activities to be performed by us under the contract are divided between the U.S. Government and us based on the terms of the contract. The government’s cost share is then paid to us. Activities performed under these arrangements include research regarding SiC and Group III nitride materials and devices. The contracts typically require the submission of a written report that documents the results of such research, as well as some material deliverables.
The revenue and expense classification for contract activities is based on the nature of the contract. For contracts where we anticipate that funding will exceed direct costs over the life of the contract, funding is reported as contract revenue and all direct costs are reported as costs of contract revenue. For contracts under
which we anticipate that direct costs of the activities subject to the contract will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses and related funding is reported as an offset of those expenses.
Accruals for Liabilities and Warranties. At times, we must make estimates for the amount of costs that have been incurred but not yet billed for general services, including legal and accounting fees, costs pertaining to our self-funded medical insurance, warranty costs at Cree Microwave and other expenses. Many of these expenses are estimated based on historical experience or averages and information gained directly from the service providers. Material
differences may result in the amount and timing of our expenses for any period
if management made different judgments or utilized different estimates.
Valuation of Deferred Tax Assets. As of June 30, 2002, the Company29, 2003, we had $28.5$22.8 million recorded as a deferred tax assets. These assets wereasset. This asset was recorded as a result of tax benefits associated with the $143.9 million of significant charges taken in fiscal 2002. These charges were recorded for the write-off of property and equipment, the impairment of goodwill and intangible assets at Cree Microwave and other charges resulting from the downturn in Cree Microwave’s business and the "other“other than temporary"temporary” charges taken on our investments. We did not record a reserve against
these deferred tax assets as we target a return to
-37-
profitable operations over the next several periods and target being able to use
the deferred tax assets in their entirety.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgementmanagement’s judgment in its application. There are also areas in which management's judgementmanagement’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto included in this Annual Report on Form 10-K which contain a discussion of our accounting policies and other disclosures required by accounting principles generally accepted in the United States.
Results of Operations
The following table shows our consolidated statementstatements of operations data expressed as a percentage of total revenue for the periods indicated:
| Years Ended | |||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | |||||||
Revenue: | |||||||||
Product revenue, net | 88.3 | % | 87.6 | % | 90.0 | % | |||
Contract revenue, net | 11.7 | 12.4 | 10.0 | ||||||
Total revenue | 100.0 | 100.0 | 100.0 | ||||||
Cost of Revenue: | |||||||||
Product revenue, net | 47.7 | 50.3 | 43.3 | ||||||
Contract revenue, net | 9.1 | 8.9 | 7.3 | ||||||
Total cost of revenue | 56.8 | 59.2 | 50.6 | ||||||
Gross margin | 43.2 | 40.8 | 49.4 | ||||||
Operating expenses: | |||||||||
Research and development | 13.6 | 18.0 | 7.3 | ||||||
Sales, general and administrative | 11.5 | 16.5 | 10.2 | ||||||
Intangible asset amortization | — | 4.4 | 2.6 | ||||||
In-process research and development costs | — | — | 9.8 | ||||||
Impairment of goodwill | — | 49.2 | — | ||||||
Loss on disposal of fixed assets | 0.7 | 12.2 | — | ||||||
Other expense | 0.1 | 1.2 | — | ||||||
Total operating expense | 25.9 | 101.5 | 29.9 | ||||||
(Gain) on termination of supply agreement | (2.2 | ) | — | — | |||||
Income (loss) from operations | 19.5 | (60.7 | ) | 19.5 | |||||
Non-operating income (expense): | |||||||||
(Loss) gain on investments in marketable securities | (0.9 | ) | (13.8 | ) | 3.4 | ||||
Loss on long term investments | — | (13.1 | ) | (2.6 | ) | ||||
Other non-operating income (expense) | 0.1 | — | (0.8 | ) | |||||
Interest income, net | 1.8 | 3.7 | 8.8 | ||||||
Income (loss) before income taxes | 20.5 | (83.9 | ) | 28.3 | |||||
Income tax expense (benefit) | 5.3 | (18.5 | ) | 12.6 | |||||
Net income (loss) | 15.2 | % | (65.4 | )% | 15.7 | % | |||
Comparison of Fiscal Years Ended June 29, 2003 and June 30, 2002
Revenue. Revenue increased 48% to $229.8 million in fiscal 2003 from $155.4 million in fiscal 2002. Higher revenue was primarily attributable to greater product revenue, which increased 49% to $203.0 million in fiscal 2003 from $136.2 million in fiscal 2002. Much of the increase in revenue resulted from significantly higher unit shipments of our LED products due to stronger demand from our customers primarily for mobile appliance and automotive applications. LED revenue was $172.3 million and $90.5 million, for fiscal 2003 and 2002, respectively. The most significant increase in revenue in fiscal 2003 came from sales to our Japanese distributor, Sumitomo. Revenue from sales to Sumitomo increased by 153% or $33.3 million in fiscal 2003 as compared to fiscal 2002 due to strong demand among Japanese manufacturers for our products for mobile appliance, automotive, consumer products and indicator light applications. Revenue from sales to Osram and Agilent also increased by 63% and 64%, respectively, or $19.4 million and $8.9 million, respectively, in fiscal 2003 over the prior year comparative period. Much of this increased business was
caused by demand for our products used in mobile appliances as well as automotive and other applications. During fiscal 2003, we also noted an increase in business from several smaller Asian LED packagers as our customer base became more diversified. The only significant decline in revenue came from Spectrian, which was acquired by Remec in December 2002, where revenue from sales declined 96% or $23.5 million in fiscal 2003 as compared to fiscal 2002. Spectrian or Remec purchases silicon RF transistors from our Cree Microwave segment. The distributorship agreement with Sumitomo requires us to establish reserves at the time we ship LED products to Sumitomo based upon a percentage of the total purchase price of such products. Revenue is recognized from our customers at shipment. For certain customers we defer revenue for certain sales costs incurred in selling our products and for managing our inventory, up to the balance of the deferred revenue. This deferred revenue amounted to $5.5 million and $741,000 as of June 29, 2003 and June 30, 2002, respectively.
Our LED revenue increased 90% in fiscal 2003 as compared to fiscal 2002 and made up 75% of our total revenue in fiscal 2003. Our average LED sales price declined 9% for the twelve months ended June 2003 compared to the prior year. This decrease was in line with our strategy to lower prices to our customers to expand applications using nitride LEDs. Our average sales price for LEDs also was lower due to increasing price competitiveness in the marketplace and a change in the product mix of our sales to customers. For fiscal 2003, our LED chip volume increased 111% over prior year shipments. The most significant increase to revenue occurred in our mid-brightness range of LED products including our high brightness, UltraBright and MegaBright products. Our lower range mid-brightness LED products have been incorporated into new designs in the keypads of several mobile phone models that feature a blue color as well as blue LEDs that are used as the backlight for blue displays. In addition, these LED chips are now used in other products targeting gaming equipment, consumer products and office automation applications. The introduction of the MegaBright blue, green and UV products in fiscal 2002 also has generated new design wins for our customers. The MegaBright chip is approximately two times brighter than our previous generation devices and is similar to the brightness that is currently offered by our primary competitors. These MegaBright products have replaced some existing demand for our previous generation high brightness devices. However, due to the MegaBright product line’s higher performance, it has also generated new opportunities in other markets, particularly mobile appliance applications for blue and white LED backlight designs. Blue and white LEDs have replaced a portion of the yellow-green LEDs that have traditionally backlit mobile handsets as more handsets now offer blue backlit keypads and full color displays backlit by white LEDs. The MegaBright product line also is being used in new automotive designs from both European and Asian manufacturers for the 2003 model year.
During fiscal 2002, we introduced our XBright family of LEDs, including blue, green and UV devices. These products offer a higher brightness than our MegaBright products. We completed the introduction of these devices in the second half of fiscal 2002; however, we continue to work with customers to optimize our chip design for use in their packages. While our XBright products did not contribute significantly to our revenue in fiscal 2003, we project that they will be more significant to our revenue in fiscal 2004 for high brightness applications such as mobile appliances, display signs, traffic signals and lighting applications. Shipments of our standard brightness products were flat in fiscal 2003 in comparison to the prior year due to stable demand for automotive and indicator light applications.
SiC wafer revenue was $19.5 million and $17.5 million, for fiscal 2003 and 2002, respectively. Wafer revenue increased 11% over the prior year due to greater sales to the corporate and university research customers. Wafer units declined 6% while the average sales price increased 19% during fiscal 2003, due to a lower mix of shipments to Osram, which uses wafers in commercial production. Since Osram uses the wafers in commercial high volume production, they receive volume discounts on their purchases, therefore, these sales have a lower average sales price. We also sold more wafers with epitaxial layers during fiscal 2003, which contributed to a higher average sales price. Wafer revenue made up 9% of our total revenue in fiscal 2003.
SiC material revenue from material sold for gemstone use was $7.4 million and $2.6 million, for fiscal 2003 and 2002, respectively. Revenue from sales of our SiC materials for use in gemstones increased 190% during fiscal 2003 as compared to fiscal 2002 as C&C increased their orders to us. Revenue from gemstone materials was 3% of our total sales for fiscal 2003. During the fourth quarter of fiscal 2003, we experienced lower yields of useable materials in our production of gemstone material.
Revenue from microwave products was $3.0 million and $25.1 million, for fiscal 2003 and 2002, respectively. Microwave revenue made up 1% of our total revenue for fiscal 2003. Revenue from these products decreased 88% to $3.0 million in fiscal 2003 from $24.8 million in fiscal 2002. The decrease in revenue resulted from the termination of the supply agreement with Spectrian in November 2002. Approximately 99% of Cree Microwave revenues were derived from shipments to Spectrian in fiscal 2002. Prior to the termination of the supply agreement, Spectrian had reduced its purchase obligations beginning in March 2002 because our LDMOS8 products had not been qualified. We amended our agreement with Spectrian in March 2002, which resulted in Spectrian ordering fewer products each quarter until the agreement was terminated in November 2002. We also had little success in gaining new customers in fiscal 2003 due to the poor economic environment for wireless infrastructure spending. Our LDMOS8 products were released to production in November 2002 but these products have not yet contributed significantly to revenue. Design cycles can be 12 to 18 months for wireless infrastructure applications.
Product sales mix for our Cree Microwave products remained constant as LDMOS made up 55% and 54% of microwave revenue for fiscal 2003 and fiscal 2002, respectively. Revenue attributable to bipolar devices was 23% and 45% for fiscal 2003 and 2002, respectively. Approximately 22% of Cree Microwave’s revenue was from engineering services for fiscal 2003 as we continued to work with new customers toward design wins. Overall, our average sales price for Cree Microwave was fairly stable compared to the prior fiscal year. The most significant factor impacting revenue for our Cree Microwave segment was the 89% decline in units sold as a result of the termination of the Spectrian supply agreement and the overall slowdown in Spectrian’s business prior to the termination of the supply agreement. For fiscal 2004, we target higher revenue for Cree Microwave. However, if we are unable to secure new design wins for Cree Microwave, revenue from this segment may decline and the valuation of our assets may be impaired.
Contract revenue was 12% of total revenue for fiscal 2003. Contract revenue received from U.S. Government agencies increased 40% during fiscal 2003 compared to fiscal 2002, due to additional contract awards that we received in 2002. In June 2002, we were awarded two contracts by ONR, with a total value of approximately $14.4 million as part of the Wide Bandgap Semiconductor Technology Initiative of DARPA. In July 2002, the Company was awarded government contracts totaling $26.5 million, if fully funded, over a three-year period from ONR and the AFRL. In fiscal 2003, we recognized approximately $16.1 million in revenue from these contracts. Additionally, we were awarded with another contract in June 2002 funded by DARPA, through the United States Army Robert Morris Acquisition Center, to pursue the development of UV LEDs and lasers for a variety of military communications and bio-threat detection applications under DARPA’s SUVOS program. In fiscal 2003, this DARPA SUVOS contract from ARL accounted for approximately $5.7 million in total revenue. We target that contract revenue will remain essentially the same during fiscal 2004, as we expect to continue to recognize revenue under the majority of these contracts throughout fiscal 2004.
Gross Profit. Gross profit increased 57% to $99.2 million in fiscal 2003 from $63.4 million in fiscal 2002. Compared to the prior year, gross margins increased from 41% to 43% of revenue. In fiscal 2003, gross profit included a $1.3 million write-down of inventory at Cree Microwave due to the termination of the supply agreement with Spectrian. In fiscal 2002, gross profit included a $5.1 million charge relating to an inventory write-off and other related costs that were recorded as a part of the downsizing of Cree Microwave’s operations. In fiscal 2003, gross margins were impacted by higher LED margins being offset by negative margins from the Cree Microwave segment. LED margins improved as our average sales price decreased by 9% while the average cost of our LEDs decreased by 17% due to higher throughput in the
factory and improved yields. Because a significant portion of our factory cost is fixed, higher throughput typically results in lower costs per unit produced. In addition, during fiscal 2002, our LED costs per unit also were higher than during fiscal 2003 due to inefficiencies typically associated with new product introductions as we released both the MegaBright and XBright family of products during the year.
Negative gross profits were $9.3 million for our Cree Microwave business during fiscal 2003 as compared to gross profits of $10.1 million recorded during fiscal 2002, despite the $5.1 million write-off of inventory discussed above. Low factory throughput due to significantly reduced sales volume has dramatically impacted our cost per unit.
Wafer costs for our SiC materials sales were 19% higher in fiscal 2003 than 2002, due to the shift in product mix of wafers sold with epitaxy as compared to production volume wafers sold to Osram. Contract margins declined from 28% in fiscal 2002 to 22% in fiscal 2003 due to a higher percentage of cost share contracts being worked on during the year.
Research and Development. Research and development expenses increased 11% in fiscal 2003 to $31.2 million from $28.0 million in fiscal 2002. The increase in research and development spending supported our XBright, MegaBright Plus, XBright Plus, and RazerThin product lines; and our power chip LEDs as well as higher brightness LED research programs. In addition, we funded development of our LDMOS, SiC and Group III nitride microwave devices, our Schottky diode power program and our near UV lasers. While research and development spending increased, customer support of certain research and development programs decreased by $8.5 million, thereby further increasing costs. From time to time, our customers and companies that we invest in participate in research and development funding for specific programs. We record this third party funding as an offset against research and development expenses. Customers and third parties in which we invested funded $500,000 and $9.0 million in fiscal 2003 and fiscal 2002, respectively. The majority of this funding was received from companies in which we have made investments. For example, in fiscal 2003, the entire customer funding we received came from an affiliate of Lighthouse, in which we hold a private company equity investment. In fiscal 2002, Microvision, the Lighthouse affiliate, and Xemod funded $4.4 million, $3.0 million and $492,000, respectively, of our research and development. We held an investment in each of these companies at the time that they provided research and development funding to us. In addition, Spectrian, our largest customer for our Cree Microwave segment, also participated in funding our research and development programs for $1.1 million. When customers participate in funding our research and development programs, we record the amount funded as a reduction of research and development expenses. We do not expect funding for research and development during fiscal 2004 at this time from these or any other customers or third parties in which we invested.
Sales, General and Administrative. Sales, general and administrative expenses increased 3% in fiscal 2003 to $26.3 million from $25.6 million in fiscal 2002. The increase in expenses was due mostly to higher premiums for insurance and greater spending to support the growth of the business, including increased performance based compensation plans for all employees.
Intangible Asset Amortization. Intangible asset amortization decreased 100% to $0 during fiscal 2003 from $6.8 million during fiscal 2002. Nine months of intangible asset amortization was included in fiscal 2002 resulting from the acquisition of Cree Microwave in December 2000. In March 2002 an analysis of goodwill and other intangible assets indicated that the carrying values of such assets had been fully impaired under Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS 121”) (see “Impairment of goodwill and loss on disposal of fixed assets”). Therefore, we wrote off the entire amount of goodwill and other intangible assets in March 2002. Prior to the write-off of goodwill and intangible assets, we were amortizing these assets over periods ranging from five to ten years.
Impairment of Goodwill and Loss on Disposal of Fixed Assets. Impairment of goodwill decreased 100% to $0 during fiscal 2003 from $76.5 million during fiscal 2002. In March 2002, we determined that
impairment existed and wrote off the entire balance of goodwill and other intangible assets. An analysis was performed at that date and indicated that the carrying values of such assets had been fully impaired under SFAS 121. The analysis was performed as several impairment indicators had occurred during the March 2002 quarter as discussed below. One of the significant impairment indicators related to a change in outlook for business at Cree Microwave related to the supply agreement between Cree Microwave and Spectrian. Under the original terms of the agreement, if Cree Microwave were unable to supply components deemed competitive with components available from third party suppliers within a certain period, Spectrian’s quarterly minimum purchase commitment would be reduced each quarter by the dollar volume of the component that Spectrian purchased from other vendors. Cree Microwave and Spectrian agreed to enter into the first amendment to the supply agreement in October 2001 because Cree Microwave was delayed in fully qualifying and completing development of its new LDMOS8 technology. Technology similar to LDMOS8 was made available to Spectrian from a competitor in early 2001. As a result, the Company agreed to reduce Spectrian’s commitments for the December 2001 quarter. In addition, we amended the supply agreement to provide that if competitive components meeting the applicable requirements were not available from Cree Microwave on or after April 1, 2002, Spectrian’s quarterly minimum purchase commitment thereafter would be reduced by any purchases of such products from other vendors.
By March 2002, Cree Microwave had not yet completed development and qualification testing of any of the components using its LDMOS8-based transistors and thus had not released the components to production. Cree Microwave then executed a second agreement of the supply agreement with Spectrian in March 2002 and agreed to reduced minimum quarterly purchase commitments from Spectrian in return for additional time in which to complete development and qualification testing of the LDMOS8 components. In addition, many of the products that Spectrian indicated that it would purchase in the future had not yet been released to production. Under the amended supply agreement with Spectrian, if Cree Microwave was not able to produce LDMOS8 devices in a timely manner, revenue from Spectrian would be significantly reduced after the June 2002 quarter. In addition, the outlook for acquiring additional customers decreased due to the overall weakened economy and the length of qualification cycles. Due to the change in outlook for business at Cree Microwave and the reduction in expected revenue per quarter, we performed an asset impairment analysis under SFAS 121. As a result of this analysis, the full amount of goodwill and intangible assets of $76.5 million was written off and recorded as “impairment of goodwill” under operating expenses on our consolidated statements of operations. Please refer to theBusiness CombinationsFootnote #2 “Summary of Significant Accounting Policies and Other Matters” in the consolidated financial statement included in Item 8 of this report for further information about the valuation of Cree Microwave.
Loss on the disposal of fixed assets decreased 92% to $1.6 million in fiscal 2003 from $19.0 million recorded in fiscal 2002. During fiscal 2003, we recorded a $1.4 million write-down for fixed assets associated with a novel epitaxy equipment project that we discontinued before the equipment was delivered to us by the vendor. The amount represented a deposit that we paid for the equipment. We also disposed of $200,000 of other assets during the year. During fiscal 2002, we took a $19.0 million charge to write down fixed assets due to decisions made based on changes in technology. This impairment reflected management’s decision to focus our technology in certain directions based on feedback from our research and development teams. After extensively testing certain reactor technology equipment, we narrowed a preference for certain processes, and as a result, we wrote-off non-producing reactor equipment that did not use the preferred processes. Also, in December 2001, management prepared for a 3” wafer transition over the next several years. As a result, during that period we wrote-off non-convertible 2” crystal growth equipment that was not expected to be used. Finally, yield improvements in our existing facility also resulted in the obsolescence of certain other equipment. All equipment written off in the second quarter of fiscal 2002 was dismantled and destroyed, if proprietary in nature, or sold by June 2002.
Severance Charges and Other Operating Expense. Severance charges decreased by 54% to $400,000 in fiscal 2003 from $875,000 in fiscal 2002. In the first quarter of fiscal 2003, we incurred $400,000 of severance charges at our Cree Microwave segment. In the third quarter of fiscal 2002, we recorded an
$875,000 severance charge also associated with Cree Microwave. In both periods we recorded the severance charge in the same period that the employees were laid off and received their severance payments.
Other operating expense decreased to $0 in fiscal 2003 from $840,000 in fiscal 2002. This reduction was primarily caused by a $700,000 one-time retention bonus paid to Cree Microwave employees pursuant to a contractual commitment made as a part of the acquisition of Cree Microwave from Spectrian in the second quarter of fiscal 2002.
Other Operating Income-Gain on Termination of Supply Agreement. Gain on the termination of supply agreement increased to $5.0 million in fiscal 2003 from $0 in fiscal 2002. In the second quarter of fiscal 2003, we received a $5.0 million one time payment from Spectrian associated with the termination of the supply agreement between Cree Microwave and Spectrian.
Loss on Investments in Marketable Securities and Loss on Long-term Investments. Loss on investments in marketable securities declined 90% to $2.1 million in fiscal 2003 from $21.5 million recorded in fiscal 2002. The $2.1 million recorded in fiscal 2003 related to marketable securities that we sold during the second quarter of fiscal 2003. The $21.5 million loss recorded in fiscal 2002 related to an entry to reclassify other comprehensive losses from equity to “loss on investments in marketable securities” in our consolidated statements of operations. In addition, we also recorded additional write-downs for “other-than-temporary” declines in the market value of these investments of these companies as well as the overall stock market declines. This charge was partially offset by a gain on the sale of marketable trading securities of $558,000.
Loss on long-term investments declined to $0 in fiscal 2003 from $20.4 million recorded in fiscal 2002. In fiscal 2002, we recorded write-downs for some investments we had made in privately held companies as many of the companies were experiencing deteriorating financial conditions and/or an inability to raise additional capital, which represented significant indicators of value impairment. In the second quarter of fiscal 2002, we recorded a write-down of $12.4 million in privately held investments. The majority of the write-down was taken on our investment in Xemod based on data regarding the company’s valuation. We recorded an $8.4 million write-down on the investment to bring the market capitalization estimate for the entire company to $3.8 million. In 2002, a third party purchased Xemod for approximately $4.5 million. We also took an additional $1.8 million write down on our investment in Lighthouse based on data regarding the company’s valuation. A $2.1 million write-down was also taken on our investment in World Theatre based on data regarding the company’s valuation. World Theatre also attempted to raise capital during the December 2001 quarter and only raised one half of the amount expected in a convertible debt round.
In the fourth quarter of 2002, we wrote down an additional $8.0 million related to our privately held investments. Our investment in EMF Limited (EMF) was fully written down by $1.1 million based on data regarding the Company’s valuation. We further wrote down our Lighthouse investment by $3.4 million, based on data regarding the Company’s valuation. During the fourth quarter of 2002, we also fully wrote down our investment in World Theatre based on data regarding the Company’s valuation. The amount of the additional write-down was $2.1 million. World Theatre has recently filed for bankruptcy protection. A $1.4 million charge was also taken to fully write down our investment in Kyma Technologies Inc. (Kyma) based on data regarding the Company’s valuation.
Other Non-operating Income. Other non-operating income increased to $442,000 in fiscal 2003 from $0 in fiscal 2002. In the fourth quarter of fiscal 2003, we received a contractually agreed upon payment from one of our customers, representing a settlement for a foreign currency translation adjustment included in our sales contract.
Interest Income, net. Interest income, net decreased 28% to $4.1 million in fiscal 2003 from $5.7 million in fiscal 2002. The reduction from the comparative period in the prior year resulted primarily from lower interest rates available for our liquid cash over the period.
Income Tax Expense (Benefit). Income tax expense for fiscal 2003 was $12.3 million compared to a $28.7 million tax benefit recorded in fiscal 2002. The income tax benefit resulted from the $130.4 million net pre-tax loss resulting mainly from the charges taken during the period. These charges included write downs for the impairment of fixed assets of $19.0 million, a $20.4 million charge to reserve for the decline in value of investments in privately held companies, a $21.4 million write down for “other than temporary” declines in the fair market value of our marketable securities, a $76.5 million write down of goodwill and other intangibles and a $5.1 million reserve taken for inventory and other items. Our effective income tax rate was 26% for fiscal 2003 compared to a 22% rate during the comparative period in fiscal 2002 due to greater tax benefits in fiscal 2002 associated with the losses reported in that year. At June 29, 2003, we also maintained $22.8 million in deferred tax assets that we did not reserve for as we target profitable operations over the next several periods and target being able to use the assets in their entirety.
The minimum amount of future taxable income that will be required to realize existing deferred tax assets is approximately $59.6 million, applicable within the next 20 years to offset existing net operating losses. The new tax act, “The Job Creation and Workers’ Assistance Act of 2002”, is expected to allow us to recover past alternative minimum tax that had been previously paid. This amount has been recorded as a tax receivable. The new legislation also allows us more favorable depreciation. Historically, our reported taxable income has been significantly lower than income reported for financial reporting purposes. The primary reasons for this difference are the timing differences for depreciation, stock option deductions for tax purposes, other tax planning strategies and impairment charges expensed for financial accounting purposes that are not tax deductible.
Comparison of Revenue:
Product revenue, net ................ 50.3 43.3 40.0
Contract revenue, net ............... 8.9 7.3 8.2
---------------- --------------- ----------------
Total cost of revenue ........... 59.2 50.6 48.2
---------------- --------------- ----------------
Gross margin ............................. 40.8 49.4 51.8
Operating expenses:
Research and development ............ 18.0 7.3 6.5
Sales, general and administrative ... 16.5 10.2 10.2
Intangible asset amortization ....... 4.4 2.6 --
In-process research and development
costs ............................ -- 9.8 --
Other expense ....................... 62.6 -- 1.2
---------------- --------------- ----------------
(Loss) income from operations ............ (60.7) 19.5 33.9
Other non-operating (expense) income ..... (26.9) -- 0.6
Interest income, net ..................... 3.7 8.8 8.6
---------------- --------------- ----------------
(Loss) income before income taxes ........ (83.9) 28.3 43.1
Income tax (benefit) expense ............. (18.5) 12.6 15.0
---------------- --------------- ----------------
Net (loss) income ........................ (65.4%) 15.7% 28.1%
================ =============== ================
Revenue. Revenue declined 12% to $155.4 million in fiscal 2002 from $177.2 million in fiscal 2001. This decrease was attributable to lower product revenue, which declined 15% to $136.2 million in fiscal 2002 from $159.5 million in fiscal 2001. ExcludingThis decrease included results of Cree Microwave, due to itsour mid-year
acquisition in fiscal 2001 revenue for fiscal 2002 would have decreased 17%
over the prior year comparative results. Muchacquisition of the UltraRF business from Spectrian, which subsequently reduced the overall decrease by approximately 2%. The decline in revenue from our traditional business resulted fromwas mainly attributable to lower average selling prices for our LED and SiC wafer products.
LED revenue was $90.5 million and $114.7 million for fiscal 2002 and 2001, respectively. LED revenue made up 58% of total revenue in fiscal 2002. Average LED sales prices declined 24% for the twelve months ended June 2002 compared to the prior year. This decrease was related to contractual volume
discounts given to customers and increasingincreased price competitivenesscompetition in the marketplace due to weaknessweaknesses in the worldwide economy. We believe that theThe overall demand for nitride LEDs declined during our fiscal 2002. However, our
overall market share has recently increased as a result of our lower pricing and
the introduction of higher brightness products. For fiscal 2002, our LED chip volume increased 5% over prior year shipments. The introduction of the MegaBright(TM)MegaBright UV, blue, and green products in fiscal 2002 has generated new design wins for our customers. The MegaBright(TM) product is approximately two
times brighter than our previous generation devices and is similar to the
brightness that is currently offered by our primary competitors. Prior to the
introduction of the MegaBright(TM) product line, our products were not as bright
as those offered by our competition. The MegaBright(TM)MegaBright product line was not fully introduced until February 2002, when our green devices in this line were released.
These products have replaced some existing demand for our previous generation
high brightness devices; however, due to the product's higher performance, it
has also generated new demand, particularly in the mobile handset market. We
believe that volume shipments of the MegaBright(TM) product will increase in
fiscal 2003 due to new design wins primarily in the mobile handset market.
Several large wireless phone manufacturers have recently introduced new products
that feature a blue backlight of the keypad and, at times, a blue color for the
display. In addition, newer designs now offer white backlighting for full color
screens that require white LEDs. We believe that our products are featured in
several of these models of phones, and blue and white backlit phones have grown
significantly as a percentage of handsets currently offered by major
manufacturers. We also believe that the blue and white LEDs have replaced a
portion of the yellow-green LEDs that have traditionally backlit mobile
handsets. Our products will also target new automotive designs in fiscal 2003 as
well as other consumer product applications.
During fiscal 2002, we also introduced our new XBright(TM) familiesXBright family of LEDs,
including UV, blue and green devices. These products offer approximately 40%
higher brightness than our MegaBright(TM) products, and we believe they are
currently the highest brightness UV, blue and green products available in the
market place.LEDs. We completed the introduction of these devices in the second half of fiscal 2002. These devices did not contribute significantly to revenue in fiscal 2002, as we continuecontinued to work with customers to optimize our chip design in packaged solutions. We are targeting these productssolutions and to be more significant to
revenue in fiscal 2003 for high brightness applications such as display signs,
traffic signals and lighting applications.
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We target that
SiC wafer revenue was $17.5 million and $18.6 million, respectively for fiscal 2002 and 2001. Wafer revenue was 12% of total revenue for fiscal 2002. Overall, for fiscal 2002, SiC wafer sales decreased 6% from the prior year due to lower pricing for wafers sold to corporate and research communities, including certain customers using our LEDwafers for commercial production. Wafer units increased 8%, while average sales prices declined 12% due to a higher mix of volume sales related to wafers used in commercial production by Osram and Infineon.
Revenue for SiC materials sold for gemstone applications was $2.6 million and $5.9 million for fiscal 2002 and 2001, respectively. Revenue for SiC materials for use in gemstones was 2% of total revenue may grow significantly in our
first quarterfor fiscal 2002. Sales of gemstone materials declined 57% during fiscal 20032002 as compared to the fourth quarter offiscal 2001 due to declining orders from C&C.
Microwave revenue was $25.1 million and $19.4 million in fiscal 2002 due to increased volume shipments. We also believe that average sales prices for
LEDs will decline in fiscal 2003. However, we are targeting unit shipments to
grow at a faster rate than average sales price declines, and as a result, we
target higher2001, respectively. Microwave revenue was 16% of total revenue in fiscal 2003 over fiscal 2002. LED revenue visibility
beyond the first quarter of fiscal 2003 is limited due to short lead times given
to us by customers. In addition, we must complete additional improvements to our
chip design and performance in order to succeed with our LED revenue targets for
fiscal 2003. Revenue from Cree Microwave increased 29% to $24.8 million in fiscal 2002 from $19.2 million in fiscal 2001. The increase in revenue representsrepresented an additional six months of sales for the segment due to our mid-year acquisition of Cree Microwave from Spectrian in fiscal 2001. Our average quarterly revenue in fiscal 2002 was lower than fiscal 2001 due to the current market environment for wireless infrastructure spending. Product mix shifted to LDMOS during fiscal 2002, which comprised 54% of microwave revenue, an increase of 13% from fiscal 2001. Revenue attributable to bipolar devices was 45% and 1% related to other products during fiscal 2002. Over 90%Approximately 99% of Cree Microwave revenues were derived from shipments to Spectrian in fiscal 2002 as well as fiscal 2001. Overall, our average sales prices for this business segment were fairly stable, with quarterly average volume being reduced in fiscal 2002 as compared to fiscal 2001. Cree
Microwave continues to work with Spectrian to qualify and deliver new LDMOS 8
products for next generation wireless base station applications. If we are
unable to deliver qualified LDMOS 8 products to Spectrian on a timely basis, the
amount
Contract revenue was 12% of our contractual supply agreement with Spectrian may be reduced
significantly. Specifically, until we complete the qualification of LDMOS 8
parts and the parts are accepted by Spectrian, we anticipate minimaltotal revenue
from this segment of our business. If our revenue is reduced substantially, it
could have an adverse effect on our results of operations for this segment of
business. We continue to work on new customer design wins; however, due to long
product qualification cycles in the RF industry, progress in this area will
require a longer time commitment. As a result of continued weakness in market
conditions for wireless infrastructure spending, combined with a reduced supply
agreement with Spectrian that calls for a remaining $16.3 million of revenue
through June 2003, we target revenue from this segment to decline in fiscal 2003
from fiscal 2002.
Overall, for fiscal 2002, materials revenue declined 19% over the prior year due
to a 57% reduction in gemstone sales and a 6% decrease in wafer sales. SiC wafer
sales decreased 6% from the prior year due to lower pricing for wafers sold to
corporate and research communities, including certain customers using our wafers
for commercial production. Wafer units sold increased 8%, while average sales
prices declined 12% due to a higher mix of volume sales related to wafers used
in commercial production. For fiscal 2003, we target wafer sales revenue to be
even with fiscal 2002 results. Sales of gemstone products declined 57% during
fiscal 2002 as compared to fiscal 2001. During the fourth quarter of fiscal
2002, we experienced a modest recovery in revenue from C&C and target revenue
improvement from this customer during fiscal 2003. Contract revenue received from U.S. Government agencies and non-governmental customers increased 9% during fiscal 2002 compared to fiscal 2001, due to additional contract awards. We anticipate thatawards received. In June 2002, we were awarded two contracts by ONR, with a total value of approximately $14.4 million as part of the Wide Bandgap Semiconductor Technology Initiative of DARPA. Additionally, we were awarded with another contract revenue will increase
during fiscal 2003 asin June 2002 funded by DARPA, through ARL, to pursue the development of UV LEDs and lasers for a resultvariety of new contract awards received in the second
half of fiscal 2002.
military communications and bio-threat detection applications under DARPA’s SUVOS program.
Gross Profit. Gross profit decreased 28% to $63.4 million in fiscal 2002 from $87.5 million in fiscal 2001. Compared to the prior year, gross margins declined from 49% to 41% of total revenue. In fiscal 2002,
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Microwave'sMicrowave’s operations. Without this adjustment, gross profit and gross margin
for fiscal 2002 would have been $68.5 million and 44%, respectively. Lower margins resulted fromwere attributed to a combination of lower revenue and reduced profitability for LED and wafer products and lower profitability at Cree Microwave related to weak demand for RF devices. LED margins declined due to average sales prices decreasing at a faster rate than average costs. During fiscal 2002, LED average sales prices declined 24%, which was in line with our plans, while costs were only 16% lower. LED costs did not decline as quickly as revenue due to reduced worldwide demand for UV, blue, green and greenUV LED products, whichthis put pressure on average sales prices and lowered our factory throughput. Because a significant portion of our factory cost is fixed, lower throughput typically results in higher costs per unit produced. In addition, our LED costs per unit were higher due to inefficiencies typically associated with new product introductions as we released both the MegaBright(TM)MegaBright and XBright(TM)XBright family of products during the year. In ourthe fourth quarter of fiscal 2002, we had product returns and inventory write-downs that netted toresulted in a $948,000 reduction in gross profitprofit. This reduction was related to packaging issues identified by some customers after the release of the XBright(TM)XBright family of products. We have redesigned our XBright(TM) chips and are
planning to manufacture the products in volume in the first half of fiscal 2003. Despite the lower throughput of volume and new product inefficiencies, we were still able to reduce LED costs by 16% due to improved yield, cost cutting measures and other efficiencies.
Gross marginsmargin at Cree Microwave werewas 19% during fiscal 2002 and werewas impacted by the $5.1 million write-off of inventory discussed above. Excluding this write
down, grossabove which decreased said margin would have been 40% of revenue for the Cree Microwave segment
compared to 44% in fiscal 2001.by approximately 21%. Low factory throughput due to reduced sales volumes and the qualification of LDMOS 8 has significantly impacted our cost per unit. Our greatest opportunity to improve margins would be in yield improvements
and the achievement of greater throughput levels in our factory.
Forunit during fiscal 2003, we target gross margins to improve slightly as a result of
higher throughput in our Durham, North Carolina facility as well as improved
yields due to higher anticipated volume. Depending on our success with the
introduction of the LDMOS 8 devices at Cree Microwave, our margins for that
segment may increase, remain stable or may decline.
2002.
Research and Development. Research and development expenses increased 116% in fiscal 2002 to $28.0 million from $13.0 million in fiscal 2001. The increase in research and development spending supported our MegaBright(TM)MegaBright and XBright(TM)XBright product lines;lines, our largepower chip LED devices as well as new higher brightness LED research programs. In addition, we funded development of our next generation LDMOS, SiC and GaN microwave devices, our Schottky diode power program and our near UV lasers. While research and
development spending increased, customer support of certain programs decreased by $2.9 million, thereby further increasing costs. From time to time, our customers and companies that we invest in participate in research and development funding for specific programs. We record this funding from third parties as an offset against research and development expenses. Customers and third parties in which we invested funded $9.0 million and $11.9 million in fiscal 2002 and fiscal 2001, respectively. The majority of this funding was received from companies that we had made investments in. Finally, the mid-year acquisition of Cree Microwave during fiscal 2001, which added approximately 8% to research and development expenses, also contributed to the higher spending variance. Without the impactIn fiscal 2002, Microvision, a Lighthouse affiliate and Xemod funded $4.4 million, $3.0 million and $492,000, respectively, of Cree Microwave, research and
development spending would have increased 99% over the prior year. We believe our research and development duringprograms. We held an investment in each of these companies at the time that they provided research and development funding to us. In addition, Spectrian, which was the largest customer for our Cree Microwave segment, also funded our research and development programs for $1.1 million. In fiscal 2002 is critical to our future
revenue growth. For example, we target that more than 70%2001, Microvision, a Lighthouse affiliate and Xemod funded $4.7 million, $2.5 million and $2.7 million, respectively, of our revenue goal
for fiscal 2003 will be met with technology developedresearch and development. We held an investment in fiscal 2002. We believe
that internal funding foreach of these companies at the time. In addition, Spectrian funded $1.2 million and C&C funded $720,000 of our research and development programs. When customers or third parties in which we invested fund our research and development, we record the amount funded as a reduction of new products will stabilize during
fiscal 2003.
research and development expenses.
Sales, General and Administrative. Sales, general and administrative expenses increased 41% in fiscal 2002 to $25.6 million from $18.1 million in fiscal 2001. The increase in expenses was dueattributed mostly to costs associated with ongoing
intellectual property litigation.litigation subsequently resolved in fiscal 2003. The mid-year acquisition of Cree Microwave during fiscal 2001 added approximately 5% to sales and general and administrative expenses, which also contributed to the higher spending variance. In addition, costs were higher due to the mid
year acquisition of Cree Microwave during fiscal 2001, higher premiums for
directors' and officers' insurance and greater spending to support the growth of the business. Without the impact of Cree
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Microwave, sales and general and administrative expenses would have increased by
38% year over year. For fiscal 2003, we target that sales, general and
administrative costs to remain stable depending on developments in our ongoing
patent litigation.
Intangible Asset Amortization and In-Process Research and Development Costs. Intangible asset amortization increased 49% to $6.8 million during fiscal 2002 from $4.5 million during fiscal 2001. Nine months of intangible asset amortization was included in fiscal 2002 and six months of amortization was included in fiscal 2001 resulting from the acquisition of Cree Microwave in December 2000. Intangible asset amortization ceased during the fourth quarter of
fiscal 2002. An analysis of goodwill and other intangible assets indicated that the carrying values of such assets had been fully impaired under StatementSFAS 121 (see “Impairment of Financial Accounting Standards No. 121, "Accounting forgoodwill and loss on disposal of fixed assets”). Therefore, we wrote off the Impairmententire balance of Long-Lived Assetsgoodwill and for Long-Lived Assets to be Disposed Of" (SFAS 121) (see
"Other Expense").other intangible assets in March 2002. Prior to the write-off of goodwill and intangible assets, we were amortizing these assets over periods ranging from five to ten years.
As a result of the acquisition of Cree Microwave in December 2000, we recorded a charge of $17.4 million in the third quarter of fiscal 2001 associated with acquired in-process research and development costs.
Other Expense. Other expensecosts (“IPR&D”). Management is primarily responsible for the valuation of IPR&D. The IPR&D projects ongoing at the acquisition date were LDMOS-non module technologies which were estimated to be 95% complete at the acquisition date and LDMOS-module technologies then estimated to be 85% complete at the acquisition date. At the acquisition date, we estimated that both of these technologies would be completed with in six months. The LDMOS-non module technology was abandoned in March 2002. The LDMOS-module device R&D was completed successfully in calendar 2001. The projections for revenue and costs for the LDMOS-non module technology as of the acquisition date (December 29, 2000) differed from actual results as the project was never completed and was abandoned in March 2002. The projections as of the acquisition date for revenue and cost for the LDMOS-module device also differed from actual results because even though the technology was completed in 2001, the devices are being customized for specific customers and have not generated significant revenue to date. The abandonment of the LDMOS-non module technology and our failure to obtain significant design wins for the LDMOS-module technologies to date has impacted our expected return on investment and our future results of operations and financial position. As a result, we wrote off all of the intangible assets for Cree Microwave in March 2002.
Impairment of Goodwill and Loss on Disposal of Fixed Assets. Impairment of goodwill increased to $97.2$76.5 million during fiscal 2002 from $62,000 in$0 during fiscal 2001. This charge was primarily made up In March 2002, we wrote off the entire balance
of a $76.5 million
charge for goodwill and other intangible assets. An analysis was performed at that date and indicated that the carrying values of such assets relatinghad been fully impaired under SFAS 121. The analysis was performed as several impairment indicators had occurred during the quarter. One of the significant impairment indicators related to a change in outlook for business at Cree Microwave in responserelated to several impairment indicators.the supply agreement between Cree Microwave and Spectrian. Cree Microwave amended its supply agreement with Spectrian in the third quarter of fiscal 2002, which reduced quarterly revenue expectations. Also, many of the products that Spectrian indicated that it would purchase in the future havehad not yet been released to production. Under the amended supply agreement with Spectrian, if Cree Microwave iswere not able to produce LDMOS 8LDMOS8 devices in a timely manner, revenue from Spectrian maywould be significantly reduced after the June 2002 quarter. In addition, the outlook for acquiring additional customers in the near term has decreased due to the weakened economy and the long qualification cycles. Due to the change in outlook for business at Cree Microwave and the reduction in expected revenue per quarter, we performed an asset impairment analysis under SFAS 121. As a result of this analysis, the full amount of goodwill and intangible assets of $76.5 million was written off and recorded as other expense“impairment of goodwill” under operating expenses on our consolidated statements of operations. AlsoPlease refer to theBusiness CombinationsFootnote #2 “Summary of Significant Accounting Policies and Other Matters” in the consolidated financial statement included in other expense was $875,000 relatedItem 8 of this report for further information about the valuation of Cree Microwave.
Loss on the disposal of fixed assets increased 100% to severance payments and other expenses related to the downsizing in the Cree
Microwave business. In addition, a $19.0 million write-off of property and
equipment was recorded to reflect changes in technology that resulted in their
obsolescence.
Other Non-Operating (Loss) Income. Other non-operating (loss) income was a loss
of $41.8 million in fiscal 2002 from $62,000 recorded in fiscal 2001. During the fiscal 2002, we took a $19.0 million charge to write down fixed assets. This impairment reflected management’s decision to focus our technology in certain directions based on feedback from our research and development teams. After extensively testing certain reactor technology equipment, we redefined our preference for certain processes, and as a result, we wrote-off non-producing reactor equipment that did not use the preferred processes. Also, in December 2001, management prepared for a 3” wafer transition over the next several years. As a result, we wrote-off non-convertible 2” crystal growth equipment that was not used. Finally, yield improvements also resulted in the obsolescence of certain other equipment that could not meet our yield expectations. All equipment written off in the second quarter of fiscal 2002 was dismantled and destroyed, if proprietary in nature, or sold by June 2002.
Severance Charges and Other Operating Expense. Severance charges increased to $875,000 in fiscal 2002 from $0 in fiscal 2001. In the third quarter of fiscal 2002, we recorded an $875,000 severance charge associated with employment reduction at Cree Microwave. We recorded the severance charge in the same period that the employees were laid off and received their severance payment.
Other operating expense increased to $840,000 in fiscal 2002 from $0 in fiscal 2001. This increase was primarily caused by a $700,000 one-time retention bonus paid to Cree Microwave employees pursuant to a commitment made as a part of the acquisition of Cree Microwave from Spectrian in the second quarter of fiscal 2002.
Loss (Gain) on Investments in Marketable Securities and Loss on Long-term Investments. In fiscal 2002, we recorded a $21.4 million loss on investments in marketable securities compared to $82,000 of incomea $6.0 million gain recorded in fiscal 2001. The $21.5 million loss recorded in fiscal 2002 loss was attributablerelated to a $42.4 million write-down of
investments made in publicly traded and privately held equity securities. For
publicly traded securities, we reclassifiedan entry to reclassify other comprehensive losses from equity to non-operating losses“loss on investments in marketable securities” in our consolidated statements of operations and
recorded additionalrelated to write-downs for the "other-than-temporary"“other than temporary” declines in the market value of these investments asin Microvision and Emcore. This charge was partially offset by a gain on the stock market has sustained significant
declinessale of marketable trading securities of $558,000. In fiscal 2001, we recognized a $6.0 million realized gain on the sale of marketable trading securities. See Note 6, to the Consolidated Financial Statements.
Loss on long-term investments increased 343% to $20.4 million in value.fiscal 2002 from $4.6 million recorded in fiscal 2001. In the case offiscal 2002, we reserved for some investments we had made in privately held investments,companies as many of the companies were experiencing deteriorating financial conditions and/or an inability to raise additional capital, which represented significant indicators of value impairment. TheIn the second quarter
of fiscal 2002, other non-operating losswe reserved $12.4 million in privately held investments. The majority of the reserve was partially
offset by a $558,000 gaintaken on our investment in Xemod, based on data regarding the company’s valuation and in 2001 the company had difficulty raising capital. We recorded an $8.4 million write-down on the sale of marketable securitiesinvestment to bring the market capitalization estimate to $3.8 million. In 2002, a third party purchased Xemod for approximately $4.5 million. We also took an additional $1.8 million write down on our investment in Lighthouse based on data regarding the company’s valuation. A $2.1 million write down was taken on our investment in World Theatre based on data regarding the company’s valuation. World Theatre also attempted to raise capital during the secondDecember 2001 quarter and only raised one half of the amount expected in a convertible debt round.
In the June 2002 quarter, we wrote down an additional $8 million related to our privately held investments. Our investment in EMF, was fully written down by $1.1 million based on data regarding the company’s valuation. We further wrote down our Lighthouse investment by $3.4 million, based on data regarding the company’s valuation. During the June 2002 quarter, we also fully wrote down our investment in World Theatre based on data regarding the company’s valuation. The amount of the additional write-down was $2.1 million. Finally, a $1.4 million charge was taken to fully write down our investment in Kyma during the quarter based on data regarding the company’s valuation.
During the fourth quarter of fiscal 2002.
During2001, we took a $4.6 million reserve against our investments in privately held companies. A $2.4 million reserve was taken against our investment in Xemod based on data regarding the company’s valuation. In addition, a $1.4 million reserve was taken on our investment in Lighthouse based on data regarding the company’s valuation. Also, in the fourth quarter of fiscal 2001 a $4.6 million$750,000 write-down was taken for our investment in World Theater based on data regarding the company’s valuation.
Other Non-operating Expense. Other non-operating expense decreased to establish a reserve
for investments made$0 in privately held companies that were considered to have an
"other than temporary" impairment to value.fiscal 2002 from $1.3 million in fiscal 2001. In -42-
addition,fiscal 2001, we made a one-time pledge of a charitable contribution pledge of $1.2 million to the University of California at Santa Barbara to endow a Cree, Inc. chair in solid state lighting and displays and for other uses. Finally,In addition, a $100,000 charge was recorded related to one-time charges for expenses incurred for the acquisition of Nitres. TheseNitres, Inc. We acquired Nitres, Inc. in May 2000 and these charges were offset by a $6.0 million gain on the sale of
marketable securities during the year.
adjustments to estimates for expenses that were made.
Interest Income, net.net. Interest income, net has decreased 64% to $5.7 million in fiscal 2002 from $15.7 million in fiscal 2001 due to significantly lower interest rates available in fiscal 2002. In addition, slightly lower cash amounts were available as $20.3 million was used to repurchase our own stock during fiscal 2002.
Income Tax Expense (Benefit) Expense.. Income tax expense (benefit) expense for fiscal 2002 was a benefit of $28.7 million compared to an expense of $22.3 million in fiscal 2001. The fiscal 2002 income tax benefit resulted from significantthe $130.4 million net pre-tax loss resulting mainly from the charges of $143.9
million taken during the year.period. These charges included the write-off of property
and equipment due to changes in technology,write downs for the impairment of goodwill and
intangiblefixed assets at Cree Microwave and other charges relating toof $19.0 million, a $20.4 million charge for the downturnreserve for investments in business, and an "otherprivately held companies, a $21.4 million write down for “other than temporary" declinetemporary” declines in the fair market value of marketable securities, a $76.5 million write down of goodwill and privately held securities. Ourother intangibles and a $5.1 million reserve taken for inventory and other items. The effective tax rate during fiscal 2002 was 22% compared to 33% in fiscal 2001. At June 30, 2002, we also maintained $28.5
million of deferred tax assets that were not reserved for by us as we target to
return to profitable operations over the next several periods and target being
able to use the assets in their entirety.
The minimum amount of future taxable income that will be required to realize
existing deferred tax assets is approximately $66 million, $20 million of which
will need to occur within the next 20 years to offset existing net operating
losses. The new tax act, "The Job Creation and Workers' Assistance Act of 2002"
will allow us to recover past alternative minimum tax that has been paid. This
amount has been recorded as a tax receivable. The new legislation also allows us
more favorable depreciation. Historically, reported taxable income has been
significantly lower than income reported for financial reporting purposes. The
primary reasons for this difference are the timing differences for depreciation,
stock option deductions for tax purposes, other tax planning strategies, and
impairment charges expensed for financial accounting purposes, which are not tax
deductible.
Fiscal Years Ended June 24, 2001 and June 25, 2000
Revenue. Revenue grew 63% to $177.2 million in fiscal 2001 from $108.6 million
in fiscal 2000. This increase was attributable to higher product revenue, which
rose 65% to $159.5 million in fiscal 2001 from $96.7 million in fiscal 2000.
Without the acquisition of Cree Microwave in December 2000, revenue for fiscal
2001 would have increased 46% over the prior year comparative results. Much of
the increase in revenue from our traditional business resulted from demand for
our LED and SiC wafer products. LED chip volume increased 104% over units
delivered in the prior year. The largest increase occurred as a result of the
introduction of our UltraBright(TM) product line in fiscal 2001. During fiscal
2000 only our high brightness and standard brightness product lines were
available for sale. Our standard brightness products also increased 65% in
fiscal 2001 in terms of units shipped over the prior year due to strong demand
for automotive and indicator light applications. Average LED sales prices
declined 18% for the twelve months ended June 2001 compared to the prior year
average due to expected contractual volume discounts given to customers.
SiC wafer sales increased 71% over the prior year due to demand from corporate
and research customers, including certain customers using our wafers for
commercial production. Wafer units sold increased 107%, while average sales
prices declined 16% due to a higher mix of volume sales related to wafers
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used in commercial production. Sales of gemstone products declined 63% during
fiscal year 2001 as compared to fiscal 2000 due to inventory reduction efforts
at C&C.
Revenue from Cree Microwave was $19.2 million for fiscal 2001. This represents
six months of sales for the unit as it was acquired in December 2000 and
accounted for using the purchase method of accounting. Since we acquired Cree
Microwave in December 2000, there were no sales for this unit in fiscal 2000.
Contract revenue received from U.S. Government agencies and non-governmental
customers increased 50% during fiscal 2001 compared to fiscal 2000, due to
additional contract awards. Seven new contract awards were received during
fiscal 2001.
Gross Profit. Gross profit increased 56% to $87.5 million in fiscal 2001 from
$56.2 million in fiscal 2000. Compared to the prior year, gross margins declined
from 52% to 49% of revenue. Lower margins resulted from a combination of reduced
profitability for LED devices and the acquisition of Cree Microwave. LED margins
declined due to average sales prices decreasing at a faster rate than average
costs. During fiscal 2001 average LED costs declined 11% while average sales
prices were reduced 18%. LED costs did not decline as quickly as revenue due to
lower yields as a result of new product introductions and chip modifications
made to our products in the second half of the year. In addition, factory
throughput was reduced during the fourth quarter of fiscal 2001, which resulted
in higher costs per chip. The margins for Cree Microwave averaged 44% as a
percentage of revenue due to the competitive environment for LDMOS chips. Cree
Microwave was 11% of total revenue in fiscal 2001.
Research and Development. Research and development expenses increased 84% in
fiscal 2001 to $13.0 million from $7.1 million in fiscal 2000. Much of this
increase resulted from the acquisition of Cree Microwave, as well as greater
investment made for research in the RF and microwave, power and optoelectronic
programs. Without the acquisition of Cree Microwave, research and development
expenses would have increased 62% over the prior year.
Sales, General and Administrative. Sales, general and administrative expenses
increased 63% in fiscal 2001 to $18.1 million from $11.1 million in fiscal 2000.
This increase in expenses is due to the acquisition of Cree Microwave and
greater spending to support the overall growth of the business, as well as costs
associated with ongoing intellectual property litigation. Without the
acquisition of Cree Microwave, sales, general and administrative expenses would
have increased 44% over the prior year.
Intangible Asset Amortization and In-Process Research and Development Costs. The
purchase of Cree Microwave generated goodwill and other intangible assets, which
will be amortized over periods ranging from five to ten years. In addition, as a
result of the acquisition of Cree Microwave, we recorded a one-time charge of
$17.4 million in the third quarter of fiscal 2001 associated with acquired
in-process research and development costs.
Other Expense. Other expense decreased 95% to $62,000 during fiscal 2001 from
$1.3 million in fiscal 2000. The decrease was attributable to fewer fixed asset
disposals.
Other Non-Operating Income. Other non-operating income decreased 88% to $82,000
in fiscal 2001 from $656,000 in fiscal 2000. This decrease was attributable to a
$4.6 million write down taken in the fourth quarter of fiscal 2001 to establish
a reserve for investments made in private companies that was considered to be an
"other-than-temporary" decline in fair value. In addition, we made a one-time
pledge of a charitable contribution of $1.2 million to the University of
California at Santa Barbara to endow a Cree chair in solid state lighting and
displays, and for other uses, in the first quarter of fiscal 2001.
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Finally, a $100,000 charge was recorded related to one-time charges for expenses
incurred for the acquisition of Nitres. These charges were offset by a $6.0
million gain on the sale of investment securities during the year. During fiscal
2000, a $4.1 million gain was recognized on the sale of securities. This gain
combined with one-time proceeds from an insurance recovery of $400,000, more
than offset a $3.8 million one-time charge for expenses incurred with the
acquisition of Nitres.
Interest Income, net. Interest income, net has increased 67% to $15.7 million in
fiscal 2001 from $9.4 million in fiscal 2000 due to higher average cash balances
being available in fiscal 2001 as a result of the public stock offering
completed in January 2000. Higher interest rates in fiscal 2001 also contributed
to increased interest income.
Income Tax Expense. Income tax expense for fiscal 2001 was $22.3 million
compared to $16.3 million in fiscal 2000. This increase resulted from increased
profitability during fiscal 2001 over fiscal 2000, as adjusted for the cost of
in-process research and development which is non-deductible in the current
period for tax purposes. Our effective tax rate during fiscal 2001 was 33%
compared to 35% in fiscal 2000.
Liquidity and Capital Resources
We have funded our operations, to date, through sales of equity, bank borrowings and from product and contract gross profits. As of June 30, 2002,29, 2003, we had working capital of $151.8$181.1 million, including $106.1$140.0 million in cash, cash equivalents and short-term investments held to maturity. As of June 30, 2002,29, 2003, we invested $64.2$58.8 million in long term securities held to maturity in order to receive a higher interest rate on our cash. Operating activities generated $39.1$89.6 million in fiscal 20022003 compared with $74.8$39.1 million generated
during fiscal 2001.2002. This decreaseincrease was primarily attributable to a $31.2 million increase in deferred income tax assets recorded in fiscal 2002 that was generated from the $143.9 million in pretax charges taken in fiscal 2002. Operating results were also more profitable in fiscal 2003 than fiscal 2002. Depreciation and amortization increased by $13.0$9.3 million in fiscal 2002,2003, due to new equipment purchased primarilypurchased. Prepaid and other current assets also declined by $2.9 million due to a reduction in fiscal 2001. Tax
benefits from stock options were also $4.3short term tax receivable balances, while accrued expenses increased by $4.4 million lower in fiscal 2002.due to timing. These inflows of cash were partly offset by a $2.8$12.7 million increase in inventoryaccounts receivable due to increased shipments anticipated for early fiscal 2003 and inventory being
maintained at an offsite location, and a $3.8 million increase to prepaid
expenses mostly for higher insurance premiums.
revenue.
Cash used by investing activities in fiscal 20022003 was $116.9$111.3 million. Net investments of $51.8$34.7 million were made in securities held to maturity and $13.8
million was invested in available for sale securities. $41.7$77.6 million was invested in property and equipment and in additional deposits for property and equipment. The majority of the increase in spending was due to new equipment additions to increase manufacturing capacity in our crystal growth, epitaxy, clean room and package and test areas. Finally, $9.1$3.3 million was invested in other long-term
assets during fiscal 2002patents and reflects strategic investments made in private
companies.
the purchase of patent rights.
Cash used inprovided by financing activities included common stock repurchases of 1.49
million shares of our common stock on the open market for $20.3 million or an
average cost of $13.63 per share. This was partially offset by the receipt of $7.2$12.7 million for the exercise of stock options and shares issued under our employee stock purchase program.
We target approximately $50.0-60.0$50 to 60 million in capital spending in fiscal 2004, which is lower than fiscal 2003. We estimate lower spending despite higher revenue targets for fiscal 2003.2004, including targeting $100 million of revenue from Sumitomo ending in June 2004. Capital expenses are expected to be lower as we aim to receive benefits in fiscal 2004 from capital expenditures made in fiscal 2003, and we target yield improvements in our factory. We anticipate that the majority of the expenditures will be made for new equipment and will be funded by cash from operations. We target that our cash from operations will be higher in fiscal 2004 than it was in fiscal 2003 due to higher targeted profitability resulting from greater revenue. We also project that we will be free cash flow (defined as cash from operations less capital spending) positive for fiscal 2004. Therefore, we plan to meet the cash needs for the business for fiscal 2004 through cash from operations. We also anticipate that long term cash needs will be met with cash flow from operations or cash on hand over the next two fiscal years. Actual results may differ from our targets for a number of reasons as we discuss herein. We may also issue additional shares of common stock for the acquisition of complementary -45-
of and investments in complementary businesses as strategic opportunities and anticipate continuing to make such evaluations.
As of June 29, 2003, our cash and cash equivalents, short-term investments held to maturity and marketable securities accounts combined increased by $27.9 million or 25% over balances reported as of June 30, 2002 due to increased cash flow from operations. Our accounts receivable balance increased by $9.3 million or 27% over the accounts receivable balance as of June 30, 2002, which resulted from the overall increase in revenue. Our revenue in the fourth quarter of fiscal 2003 was $64.1 million, which was 70% higher than the fourth quarter of fiscal 2002 revenue of $37.8 million. Our net property and equipment has also increased by $39.7 million or 19% since June 30, 2002 due to investments made to expand production capacity. These investments are targeted to aid us in meeting current and what we view as increasing, future customer product demands on a cost-effective basis. We target that these investments in additional equipment will allow us to meet any increase in demand for our products and thus may lead to higher revenue for us. The higher property investment will also result in higher depreciation expense. The deferred income tax asset account declined by $6.4 million or 24% since June 30, 2003 due to the use of tax assets toward our current year tax provision, as we were profitable in fiscal 2003. Other assets declined by $6.6 million or 29% since June 30, 2002 due to a $5.2 million decrease in deposits that were related to fixed asset additions. Our deferred revenue account increased by $4.8 million to $5.5 million as a result of the distributorship agreement with Sumitomo which requires us to establish reserves at the time we ship LED products to Sumitomo based upon a percentage of the total purchase price of such products. Revenue is recognized from our customers at shipment. For certain customers we defer revenue for certain sales costs incurred in selling our products and for managing our inventory, up to the balance of the deferred revenue.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures:
As of June 30, 2002,29, 2003, we maintainno longer hold investments in equity securities that are
treated for accounting purposes under SFAS 115 as "available-for-sale"
securities. These investments are normally carried at fair market value based
upon the quoted market price of that investment at the end of the reporting
period, with net unrealized gains or losses excluded from earnings and reported
as a separate component of shareholder's equity. It is our policy to write down
these equity investments to their market value and record the related write-down
asmarketable securities; however, an investment loss on our consolidated statements of operations when the
investment has an "other-than-temporary" decline in value. At June 30, 2002, we
believe that an "other-than-temporary" decline existed in our marketable equity
securities and we recorded an "other-than-temporary" investment loss of $22.0
million related to our available for sale marketable securities. These
investments are subject to market risk of equity price changes. Management views
these stock holdings as an investment; therefore, the shares are accounted for
as "available for sale" securities under SFAS 115. The fair market value of
these investments as of June 30, 2002, using the closing sale price as of June
28, 2002, was $6.0 million. These equity securities are held for purposes other
than trading. Our equity portfolio consists of securities with characteristics
that most closely match the Nasdaq National Market. The Nasdaq Composite Index
has shown a 72% decline over the past two years, therefore if there was a 72%
adverse change in the market prices, our portfolio would decrease in value by
$4.3 million.
An adverse movement of equity market prices would alsolikely have an impact on our portfolio of non-marketable strategic equity securities, although the impact cannot be directly quantified. Such a movement and the related underlying economic conditions wouldcould negatively affect the prospects of the companies we invest in, their ability to raise additional capital and the likelihood of our being able to realize our investments through liquidity events such as initial public offerings, mergers and private sales. At June 30, 2002,29, 2003, our non-marketable strategic equity securities had a carrying amountnet book value of $16.0$15.6 million.
We have invested some of the proceeds from our January 2000 public offering into high-grade corporate debt, commercial paper, government securities and other investments at fixed interest rates that vary by security. These investments are A grade or better per our cash management policy. At June 30, 2002, the
Company29, 2003, we had $157.6$134.0 million invested in these securities. Although these securities generally earn interest at fixed rates, the historical fair values of such investments have not differed materially from the amounts reported on our consolidated balance sheets. Therefore, we believe that potential changes in future interest rates will not create material exposure for us from differences between the fair values and the amortized cost of these investments.
We currently have no debt outstanding. With two of our larger customers, we maintain a foreign currency adjustment to our sales price if certain exchange rates against the U.S. dollar are not maintained. During the fourth quarter of fiscal 2003, we recognized $442,000 of other non-operating income associated with proceeds received from one of these customers for foreign currency adjustments. These revenue adjustments represent our main risk with respect to foreign currency, since our contracts and purchase orders are denominated in U.S. dollars. We also have no commodity risk.
Qualitative Disclosures:
OurDisclosures
We hold no investments in publicly traded equity securities are subject to the market
risk of equity price changes. While we cannot predict or manage the future
market price for such stock, management continues to evaluate our investment
position on an on-going basis.
-46-
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Cree, Inc.
We have audited the accompanying consolidated balance sheets of Cree, Inc. as of June 30, 200229, 2003 and June 24, 2001,30, 2002, and the related consolidated statements of operations, shareholders'shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2002.29, 2003. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cree, Inc. at June 30, 200229, 2003 and June 24, 2001,30, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2002,29, 2003, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
As discussed in Note 16 to the consolidated financial statements, in 2003 the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets and changed its method of accounting for goodwill.
Raleigh, North Carolina
July 24, 2002
-48-
CONSOLIDATED BALANCE SHEETS
(In
(In thousands, except per share amounts)
June 30, June 24,
2002 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 73,744 $ 164,562
Short-term investments held to maturity 32,396 36,965
Marketable securities available for sale 6,008 6,675
Accounts receivable, net 34,592 34,850
Interest receivable 2,083 1,270
Inventories, net 17,966 15,202
Deferred income taxes 1,122 4,172
Prepaid expenses and other current assets 5,994 2,220
----------- ------------
Total current assets 173,905 265,916
Property and equipment, net 211,685 226,920
Goodwill and intangible assets, net -- 83,282
Long-term investments held to maturity 64,225 7,971
Deferred income taxes 27,365 --
Patent and license rights, net 4,251 3,246
Other assets 22,764 27,788
----------- ------------
Total assets $ 504,195 $ 615,123
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 13,075 $ 14,147
Accrued salaries and wages 4,010 2,435
Other accrued expenses 4,969 5,156
----------- ------------
Total current liabilities 22,054 21,738
Long term liabilities:
Deferred income taxes -- 3,850
Other long-term liabilities 37 438
----------- ------------
Total long-term liabilities 37 4,288
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares authorized at
June 30, 2002 and June 24, 2001; none issued and outstanding -- --
Common stock, par value $0.00125; 200,000 shares authorized at
June 30, 2002 and June 24, 2001; 72,729 and 72,907 shares issued
and outstanding at June 30, 2002 and June 24, 2001, respectively 90 91
Additional paid-in-capital 508,432 518,781
Deferred compensation (696) (1,211)
(Accumulated deficit) retained earnings (25,722) 76,001
Accumulated other comprehensive loss, net of tax -- (4,565)
----------- ------------
Total shareholders' equity 482,104 589,097
----------- ------------
Total liabilities and shareholders' equity $ 504,195 $ 615,123
=========== ============
| June 29, 2003 | June 30, 2002 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 64,795 | $ | 73,744 | ||||
Short-term investments held to maturity | 75,242 | 32,396 | ||||||
Marketable securities available for sale | — | 6,008 | ||||||
Accounts receivable, net | 43,901 | 34,592 | ||||||
Interest receivable | 1,650 | 2,083 | ||||||
Inventories, net | 17,674 | 17,966 | ||||||
Deferred income taxes | 1,863 | 1,122 | ||||||
Prepaid expenses and other current assets | 4,230 | 5,994 | ||||||
Total current assets | 209,355 | 173,905 | ||||||
Property and equipment, net | 251,346 | 211,685 | ||||||
Long-term investments held to maturity | 58,794 | 64,225 | ||||||
Deferred income taxes | 20,934 | 27,365 | ||||||
Patent and license rights, net | 7,146 | 4,251 | ||||||
Other assets | 16,119 | 22,764 | ||||||
Total assets | $ | 563,694 | $ | 504,195 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable, trade | $ | 14,916 | $ | 13,075 | ||||
Accrued salaries and wages | 5,756 | 4,010 | ||||||
Deferred revenue | 5,533 | 741 | ||||||
Other accrued expenses | 2,087 | 4,228 | ||||||
Total current liabilities | 28,292 | 22,054 | ||||||
Long term liabilities: | ||||||||
Other long-term liabilities | 31 | 37 | ||||||
Total long-term liabilities | 31 | 37 | ||||||
Commitments and Contingencies (Note 13) | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, par value $0.01; 3,000 shares authorized at June 29, 2003 and June 30, 2002; none issued and outstanding | — | — | ||||||
Common stock, par value $0.00125; 200,000 shares authorized at June 29, 2003 and June 30, 2002; 74,127 and 72,729 shares issued and outstanding at | 92 | 90 | ||||||
Additional paid-in-capital | 526,318 | 508,432 | ||||||
Deferred compensation | (218 | ) | (696 | ) | ||||
Retained earnings (accumulated deficit) | 9,179 | (25,722 | ) | |||||
Total shareholders’ equity | 535,371 | 482,104 | ||||||
Total liabilities and shareholders’ equity | $ | 563,694 | $ | 504,195 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
-49-
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
(In thousands, except per share amounts)
Year Ended
--------------------------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
------------------- ------------------ -----------------
Revenue:
Product revenue, net $ 136,230 $ 159,533 $ 96,742
Contract revenue, net 19,204 17,694 11,820
------------------- ------------------ -----------------
Total revenue 155,434 177,227 108,562
Cost of revenue:
Product revenue, net 78,249 76,734 43,399
Contract revenue, net 13,827 12,967 8,963
------------------- ------------------ -----------------
Total cost of revenue 92,076 89,701 52,362
------------------- ------------------ -----------------
Gross profit 63,358 87,526 56,200
Operating expenses:
Research and development 28,026 12,980 7,054
Sales, general and administrative 25,618 18,111 11,091
Intangible asset amortization 6,765 4,537 --
In-process research and development costs -- 17,400 --
Impairment charges and other expense 97,223 62 1,305
------------------- ------------------ -----------------
(Loss) income from operations (94,274) 34,436 36,750
Other non-operating (expense) income (41,848) 82 656
Interest income, net 5,708 15,668 9,400
------------------- ------------------ -----------------
(Loss) income before income taxes (130,414) 50,186 46,806
Income tax (benefit) expense (28,691) 22,343 16,286
------------------- ------------------ -----------------
Net (loss) income ($101,723) $ 27,843 $ 30,520
=================== ================== =================
(Loss) earnings per share:
Basic ($1.40) $ 0.39 $ 0.46
=================== ================== =================
Diluted ($1.40) $ 0.37 $ 0.43
=================== ================== =================
Shares used in per share calculation:
Basic 72,718 72,243 65,930
=================== ================== =================
Diluted 72,718 75,735 70,434
=================== ================== =================
| Year Ended | ||||||||||||
June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||||
Revenue: | ||||||||||||
Product revenue, net | $ | 202,962 | $ | 136,230 | $ | 159,533 | ||||||
Contract revenue, net | 26,860 | 19,204 | 17,694 | |||||||||
Total revenue | 229,822 | 155,434 | 177,227 | |||||||||
Cost of revenue: | ||||||||||||
Product revenue, net | 109,726 | 78,249 | 76,734 | |||||||||
Contract revenue, net | 20,926 | 13,827 | 12,967 | |||||||||
Total cost of revenue | 130,652 | 92,076 | 89,701 | |||||||||
Gross profit | 99,170 | 63,358 | 87,526 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 31,203 | 28,026 | 12,980 | |||||||||
Sales, general and administrative | 26,326 | 25,618 | 18,111 | |||||||||
Intangible asset amortization | — | 6,765 | 4,537 | |||||||||
In-process research and development costs | — | — | 17,400 | |||||||||
Impairment of goodwill | — | 76,489 | — | |||||||||
Loss on disposal of fixed assets | 1,569 | 19,019 | 62 | |||||||||
Severance charges | 400 | 875 | — | |||||||||
Other expense | — | 840 | — | |||||||||
Operating expenses | 59,498 | 157,632 | 53,090 | |||||||||
Gain on termination of supply agreement | 5,000 | — | — | |||||||||
Income (loss) from operations | 44,672 | (94,274 | ) | 34,436 | ||||||||
Non-operating income (expense): | ||||||||||||
(Loss) gain on investments in marketable securities | (2,067 | ) | (21,471 | ) | 6,000 | |||||||
Loss on long term investments | — | (20,377 | ) | (4,600 | ) | |||||||
Other non-operating income (expense) | 442 | — | (1,318 | ) | ||||||||
Interest income, net | 4,117 | 5,708 | 15,668 | |||||||||
Income (loss) before income taxes | 47,164 | (130,414 | ) | 50,186 | ||||||||
Income tax expense (benefit) | 12,263 | (28,691 | ) | 22,343 | ||||||||
Net income (loss) | $ | 34,901 | $ | (101,723 | ) | $ | 27,843 | |||||
Earnings (loss) per share: | ||||||||||||
Basic | $ | 0.48 | $ | (1.40 | ) | $ | 0.39 | |||||
Diluted | $ | 0.46 | $ | (1.40 | ) | $ | 0.37 | |||||
Shares used in per share calculation: | ||||||||||||
Basic | 73,196 | 72,718 | 72,243 | |||||||||
Diluted | 75,303 | 72,718 | 75,735 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
-50-
CONSOLIDATED STATEMENTS OF CASH FLOW
(In
(In thousands)
Year Ended
--------------------------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
-------------- --------------- ---------------
Operating activities:
Net (loss) income ($ 101,723) $ 27,843 $ 30,520
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 32,400 21,948 10,803
Loss on retirement of property and equipment and
patents 18,298 134 1,256
Amortization of patent rights 293 194 145
Amortization of intangible assets 6,796 4,537 --
Amortization of premium on securities held to maturity 157 -- --
Write-off of goodwill and other intangible assets 76,488 -- --
Acquired in-process research & development -- 17,400 --
Write-down of long-term investments 20,377 4,600 --
Purchase of marketable trading securities (1,546) (17,498) (1,786)
Proceeds from sale of marketable trading securities 2,104 23,498 2,280
Gain on marketable trading securities (558) (6,000) (494)
Loss (gain) on available for sale securities 22,028 -- (3,567)
Deferred income taxes (31,200) 13,514 (11,617)
Income tax benefits from stock option exercises 2,712 7,022 27,336
Amortization of deferred compensation 515 544 980
Changes in operating assets and liabilities:
Accounts and interest receivable (555) (18,432) (91)
Inventories (2,764) (2,035) (5,334)
Prepaid expenses and other current assets (3,773) (735) (263)
Other long-term assets (833) -- --
Accounts payable, trade (1,073) (924) 6,447
Accrued expenses and other liabilities 987 (842) 6,356
-------------- --------------- ---------------
Net cash provided by operating activities 39,130 74,768 62,971
-------------- --------------- ---------------
Investing activities:
Purchase of available for sale securities (13,761) -- (12,500)
Proceeds from sale of available for sale securities -- -- 6,291
Costs associated with the acquisition of Cree
Microwave -- (1,946) --
Purchase of securities held to maturity (118,807) (7,971) (195,883)
Proceeds from maturities of securities held to
maturity 66,965 147,461 11,457
Purchase of and deposits for property and equipment (41,635) (106,194) (78,047)
Proceeds from sale of property and equipment 721 123 --
Purchase of patent rights (1,318) (1,150) (727)
Increase in other long-term assets (9,051) (26,910) (5,141)
-------------- --------------- ---------------
Net cash (used in) provided by investing
activities (116,886) 3,413 (274,550)
-------------- --------------- ---------------
Financing activities:
Net repayment of long-term debt -- -- (47)
Net proceeds from issuance of common stock 7,235 10,346 272,924
Net proceeds from sale of put options -- 2,860 --
Repurchase of common stock (20,297) (30,668) --
-------------- --------------- ---------------
Net cash (used in) provided by financing
activities (13,062) (17,462) 272,877
-------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (90,818) 60,719 61,298
Cash and cash equivalents:
Beginning of year 164,562 103,843 42,545
-------------- --------------- ---------------
End of year $ 73,744 $ 164,562 $ 103,843
============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized $ -- $ -- $ 13
============== =============== ===============
Cash paid for income taxes $ 1,901 $ 1,492 $ 272
============== =============== ===============
Non-cash investing and financing activities:
Deferred compensation $ 515 $ 544 $ 1,768
============== =============== ===============
Conversion of note payable to common stock $ -- $ -- $ 431
============== =============== ===============
Issuance of common stock in connection with the
acquisition of Cree Microwave $ -- $ 113,717 $ --
============== =============== ===============
| Year Ended | ||||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||||
Net income (loss) | $ | 34,901 | $ | (101,723 | ) | $ | 27,843 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 41,705 | 32,400 | 21,948 | |||||||||
Loss on retirement of property and equipment and patents | 1,512 | 18,298 | 134 | |||||||||
Amortization of patent rights | 394 | 293 | 194 | |||||||||
Amortization of intangible assets | — | 6,796 | 4,537 | |||||||||
Amortization of premium on investments held to maturity | 2,328 | 157 | — | |||||||||
Write-off of goodwill and other intangible assets | — | 76,488 | — | |||||||||
Acquired in-process research & development | — | — | 17,400 | |||||||||
Write-down of long-term investments | — | 20,377 | 4,600 | |||||||||
Purchase of marketable trading securities | — | (1,546 | ) | (17,498 | ) | |||||||
Proceeds from sale of marketable trading securities | — | 2,104 | 23,498 | |||||||||
Loss (gain) on marketable trading securities | 2,067 | (558 | ) | (6,000 | ) | |||||||
Loss (gain) on available for sale securities | — | 22,028 | — | |||||||||
Deferred income taxes | 5,709 | (31,200 | ) | 13,514 | ||||||||
Income tax benefits from stock option exercises | 5,188 | 2,712 | 7,022 | |||||||||
Amortization of deferred compensation | 478 | 515 | 544 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts and interest receivable | (13,289 | ) | (555 | ) | (18,432 | ) | ||||||
Inventories | 292 | (2,764 | ) | (2,035 | ) | |||||||
Prepaid expenses and other current assets | 1,764 | (3,773 | ) | (735 | ) | |||||||
Other long-term assets | 368 | (833 | ) | — | ||||||||
Accounts payable, trade | 1,840 | (1,073 | ) | (924 | ) | |||||||
Accrued expenses and other liabilities | 4,392 | 987 | (842 | ) | ||||||||
Net cash provided by operating activities | 89,649 | 39,130 | 74,768 | |||||||||
Investing activities: | ||||||||||||
Purchase of available for sale securities | — | (13,761 | ) | — | ||||||||
Proceeds from sale of available for sale securities | 3,921 | — | — | |||||||||
Costs associated with the acquisition of Cree Microwave | — | — | (1,946 | ) | ||||||||
Purchase of long-term investments held to maturity | (118,934 | ) | (118,807 | ) | (7,971 | ) | ||||||
Proceeds from maturities of investments held to maturity | 84,253 | 66,965 | 147,461 | |||||||||
Purchase of and deposits for property and equipment | (77,643 | ) | (41,635 | ) | (106,194 | ) | ||||||
Proceeds from sale of property and equipment | 635 | 721 | 123 | |||||||||
Purchase of patent rights | (3,289 | ) | (1,318 | ) | (1,150 | ) | ||||||
Increase in other long-term assets | (241 | ) | (9,051 | ) | (26,910 | ) | ||||||
Net cash (used in) provided by investing activities | (111,298 | ) | (116,886 | ) | 3,413 | |||||||
Financing activities: | ||||||||||||
Net proceeds from issuance of common stock | 12,700 | 7,235 | 10,346 | |||||||||
Net proceeds from sale of put options | — | — | 2,860 | |||||||||
Repurchase of common stock | — | (20,297 | ) | (30,668 | ) | |||||||
Net cash provided by (used in) financing activities | 12,700 | (13,062 | ) | (17,462 | ) | |||||||
Net (decrease) increase in cash and cash equivalents | (8,949 | ) | (90,818 | ) | 60,719 | |||||||
Cash and cash equivalents: | ||||||||||||
Beginning of year | 73,744 | 164,562 | 103,843 | |||||||||
End of year | $ | 64,795 | $ | 73,744 | $ | 164,562 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for income taxes | $ | 800 | $ | 1,901 | $ | 1,492 | ||||||
Non-cash investing and financing activities: | ||||||||||||
Deferred compensation | $ | 478 | $ | 515 | $ | 544 | ||||||
Issuance of common stock in connection with the acquisition of Cree Microwave | $ | — | $ | — | $ | 113,717 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
-51-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY
YEARS ENDED JUNE 29, 2003, JUNE 30, 2002 AND JUNE 24, 2001 AND JUNE 25, 2000
(In
(In thousands)
(Accumulated Accumulated
Common Additional Deficit) Other Total
Stock Paid-in Deferred Retained Comprehensive Shareholders'
Par Value Capital Compensation Earnings Income/(Loss) Equity
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 27, 1999 $ 77 $ 113,268 $ (967) $ 17,638 $ 987 $ 131,003
Common stock options and warrants
exercised for cash, 954 shares 3 6,750 6,753
Employees granted stock options, 137
shares 785 (785) --
Employees granted stock, 171 shares 983 (983) --
Common stock warrants granted, 16 shares 31 31
Loan converted to common stock, 169
shares 431 431
Issuance of common stock for cash, 3,289
shares 8 266,132 266,140
Income tax benefits from stock option
exercises 27,336 27,336
Amortization of deferred compensation 980 980
Net income 30,520 30,520
Unrealized loss on securities available
for sale, net of tax of $27 (52) (52)
-------------
Comprehensive income 30,468
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 25, 2000 88 415,716 (1,755) 48,158 935 463,142
Common stock options and warrants
exercised for cash, 870 shares 2 7,368 7,370
Issuance of common stock for cash, 113
shares 2,976 2,976
Issuance of common stock in connection
with purchase business combination,
2,657 shares 3 113,505 113,508
Purchase and retirement of 1,850
treasury shares (2) (30,666) (30,668)
Income tax benefits from stock option
exercises 7,022 7,022
Amortization of deferred compensation 544 544
Premium Received Put Option buy back 2,860 2,860
Net income 27,843 27,843
Unrealized loss on securities available
for sale, net of tax of $3,667 (5,500) (5,500)
---------------
Comprehensive income 22,343
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 24, 2001 91 518,781 (1,211) 76,001 (4,565) 589,097
Common stock options exercised for cash,
1,053 shares 1 4,229 4,230
Issuance of common stock for cash, 245
shares 3,005 3,005
Purchase and retirement of 1,489
treasury shares (2) (20,295) (20,297)
Income tax benefits from stock option
exercises 2,712 2,712
Amortization of deferred compensation 515 515
Net loss (101,723) (101,723)
Unrealized losses on securities
available for sale, net of taxes of
$3,174 (11,253) (11,253)
Losses on available for sale securities
reclassified from other comprehensive
income, net of taxes of $6,210 due to an
other than temporary decline in value 15,818 15,818
---------------
Comprehensive loss (97,158)
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 30, 2002 $ 90 $ 508,432 $ (696) $ (25,722) $ -- $ 482,104
=========== ============= ============== ============= ================ ===============
| Common Stock Par Value | Additional Paid-in Capital | Deferred Compensation | Retained Earnings (Accumulated | Accumulated Income/(Loss) | Total Shareholders’ Equity | |||||||||||||||||||
Balance at June 25, 2000 | $ | 88 | $ | 415,716 | $ | (1,755 | ) | $ | 48,158 | $ | 935 | $ | 463,142 | |||||||||||
Common stock options and warrants exercised for cash, 870 shares | 2 | 7,368 | — | — | — | 7,370 | ||||||||||||||||||
Issuance of common stock for cash, 113 shares | — | 2,976 | — | — | — | 2,976 | ||||||||||||||||||
Issuance of common stock in connection with purchase business combination, 2,657 shares | 3 | 113,505 | — | — | — | 113,508 | ||||||||||||||||||
Purchase and retirement of 1,850 treasury shares | (2 | ) | (30,666 | ) | — | — | — | (30,668 | ) | |||||||||||||||
Income tax benefits from stock option exercises | — | 7,022 | — | — | — | 7,022 | ||||||||||||||||||
Amortization of deferred compensation | — | — | 544 | — | — | 544 | ||||||||||||||||||
Premium Received Put Option buy back | — | 2,860 | — | — | — | 2,860 | ||||||||||||||||||
Net income | — | — | — | 27,843 | — | 27,843 | ||||||||||||||||||
Unrealized loss on securities available for sale, net of tax of $3,667 | — | — | — | — | (5,500 | ) | (5,500 | ) | ||||||||||||||||
Comprehensive income | — | — | — | — | — | 22,343 | ||||||||||||||||||
Balance at June 24, 2001 | 91 | 518,781 | (1,211 | ) | 76,001 | (4,565 | ) | 589,097 | ||||||||||||||||
Common stock options exercised for cash, 1,053 shares | 1 | 4,229 | — | — | — | 4,230 | ||||||||||||||||||
Issuance of common stock for cash, 245 shares | — | 3,005 | — | — | — | 3,005 | ||||||||||||||||||
Purchase and retirement of 1,489 treasury shares | (2 | ) | (20,295 | ) | — | — | — | (20,297 | ) | |||||||||||||||
Income tax benefits from stock option exercises | — | 2,712 | — | — | — | 2,712 | ||||||||||||||||||
Amortization of deferred compensation | — | — | 515 | — | — | 515 | ||||||||||||||||||
Net loss | — | — | — | (101,723 | ) | — | (101,723 | ) | ||||||||||||||||
Unrealized losses on securities available for sale, net of taxes of $3,174 | — | — | — | �� | (11,253 | ) | (11,253 | ) | ||||||||||||||||
Losses on available for sale securities reclassified from other comprehensive income, net of taxes of $6,210 due to an other than temporary decline in value | — | — | — | — | 15,818 | 15,818 | ||||||||||||||||||
Comprehensive loss | — | — | — | — | — | (97,158 | ) | |||||||||||||||||
Balance at June 30, 2002 | 90 | 508,432 | (696 | ) | (25,722 | ) | — | 482,104 | ||||||||||||||||
Common stock options exercised for cash, 1,093 shares | 2 | 9,591 | — | — | — | 9,593 | ||||||||||||||||||
Issuance of common stock for cash, 306 shares | — | 3,107 | — | — | — | 3,107 | ||||||||||||||||||
Income tax benefits from stock option exercises | — | 5,188 | — | — | — | 5,188 | ||||||||||||||||||
Amortization of deferred compensation | — | — | 478 | — | — | 478 | ||||||||||||||||||
Net income and comprehensive income | — | — | — | 34,901 | — | 34,901 | ||||||||||||||||||
Balance at June 29, 2003 | $ | 92 | $ | 526,318 | ($ | 218 | ) | $ | 9,179 | $ | — | $ | 535,371 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
-52-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
29, 2003
1. NATURE OF BUSINESS
Nature of Business
Cree, Inc., the "Company,"“Company,” or "Cree,"“Cree,” a North Carolina corporation, develops, manufactures, and markets silicon carbide ("SiC")(SiC) and group III nitrides (GaN) including gallium nitride ("GaN") based semiconductor materials and devices, as well as radio frequency ("RF")(RF) and microwave devices made from silicon. Revenues are primarily derived from the sale of blue, green and near ultra-violet, ("UV"), blue and green(UV) light emitting diodes ("LEDs"),(LEDs) and SiC based materials and RF and microwave devices.materials. The Company markets its UV, blue, green and greenUV LED chip products principally to customers who incorporate them into packaged lamps for resale to original equipment manufacturers. The Company also sells SiC material products primarily to corporate, government, and university research laboratories. RF and microwave
devices are sold primarily to power amplifier manufacturers. In addition, the Company is engaged in a variety of research programs related to the advancement of SiC and GaN process technology and the development of electronic and optoelectronic devices that take advantage of these materials'materials’ unique physical and electronic properties. The Company has historically recovered the costs
2. Summary of a
significant portion of its researchSignificant Accounting Policies and development efforts from revenues on
contracts with agencies of the U.S. Federal government.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Other Matters
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Inc., and its wholly-owned subsidiaries, Cree Microwave, Inc. ("Cree Microwave")(Cree Microwave), Cree Lighting Company ("Cree Lighting")(Cree Lighting), Cree Research FSC, Inc. ("FSC")(FSC), Cree Funding, LLC ("Cree Funding")(Cree Funding), Cree Employee Services Corporation, Cree Technologies, Inc., CI Holdings, Limited, Cree Asia-Pacific, Inc and Cree Japan, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.
Business Combination
On December 29, 2000, the Company completed the acquisition of the Cree
MicrowaveUltraRF division (formerly known as UltraRF) of Spectrian Corporation or
Spectrian,(Spectrian), through the purchase of assets of the business by Cree'sCree’s wholly owned subsidiary, now known as Cree Microwave, Inc. in a business combination accounted for using the purchase method. Under the terms of the Asset Purchase Agreement, Cree Microwave acquired substantially all of the net assets of the business from Spectrian in exchange forSpectrian. The Company paid a total of 2,656,917 shares of Cree common stock, valuedwhich consisted of the initial commitment to pay 1,815,402 shares of Company common stock plus $30 million cash or a number of shares of the Company’s common stock equal to $30 million at $113.5 million.the closing. At the closing of the transaction, the Company elected to provide Spectrian with 841,515 shares of additional Company common stock rather than $30 million in cash. Of the total shares issued, 191,094 shares were placed in escrow and proceeds from the sale of such shares were retained in escrow to secure Spectrian'sSpectrian’s representations, warranties and covenants under the Asset Purchase Agreement. Under the terms of the escrow arrangement, one-half of the funds were released to Spectrian in June 2001 and the balance was released in December 2001 because no claims were made against the escrowed assets. The value of the Company’s common stock issued as consideration for the acquisition of Cree Microwave was determined based on the number of shares issued multiplied by the closing price of the Company’s common stock on November 20, 2000 (the “measurement date”). The total purchase price was valued at the measurement date closing price for the initial 1,815,402 shares plus the $30 million in additional consideration value. This resulted in a total purchase price valuation of $113.5 million for the transaction. The results of operations of Cree Microwave have been included in the consolidated results of the Company since the date of acquisition.
In connection with the acquisitionthird quarter of the Cree Microwave business,fiscal 2001, the Company recognizedrecorded a one-time charge of $17.4 million during fiscal 2001 representingcharge for the write-off of the appraised value of certain acquired in-processin process research and development costsprojects, or “IPR&D,” acquired from Spectrian. IPR&D represents the value assigned in a purchase business combination to research and development projects of the acquired business that had commenced but had not yet been completed at the date of acquisition and which have no
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
alternative future use. In accordance with SFAS No. 2, “Accounting for Research and Development Costs,” as clarified by FASB Interpretation No. 4, amounts assigned to IPR&D meeting the above-stated criteria must be charged to expense as part of the allocation of the purchase price of the business combination. The income approach was utilized to value the IPR&D projects.
Management is primarily responsible for this cash flow analysis and, as a part of its analysis, management considers the cost to complete the project, the relative risk of the project, the contribution of other assets and an appropriate risk adjusted discount rate. For purposes of the Company’s analysis, the standard income approach was modified. This analysis included the stage of completion of each project, the exclusion of value related to research and development yet-to-be completed as part of the ongoing IPR&D projects and the inclusion of only the incremental operating cash flows attributable to the IPR&D. As of the acquisition date, two projects targeted for completion within six months were considered as IPR&D. These IPR&D projects were known as LDMOS-Non module technology and LDMOS-Module technology. The LDMOS-Module project was completed in fiscal 2001 and the LDMOS-Non module project was abandoned in fiscal 2002.
Under the standard income approach, the fair value of an IPR&D project reflects the present value of the projected operating cash flows estimated to be generated by the project. Specific factors considered in the Company’s modified income approach were: 1) an analysis of the stage of completion of each project; 2) the exclusion of value related to research and development, or R&D yet-to-be-completed as part of the ongoing IPR&D projects and; 3) inclusion of only the incremental operating cash flows attributable to the IPR&D. The stage of completion for each IPR&D project was also analyzed by assessing: 1) costs incurred, 2) labor expended, 3) expected costs to complete, 4) calendar time or milestones elapsed and 5) remaining time to complete the projects. Based on this information, the Company estimated that the LDMOS-Non module project was 95% complete and the LDMOS-Module project was 85% complete. In the determination of the operating cash flows related to the IPR&D technologies, the Company considered the specific revenues and costs and operating profits specifically attributed to each IPR&D technology. The operating cash flows associated with the core technology in this analysis were separately identified and valued under the Income Approach as part of the developed proprietary technology valuation analysis. A discount rate of 20% was applied to the projected cash flows to reflect the time and components inherent in each IPR&D project.
The projections for revenue and costs for the LDMOS-Non module technology differed from actual results, as the project was never completed and was abandoned in March 2002. The projections for revenue and cost for the LDMOS-Module device differed from actual results as the technology has now been completed; however, the devices are being customized for specific customers and have not generated significant revenue to date. -53-
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Pro Forma Summary Data
The following pro forma summary data for the twelve months ended June 24, 2001 presents the consolidated results of operations as if the acquisition of Cree Microwave made during 2001 had occurred as of June 26, 2000. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of June 26, 2000 or of results that may occur in the future.
Year Ended June 24, 2001
(in 000's except per share
data)
--------------------------
Pro forma revenue $ 194,357
Pro forma net income 42,065
Pro forma basic net income per share $ 0.58
Pro forma diluted net income per share $ 0.56
On May 1, 2000, the Company acquired Nitres, Inc. ("Nitres") in a business
combination accounted for as a pooling of interests. Nitres, became a wholly
owned subsidiary (Cree Lighting Company) of the Company through the exchange of
3,695,492 shares of the Company's common stock for all of the outstanding stock
of Nitres. In addition, the Company assumed outstanding stock options and
warrants, which after adjustment for the exchange represented a total of 304,446
options and warrants to purchase shares of Cree's common stock. The accompanying
consolidated financial statements for fiscal 2000 are based on the assumption
that the companies were combined for the full year. All prior period
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows of Nitres, as though Nitres had
been a part of the Company for all periods presented.
Reconciliation of Previously Reported Operations - Selected Financial Data
The following table reflects the summarized results of operations of the
separate companies for the nine months ended March 26, 2000, the nearest
practical reporting period prior to the business combination on May 1, 2000. In
addition, a reconciliation of the amounts of net sales and net income previously
reported with restated amounts is included.
-54-
(Unaudited)
Nine months ended
March 26, 2000
(in 000's)
-------------------
Net sales and other revenue:
As previously reported by Cree, Inc. $ 72,342
Nitres, Inc. 2,887
Elimination of intercompany transactions (27)
-------------------
As restated $ 75,202
===================
Net income (loss):
As previously reported by Cree, Inc. $ 19,575
Nitres, Inc. (392)
Elimination of intercompany transactions (20)
-------------------
As restated $ 19,163
===================
Elimination of Prior Intercompany Transactions
Prior to May 1, 2000, the Company and Nitres, in the normal course of business,
entered into certain transactions for the purchase and sale of merchandise.
These intercompany transactions have been eliminated in the accompanying
restated consolidated financial statements.
Year Ended June 24, 2001 (in 000’s except | |||
Pro forma revenue | $ | 194,357 | |
Pro forma net income | $ | 42,065 | |
Pro forma basic net income per share | $ | 0.58 | |
Pro forma diluted net income per share | $ | 0.56 | |
Business Segments
The Company operates in two business segments, Cree and Cree Microwave. The Cree segment incorporates its proprietary technology to produce wide bandgap compound semiconductors using SiC and GaN.GaN technology. Products from this segment are sold for useused in cellular handsets,mobile appliances, automotive backlighting, indicator lamps, full color LED displays and other lighting applications as well as microwave and power applications. The Cree segment also sells SiC material products to corporate, government and university research laboratories and generates revenue from contracts with agencies of the U.S. Federal government.
The Cree Microwave segment designs, manufactures and markets a line of silicon-based laterally diffused metal oxide semiconductors or LDMOS(LDMOS) and bipolar radio frequency power semiconductors and modules, thea critical component utilized in building power amplifiers for wireless infrastructure applications.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Summarized financial information concerning the reportable segments as of and for the years ended June 30, 200229, 2003 and June 24, 200130, 2002 is shown in the following table. There were no intercompany sales between the Cree segment and the Cree Microwave segment during fiscal 2003, 2002 or 2001. The "Other"“Other” column represents amounts excluded from specific segments such as interest income, and write-downs for investments made in publiclymarketable equity securities or long-term investments held to maturity and privately held equitygains or losses on the sale of marketable securities. In addition, the "Other"“Other” column also includes corporate assets such as cash and cash equivalents, short-term investments held to maturity, marketable securities, interest receivable and long-term investments held to maturity which have not been allocated to a specific segment.
-55-
As of and for the Year Ended Cree
June 30, 2002 (in 000's) Cree Microwave Other Total
------------------------------------------------- --------------- ---------------- ---------------- ---------------
Revenue $ 130,639 $ 24,795 $ -- $ 155,434
Depreciation and amortization 30,168 2,232 -- 32,400
Loss before income taxes (4,891) (89,384) (36,139) (130,414)
Assets $ 289,921 $ 19,187 $ 195,087 $ 504,195
As of and for the Year Ended Cree
June 24, 2001 (in 000's) Cree Microwave Other Total
------------------------------------------------- --------------- ---------------- ---------------- ---------------
Revenue $ 157,999 $ 19,228 $ -- $ 177,227
Depreciation and amortization 20,991 957 -- 21,948
Income (loss) before income taxes 51,743 (17,225) 15,668 50,186
Assets $ 298,495 $ 99,185 $ 217,443 $ 615,123
QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
As of and for the Year Ended | Cree | Cree Microwave | Other | Total | ||||||||||||
Highlights from the Statement of Operations: | ||||||||||||||||
Product revenue | $ | 200,165 | $ | 2,797 | $ | — | $ | 202,962 | ||||||||
Contract revenue | 26,860 | — | — | 26,860 | ||||||||||||
Total revenue | 227,025 | 2,797 | — | 229,822 | ||||||||||||
Cost of revenue | 118,677 | 11,975 | — | 130,652 | ||||||||||||
Gross profit (loss) | 108,348 | (9,178 | ) | — | 99,170 | |||||||||||
Research and development | 26,682 | 4,521 | — | 31,203 | ||||||||||||
Selling, general and administrative | 23,558 | 2,768 | — | 26,326 | ||||||||||||
Income (loss) before income taxes | 57,000 | (11,886 | ) | 2,050 | 47,164 | |||||||||||
Depreciation and amortization | $ | 39,450 | $ | 2,255 | $ | — | $ | 41,705 | ||||||||
Highlights from the Balance Sheet: | ||||||||||||||||
Inventory, net | $ | 17,257 | $ | 417 | $ | — | $ | 17,674 | ||||||||
Property and equipment, net | 239,525 | 11,821 | — | 251,346 | ||||||||||||
Additions to property and equipment | 76,385 | 1,258 | — | 77,643 | ||||||||||||
Total assets | $ | 334,049 | $ | 13,576 | $ | 216,069 | $ | 563,694 | ||||||||
As of and for the Year Ended | Cree | Cree Microwave | Other | Total | ||||||||||||
Highlights from the Statement of Operations: | ||||||||||||||||
Product revenue | $ | 111,435 | $ | 24,795 | $ | — | $ | 136,230 | ||||||||
Contract revenue | 19,204 | — | — | 19,204 | ||||||||||||
Total revenue | 130,639 | 24,795 | — | 155,434 | ||||||||||||
Cost of revenue | 71,994 | 20,082 | — | 92,076 | ||||||||||||
Gross profit | 58,646 | 4,713 | — | 63,359 | ||||||||||||
Research and development | 22,699 | 5,327 | — | 28,026 | ||||||||||||
Selling, general and administrative | 21,920 | 3,698 | — | 25,618 | ||||||||||||
Amortization of purchased intangibles | — | 6,765 | — | 6,765 | ||||||||||||
Write off of intangible assets | — | 76,489 | — | 76,489 | ||||||||||||
Write off of fixed assets | 18,917 | 102 | — | 19,019 | ||||||||||||
Loss on marketable securities and long term asset investments | — | — | (41,848 | ) | (41,848 | ) | ||||||||||
Loss before income taxes | (4,891 | ) | (89,384 | ) | (36,139 | ) | (130,414 | ) | ||||||||
Depreciation and amortization | $ | 30,168 | $ | 2,232 | $ | — | $ | 32,400 | ||||||||
Highlights from the Balance Sheet: | ||||||||||||||||
Inventory, net | $ | 14,835 | $ | 3,131 | $ | — | $ | 17,966 | ||||||||
Property and equipment, net | 198,855 | 12,830 | — | 211,685 | ||||||||||||
Additions to property and equipment | 34,617 | 7,018 | — | 41,635 | ||||||||||||
Total assets | $ | 289,921 | $ | 19,187 | $ | 195,087 | $ | 504,195 | ||||||||
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Quarterly Results of Operations—Unaudited
The following is a summary of the Company'sCompany’s consolidated quarterly results of operations for each of the fiscal years ended June 30, 200229, 2003 and June 24, 200130, 2002 (in thousands, except per share data).
| September 29, 2002 | December 29, 2002 | March 30, 2003 | June 29, 2003 | Fiscal Year 2003 | |||||||||||||||
Net revenue | $ | 48,811 | $ | 56,727 | $ | 60,223 | $ | 64,061 | $ | 229,822 | |||||||||
Cost of revenue | 30,106 | 33,187 | 32,176 | 35,183 | 130,652 | ||||||||||||||
Net income | $ | 3,883 | $ | 8,996 | $ | 10,631 | $ | 11,391 | $ | 34,901 | |||||||||
Earnings per share: | |||||||||||||||||||
Basic | $ | 0.05 | $ | 0.12 | $ | 0.15 | $ | 0.16 | $ | 0.48 | |||||||||
Diluted | $ | 0.05 | $ | 0.12 | $ | 0.14 | $ | 0.15 | $ | 0.46 | |||||||||
| September 23, 2001 | December 23, 2001 | March 24, 2002 | June 30, 2002 | Fiscal Year 2002 | |||||||||||||||
Net revenue | $ | 43,166 | $ | 41,092 | $ | 33,376 | $ | 37,800 | $ | 155,434 | |||||||||
Cost of revenue | 23,262 | 21,717 | 24,999 | 22,098 | 92,076 | ||||||||||||||
Net income (loss) | $ | 6,460 | $ | (17,376 | )(1) | $ | (68,286 | )(2) | $ | (22,521 | )(3) | $ | (101,723 | ) | |||||
Earnings (loss) per share: | |||||||||||||||||||
Basic | $ | 0.09 | ($ | 0.24 | ) | ($ | 0.94 | ) | ($ | 0.31 | ) | ($ | 1.40 | ) | |||||
Diluted | $ | 0.09 | ($ | 0.24 | ) | ($ | 0.94 | ) | ($ | 0.31 | ) | ($ | 1.40 | ) | |||||
| 1. | The $17.4 million loss reported in the quarter ended December 23, 2001 includes a net of tax write-down for fixed assets of $12.8 million and a net of tax write down of $8.9 million for long-term investments. The write down for fixed assets was caused mostly by technology changes that made the assets obsolete. The write down for long term investments was for privately held company investments where business conditions had worsened and the Company wrote investments down to their estimated fair market value. |
| 2. | The $68.3 million loss reported in the quarter ended March 24, 2002 includes a net of tax write down for goodwill and intangible assets of $59.7 million relating to Cree Microwave’s business. In addition, the Company also recorded a $4.0 million write down net of tax for Cree Microwave inventory that was deemed obsolete and a $700,000 after tax severance charge. All of these charges resulted from the down turn in Cree Microwave’s business as its supply agreement with Spectrian was amended to record less revenue under the contract. In addition, the Company also adjusted charges taken in the previous quarter for fixed assets and long-term investments due to a change in the Company’s effective tax rate. This change resulted in an additional $1.3 million and $900,000 net of tax charge for fixed assets and long-term investments, respectively. |
| 3. | The $22.5 million loss reported in the quarter ended June 30, |
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Reclassifications
Certain 2002 and 2001 2001 2002 2002 2002
---------------------------------- ------------------------------------------------
Net revenue $43,166 $ 41,092 $ 33,376 $ 37,800 $ 155,434
Cost of revenue 23,262 21,717 24,999 22,098 92,076
Net income (loss) $ 6,460 $(17,376) $(68,286) $(22,521) $(101,723)
Earnings (loss) per share:
Basic $ 0.09 ($0.24) ($0.94) ($0.31) ($1.40)
Diluted $ 0.09 ($0.24) ($0.94) ($0.31) ($1.40)
September 24, December 24, March 25, June 24, Fiscal Year
2000 2000 2001 2001 2001
-------------- ------------- ------------ ------------- ------------
Net revenue $37,642 $ 41,494 $ 53,365 $ 44,726 $ 177,227
Cost of revenue 17,076 19,420 27,668 25,537 89,701
Net income (loss) $12,655 $ 13,861 $ (5,182) $ 6,509 $ 27,843
Earnings (loss) per share:
Basic $ 0.18 $ 0.19 ($0.07) $ 0.09 $ 0.39
Diluted $ 0.17 $ 0.18 ($0.07) $ 0.09 $ 0.37
Reclassifications
Certain 2001 and 2000 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 20022003 presentation. These reclassifications had no effect on previously reported net income (loss) or shareholders'shareholders’ equity.
Fiscal Year
The Company'sCompany’s fiscal year is a 52 or 53-week period ending on the last Sunday in the month of June. FiscalThe Company’s 2003 fiscal year extended from July 1, 2002 through June 29, 2003 and was a 52-week fiscal year. The Company’s 2002 fiscal year extended from June 25, 2001 through June 30, 2002 and was a 53-week year that ended on
June 30, 2002.
-56-
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at June 30, 200229, 2003 and June 24, 2001,30, 2002, and the reported amounts of revenues and expenses during the years ended June 29, 2003, June 30, 2002 and June 24, 2001 and June 25, 2000.2001. Actual amounts could differ from those estimates.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangementa contract exists, such as when a purchase order or contract is received from the customer, the price is fixed, title of the goods has transferred and there is a reasonable assurance of collection of the sales proceeds. We obtainThe Company obtains written purchase authorizations from ourits customers for a specified amount of product at a specified price and considerconsiders delivery to have occurred at the time of shipment. The majority of its products have shipping terms that are FOB or FCA shipping point, which means that the Company fulfills the obligation to deliver when the goods are handed over and into the charge of the carrier at its shipping dock. This means that the buyer bears all costs and risks of loss of or damage to the goods from that point. The difference between FOB and FCA is that under FCA terms, the customer designates a shipping carrier of choice to be used. In certain cases, the Company ships its product Cost Insurance Freight (CIF). Under this arrangement, revenue is recognized under FOB shipping point shipping terms, however, the Company is responsible for the cost of insurance to transport the product as well as the cost to ship the product. For all of our sales other than those with CIF terms, the Company invoices its customers only for shipping costs necessary to physically move the product from its place of business to the customer’s location. The costs primarily consist of overnight shipping charges. The Company incurrs the direct shipping costs on behalf of the customer and invoices the customer to obtain direct reimbursement for such costs. The Company accounts for its shipping costs as a part of cost of revenue and records the reimbursement of such costs by its customers as a direct offset and reduction to cost of revenue. Beginning in fiscal year 2004, the Company will record the amount of freight that is invoiced to its customers as revenue, with the corresponding cost recorded as cost of revenue. If inventory is maintained at a consigned location, revenue is recognized when ourits customer pulls product for theirits use. We provide ourThe Company provides its customers with a limited rightrights of return.return for non-conforming shipments and warranty claims for up to 36 months for Cree Microwave products. Revenue is recognized from the Company’s customers at shipment, and we recordthe Company records a reserve for estimated sales returns, which is reflected as a reduction of revenue at the time of revenue recognition. Certain of the Company’s distributor arrangements provide for limited product exchanges and reimbursement of certain sales costs. For one distributor, with these arrangements, the Company defers revenue equal to the level specified with these
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
contractual arrangements and recognizes the related revenue when deferred revenue reserves expire less any claims made against the reserves. In connection with the Company’s distributor agreement with Sumitomo, such deferred revenue amounted to $5.5 million and $741,000 as of June 29, 2003 and June 30, 2002, respectively. Please see discussion in Item 1 of this report under “Distributorship Agreement with Sumitomo Corporation”, for further information.
Based on historical activity, the Company has experienced only nominal credit losses from customers’ inability to pay. Any uncollectibility of receivables is primarily due to returned products. Therefore, the Company records an allowance for sales returns at the time of sale. Significant judgments and estimates made by management are used in connection with establishing the allowance for sales returns. Some of these judgments and estimates include reserving for all accounts greater than 90 days past due plus reserving for one half of one percent of all outstanding balances less than 90 days past due. Material differences may result in the amount and timing of the Company’s revenue for any period if management made different judgments or utilized different estimates. The allowance for sales returns at June 29, 2003 and June 30, 2002 was $644,000 and $455,000, respectively.
Revenue from government contracts is recorded on the percentage-of-completion method as contract expenses per contract are incurred. Contract revenue represents reimbursement bycontracts with various U.S. Government entities to aid inperform research and development work related to the development of the Company's technology.Company’s technologies. The contract funding may be based on either a cost-plus or a cost-share arrangement. The amount of funding under each contract is determined based on cost estimates that include direct costs, plus an allocation for research and development, general and administrative and the cost of capital expenses. Cost-plus funding is determined based on actual costs plus a set percentage margin. The applicable contracts generally provide that the Company may elect to retain ownership of inventions made in performing the work, subject to a non-transferable, non-exclusive license retained by the government to practice the inventions for government purposes. Contract revenue includes funding of direct research and development costs and a portion of the Company'sour general and administrative expenses and other operating expenses for contracts under which funding is expected to exceed direct costs over the life of the contract. The specific reimbursement provisions of the contracts, including the portion of the Company'sCompany’s general and administrative expenses and other operating expenses that are reimbursed, vary by contract. Such reimbursements are recorded as contract revenue. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract (i.e., certain cost share arrangements), the Company reports direct costs as research and development expenses with related reimbursements recorded as an offset to those expenses.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three months or less when purchased.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term and long-term
investments, available for sale securities, accounts and interest receivable, accounts payable, debt, and other liabilities approximate fair values at June 30, 200229, 2003 and June 24, 2001.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). This statement requires certain securities to be
classified into three categories:
(a) Securities Held-to-Maturity- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at
amortized cost.
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(b) Trading Securities- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included in
earnings.
(c) Securities Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading securities
are reported at fair value with unrealized gains or losses excluded
from earnings and reported as a separate component of shareholders'
equity.
At June 30, 2002, the Company held marketable equity securities
available-for-sale of two public companies. At June 30, 2002, the Company owned
356,000 common shares in the first public company at an average cost of $40.10
per share, or a total cost of $14.3 million. These shares were purchased through
two transactions between May 1999 and April 2000. In June 2000, 162,600 shares
were sold for $6.3 million, with a gain on the sale recognized for $3.6 million.
The fair market value of the remaining shares held as of June 30, 2002 was $1.9
million.
At June 30, 2002, the Company owned 691,000 common shares in the second public
company at an average cost of $19.91 per share, or a total cost of $13.8
million. These shares were purchased between June 2001 and October 2001. The
fair market value of these shares as of June 30, 2002 was $4.1 million.
Management views these transactions as strategic investments and the shares are
accounted for as "available-for-sale" securities under SFAS 115. The Company
carries these investments at fair value, based on quoted market prices, and
unrealized gains and losses, net of taxes, are included in accumulated other
comprehensive income (loss), which is reflected as a separate component of
shareholders' equity. Realized gains and losses are recognized upon sale or when
declines in value are deemed to be "other than temporary" on our consolidated
statements of operations. The Company reviews equity holdings on a regular basis
to evaluate whether or not each security has experienced an
"other-than-temporary" decline in fair value. This policy requires, among other
things, a review of each of the companies' cash position, earnings\revenue
outlook, stock price performance, liquidity, ability to raise capital and
management\ownership. Based on this review, if the Company determines that an
"other-than-temporary" decline exists in the value of one of our marketable
equity securities, it is the Company's policy to write-down these equity
investments to the respective market value. The related write-down will then be
recorded as an investment loss on the Company's consolidated statements of
operations. As of June 30, 2002, the Company believed that an
"other-than-temporary" decline in market value had occurred in both of these
marketable equity investments. Accordingly, the Company has written down these
equity investments to their market values as of June 30, 2002 and recorded the
unrealized losses previously recorded as comprehensive items as a non-operating
loss on our consolidated statements of operations. The total amount of the
charge to non-operating expenses in the consolidated statements of operations
for the year ended June 30, 2002 relating to these investments was $22.0
million. One of the companies the Company invested in funded a research and
development project for custom LEDs and lasers. The amount of funding received
by the Company was $4.4 million; $4.7 million and $3.1 million for the fiscal
years ended June 30, 2002, June 24, 2001 and June 25, 2000, respectively. The
amount of the research and development funding received from the company was
recorded as an offset to research and development expense. The Company does not
anticipate additional funding from this company.
As of June 30, 2002, the Company's short-term investments held to maturity
included $32.4 million in high-grade corporate bonds and other debt securities
that mature within one year. As of June 24, 2001, the Company's short-term
investments held to maturity totaled $36.9 million consisting of high-grade
corporate bonds. The Company purchased these investments with a portion of the
proceeds from its public stock offering in January 2000. The Company has the
intent and ability to hold these securities until maturity; therefore, they are
accounted for as "securities held-to-maturity" under SFAS 115. The
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securities are reported on the consolidated balance sheets at amortized cost, as
a short-term investment with unpaid interest included in interest receivable.
As of June 30, 2002, the Company's long-term investments held to maturity
consisted of $64.2 million in high-grade corporate bond holdings and other debt
securities that mature after June 29, 2003. As of June 24, 2001, the Company's
long-term investments held to maturity consisted of $7.9 million in high-grade
corporate bond holdings. The Company purchased the corporate bonds with a
portion of the proceeds from the public stock offering in January 2000. The
Company has the intent and ability to hold these securities until maturity;
therefore, they are accounted for as "securities held-to-maturity" under SFAS
115. The securities are reported on the consolidated balance sheets at amortized
cost, as a long-term held to maturity investment with unpaid interest included
in interest receivable if interest is due in less than 12 months, and as a
long-term other asset if interest is due in more than 12 months. These
investments mature over periods ranging from 13 months to 2 years.
As of June 30, 2002, the Company maintained $16.0 million of net investments in
privately held companies, which are included in other assets on the consolidated
balance sheet. Since the Company does not have the ability to exercise
significant influence over the operations of these companies, these investment
balances are carried at cost and accounted for using the cost method of
accounting. Because the shares of stock the Company received in these
investments are not publicly traded, there is no established market for these
securities. The Company has a policy to review the fair value of these
investments on a regular basis to evaluate the carrying value of such
investments. This policy includes, but is not limited to, reviewing each of the
companies' cash position, financing needs, earnings\revenue outlook, operational
performance, management\ownership changes and competition. The evaluation
process is based on information requested from the privately held companies by
the Company. This information is not subject to the same disclosure regulations
as U.S. public companies, and as such, the basis for these evaluations is
subject to the timing and the accuracy of the data received from these
companies. If the Company determines that the carrying value of an investment is
at an amount in excess of fair value, it is the Company's policy to record a
write-down of the investment. This write-down is estimated based on the
information described above, and it is recorded as an investment loss on the
Company's consolidated statements of operations. During fiscal 2002 and fiscal
2001, the Company recognized write-downs of these investments of $20.4 million
and $4.6 million, respectively, representing the Company's best estimate of
"other-than-temporary" declines in value. Two of the companies we invested in
funded research and development projects. One of the projects was for brighter
LEDs; the other project was for SiC RF transistors. The total amount of funding
received by the Company was $3.5 million, $5.2 million and $0 for the fiscal
years ended June 30, 2002, June 24, 2001 and June 25, 2000, respectively. The
amount of the research and development funding received from the companies was
recorded as an offset to research and development expense. We anticipate
$500,000 of additional funding in fiscal 2003 under the remaining program.
During the first half of fiscal 2002, the Company purchased 150,000 common
shares in a public company at an average cost of $10.31 per share, or a total
cost of $1.5 million. These shares were purchased between September 2001 and
October 2001. The Company sold all of these common shares in November 2001 and
December 2001 at an average price of $14.03 per share, or total proceeds of $2.1
million. The sale of these marketable trading securities resulted in the Company
recording a realized gain on the sale of stock of $558,000. These securities
were classified as trading securities due to the short time they were owned by
the Company. During fiscal 2001, the Company purchased and sold marketable
available-for-sale securities that resulted in the Company recording a realized
gain on the sale of stock of $6.0 million, using the specific identification
method of cost determination for such investments.
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Inventories
Inventories are stated at the lower of cost or market, with cost determined underusing the first-in, first-out (FIFO) method.method for finished goods and work in process accounts and the Company used the average cost
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
method for raw materials for the Cree Segment. The Cree Microvision Segment uses a standard cost method to value its inventory. It is the Company'sCompany’s policy to record a reserve against inventory once it has been determined that conditions exist which may not allow the Company to sell the inventory for its intended purpose, the inventory'sinventory’s value is determined to be less than cost, or it is determined to be obsolete. The charge for the inventory reserves is recorded in cost of revenue on the consolidated statement of operations. InThe Company evaluates inventory levels quarterly against sales on the event the Company later sells inventory
that had been covered by a specific inventory reserve, the sale is recorded at
the actual selling price and the related costconsolidated statement of goods sold at the full
inventory cost.operations. The Company evaluates inventory levels quarterly against sales forecasts on a part-by-part basis and evaluatesits overall inventory forecasts on a part-by-part basis and its overall inventory risk. Reserves are adjusted to reflect inventory values in excess of forecasted sales, as well as overall inventory risk assessed by management.
As of June 30, 2002,29, 2003, the Company maintained a $2.3$2.1 million reserve for inventory. Of thethis total reserve amount, $1.8$1.5 million is attributable to the Cree Microwave segment and $477,000$592,000 is attributable to the Cree segment.
The majority of the reserveallowance at Cree Microwave was recorded during the second quarter of fiscal 2003 resulting from the termination of the supply agreement with Spectrian. In exchange for a one-time payment of $5.0 million recorded as “other operating income” on the consolidated statements of operations, the Company relieved Spectrian of further obligations to purchase product under the supply agreement that was originally signed in December 2000. For the three months ended December 29, 2002, Cree Microwave recorded an additional reserve of $1.3 million for inventory that was targeted for sale to Spectrian, including some customized parts. Additional reserves of $5.1 million were recorded in the third quarter of fiscal 2002, due to information that was obtained duringas contract negotiations at the time with Spectrian its significant customer, regarding specific order
needs over the nextindicated that several quarters. Spectrian has purchased more than 90% of
the products sold by Cree Microwave since it was acquired from Spectrian in
December 2000.parts on hand would not be salable. During these contract negotiations, Spectrian indicated that it would only purchase the latestnew generation LDMOS 8 and certain types of LDMOS7 devices from Cree Microwave after the fourth quarter of fiscal 2002. As a result, the Company fully reserved for inventories of non-LDMOS and other older devices deemed unsaleable in the
third quarter of fiscal 2002.maintained for Spectrian. The Company disposed of a portiondestroyed the majority of this inventory during the fourth quarter of fiscal 2002 and fiscal 2003 and as a result the remainder will be
disposedrelated items were taken out of withininventory and the next twelve months.related reserve. There was no financial impact to the statement of operations when these items were destroyed. The Company still maintains some packaging materials that were reserved for, that are no longer available from third party suppliers or are available only with lengthy lead timeframes. The Company also has “last time buy” contracts with Remec (who purchased Spectrian) for devices that use these packages. However, the Company plans to dispose of these remaining packages when the “last time buy” rights expire. Therefore, with the exception of the packaging materials covered under “last time buy” obligations, all items previously reserved at March 2002 have now been scrapped and removed from inventory and the related reserve account. These reserves were recorded as a cost of revenue when they were established. In addition, $417,000 of LDMOS8 product was also written off as a research and development expenditure during the fourthfirst quarter of fiscal 2002, the Company had inventory write-downs of
$690,0002003 as it related to a packaging issue identifiedprototype devices that were initially accepted by some customersSpectrian and later rejected. These parts were never sold to any customers.
Cree segment results for the XBright(TM) family of products. At June 30,three months ended December 29, 2002 the Cree segmentinclude a $784,000 additional reserve consisted of $477,000 for raw materials, LED and wafer finished goods inventory.
inventories as management assessed the inventory to be slow moving or obsolete. During the first quarter of fiscal 2003, the Company recorded a $185,000 lower of cost or market adjustment to certain LED products based on management’s estimate of an average sales price for the products. Both of these adjustments were recorded to cost of revenue. During the first quarter of fiscal 2003, the Company wrote-off $1.0 million of the initial XBright chips that were developed during fiscal 2002. An improved chip has replaced these devices and this write down was recorded as a research and development expense as the initial devices were prematurely launched and not commercially viable. In addition, customers had returned the entire product line that was initially shipped as they determined that the chips did not meet their specifications.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from three to forty years. Leasehold improvements are amortized over the lesser of the asset life or the life of the related lease. Expenditures for repairs and maintenance are charged to expense as incurred. The costs for major renewals and improvements are capitalized and depreciated over their estimated useful lives. The cost and related accumulated depreciation of the assets are removed from the accounts upon disposition and any resulting gain or loss is reflected in operations. During the years ended June 29, 2003, June 30, 2002 and June 24, 2001, and June 25,
2000, the Company recorded $1.6 million, $19.0 million $100,000 and $1.3 million,$100,000, respectively, as losses on retirement or impairments of property and equipmentequipment. These charges are reflected in other operating expense onin the consolidated statements of operations.
During October 1999, the Company entered into two agreements with Charles and
Colvard, or C&C, to sell crystal growth equipment manufactured by the Company to
C&C at cost plus a reasonable overhead allocation. As a result of these
transactions, the Company recognized $227,000 in fiscal 2000 as "other operating
income" for the overhead allocation portion of the sales price. In May 2000, the
Company agreed to purchase all of the crystal growth equipment previously sold
to C&C for a purchase price of $5.0 million, which was less than the Company's
direct cost to manufacture the equipment.
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In the second quarter of fiscal 2000, the Company completed a 42,000 square foot
facility expansion at its production site near Research Triangle Park, North
Carolina. In the third quarter of fiscal 2000, the Company purchased a 120,000
square foot facility on 17.5 acres of land adjacent to the existing production
site. The Company uses this facility for general and administrative purposes as
well as for general employee services functions. The cost to acquire this
facility was $8.1 million. In addition, in fiscal 2002, the Company completed
construction of a 147,000 square foot expansion of its main facility.
During fiscal 2000, the Company changed its depreciation policy to reflect lower
useful lives on new manufacturing equipment. The useful lives have been reduced
from nine years to five years for all manufacturing equipment purchased since
the beginning of fiscal year 2000. In management's estimate, this new policy was
necessary due to the changes in estimated useful lives of new equipment caused
by technology changes anticipated with the future development of larger diameter
wafers. Management estimates that the change in policy reduced the Company's
fiscal 2000 net income by $889,000 or $0.03 per share.
Impairment of Property and Equipment
Long-Lived Assets
In accordance with SFAS 121,144, the Company reviews long-lived assets for impairment based on changes in circumstances that indicate their carrying amounts may not be recoverable. During the year ended June 30, 2002, the Company recorded impairment charges for property and equipment totaling $19.0 million related to assetsfor the Cree segment in accordance with SFAS 121 “Accounting for the Impairment of Long-Lived Assets and Long Lived Assets to be disposedDisposed of”. This charge was included as a loss on the disposal of whichfixed assets that is included as an other“other operating expense onexpense” in the consolidated statements of operations. These impairment charges were due to technology decisions or changes resulting in the obsolescence of the assets. The write-down included epitaxy reactors, nonconvertible two-inch crystal growers and other equipment. All of these assets were sold or disposed of by June 30, 2002. The Company also reviews the discounted cash flow analysis calculation for the Cree Microwave segment to test for impairment of its assets on a quarterly basis. During fiscal 2003 there was no impairment recorded for these assets. There can be no assurance that a future analysis of Cree Microwave’s discounted cash flow will not result in a change to earnings.
Patent and License Rights
Patent rights reflect costs incurred to enhance and maintain the Company'sCompany’s intellectual property position. License rights reflect costs incurred to use the intellectual property of others. Both are amortized on a straight-line basis over the lesser of 20 years from the date of patent application or over the license period. The related amortization expense was $394,000, $293,000 $194,000 and $145,000$194,000 for the years ended June 29, 2003, June 30, 2002 and June 24, 2001, and June 25, 2000,
respectively.
Total accumulated amortization for patents and license rights was approximately $1.7 million and $1.3 million at June 29, 2003 and $990,000 at June 30, 2002, and June 24, 2001,
respectively.
Goodwill and Intangible Assets
During the third quarter of fiscal 2002, the Company determined that business conditions for its Cree Microwave segment had changed due to several factors. First, Cree Microwave amended its supply agreement with Spectrian effective March 31, 2002, which resulted in a significant reduction in quarterly revenue expectations. Under the original supply agreement with Spectrian, if Cree Microwave was unable to supply components under the agreement that were deemed competitive with components available from third party suppliers within nine months, Spectrian’s quarterly minimum purchase commitment would be reduced. The amount of the reduction each quarter would be calculated by the dollar amount of the locked-in components that Spectrian purchased from other vendors. Cree Microwave was delayed in supplying Spectrian with LDMOS8 technology that had been available from third parties. Under the amended supply
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
agreement signed in March 2002, Spectrian was no longer required to purchase parts from the Company or third parties because of the delays of the release of LDMOS8 technology from Cree Microwave. As a result, the amount of revenue expected from the contract with Spectrian was greatly reduced. In addition, because LDMOS8 technology was not completed, Cree Microwave'sMicrowave’s outlook for acquiring additional customers in the near term weakened due toweakened. At the same time, the overall market sustained deteriorating economic conditions and longlengthened product qualification cycles. Also, many of the products that Spectrian initially indicated it would purchase in the future havehad not yet been released to production. Under the amended supply agreement, if Cree Microwave iswas not able to produce LDMOS 8qualified LDMOS8 devices qualified for Spectrian'sSpectrian’s applications in a timely manner, revenue from Spectrian maywould be significantly reduced after the June 2002 quarter. If our revenue declines significantly, it would have an adverse effect
on our results of operations from this segment of business.
Based on these impairment indicators, the Company performed an asset impairmenta discounted cash flow analysis in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of".121. As a result of this analysis, the remaining balance of goodwill and intangible assets of $76.5 million was deemed to be fully impaired, and was written off during the third quarter of fiscal 2002. This write-
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offwrite-off was recorded as "other expense" on“other expense” in the consolidated statements of operations. See "Significant Sales Contracts" for further discussion of the
Spectrian contract.
Prior to the impairment charge that was recorded duringdescribed in the third quarter of
fiscal 2002,preceding paragraph, intangible assets included goodwill, current technology and workforce-in-place associated with the acquisition of Cree Microwave accounted for under the purchase method in December 2000. Goodwill was capitalized at $81.5 million and represented the excess of cost over the fair value of assets acquired and was amortized using the straight-line method over ten years. Current technology and workforce-in-place represented assets have beenthat were assigned values of $5.5 million and $800,000, respectively. These intangibles were being amortized underusing the straight-line method over eight and five years, respectively. During the first three-quarters of fiscal 2002, prior to the impairment charge, the expense for intangible asset amortization was $6.8 million. During fiscal 2001, the Company recorded $4.5 million of intangible asset amortization. Please see the previousBusiness Combinations section of this Note 2 for the details of the valuation of the transaction under Accounting Principles Board Opinion #16 (APB #16).
Research and Development
The U.S. Government provides funding through research contracts for several of the Company'sCompany’s current research and development efforts. The contract funding may be based on either a cost-plus or a cost-share arrangement. The amount of funding under each contract is determined based on cost estimates that include direct costs, plus an allocation for research and development, general and administrative and the cost of capital expenses. Cost-plus funding is determined based on actual costs plus a set percentage margin. For the cost-share contracts, the actual costs are divided between the U.S. Government and the Company based on the terms of the contract. The government'sgovernment’s cost share is then paid to the Company. Activities performed under these arrangements include research regarding SiC and GaN materials and devices. The contracts typically require the submission of a written report that documents the results of such research, as well as some material deliverables.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
The revenue and expense classification for contract activities is based on the nature of the contract. For contracts where the Company anticipates that funding will exceed direct costs over the life of the contract, funding is reported as contract revenue and all direct costs are reported as costs of contract revenue. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses and related funding as an offset of those expenses. The following table details information about contracts for which direct expenses exceeded funding by period as included in research and development expenses:
| Year Ended (in 000’s) | |||||||||
June 29, 2003 | June 30, 2002 | June 24, 2001 | |||||||
Net research and development costs | $ | — | $ | 17 | $ | 435 | |||
Government funding | — | 276 | 1,306 | ||||||
Total direct costs incurred | $ | — | $ | 293 | $ | 1,741 | |||
Non-government contract related research and development is expensed as incurred. Customers contributed $500,000 in fiscal 2003, $9.0 million in fiscal 2002 and $11.9 million in fiscal 2001
and $5.5 million in fiscal 2000 toward product research and development activities. In addition, customers are committedThese amounts were recorded as an offset to spend an additional $462,000
in fiscal 2003 for research and development activities.
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Credit Risk, Major Customers and Major Suppliers
Financial instruments, which may subject the Company to a concentration of credit risk, consist principally of short-term and long-term investments, marketable securities, cash equivalents and accounts receivable. Short-term and long-term investments consist primarily of high-grade corporate debt, commercial paper, government securities and other investments at interest rates that vary by security. The Company'sCompany’s cash equivalents consist primarily of money market funds. Certain bank deposits may at times be in excess of the FDIC insurance limits.
The Company sells its products on account to manufacturers and researchers worldwide and generally requires no collateral. At the time of shipment, the Company records revenue and related accounts receivable. The Company maintains reservesalso records at the time of sale, an allowance for potential
credit losses,sales returns which is recorded as an offset to accounts receivable and such losses,reduction in revenue. Such returns, in the aggregate, have generally been within management'smanagement’s expectations. The Company presently derives its contract revenue from contracts with the U.S. Government. Approximately 18%5% and 10%18% of the Company'sCompany’s accounts receivable balance at June 30, 200229, 2003 and June 24, 2001,30, 2002, respectively, was due from the U.S. Government. The Company had amounts due from Osram Opto Semiconductors GmbH, or Osram(Osram), totaling 13%20% and 18%13%, of accounts receivable balances at June 30, 200229, 2003 and June 24, 2001,30, 2002, respectively. The Company had amounts due from SpectrianRemec (who purchased Spectrian) totaling 8%1% and 9%8% of accounts receivable balances at June 30, 200229, 2003 and June 24, 2001,30, 2002, respectively. The Company had amounts due from Sumitomo Corporation totaling 9%29% and 14%9% of accounts receivable balances at June 29, 2003 and June 30, 2002, respectively. The Company had amounts due from Agilent Corporation (Agilent), totaling 6% and 20% of accounts receivable balances at June 29, 2003 and June 24, 2001,30, 2002, respectively.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
The Company has derived its product and contract revenue from sales in the United States, Malaysia, Japan, Other Asian countries, and Europe based on ship-to locations for our products as follows:
| Year ended | |||||||||
June 29, 2003 | June 30, 2002 | June 24, 2001 | |||||||
United States | 20 | % | 35 | % | 31 | % | |||
Malaysia | 28 | % | 23 | % | 17 | % | |||
Japan | 24 | % | 14 | % | 22 | % | |||
Other Asian Countries | 21 | % | 20 | % | 23 | % | |||
Europe | 7 | % | 8 | % | 7 | % | |||
Sumitomo accounted for 19%24%, 25%14%, and 26%22% of revenue for fiscal 2003, 2002, and 2001, and 2000, respectively. A second customerOsram accounted for 14%21%, 22%19%, and 25% of revenue for fiscal 2003, 2002, and 2001, and 2000, respectively. A third customerRemec (who purchased Spectrian) accounted for 2%less than 1%, 3%16%, and 15%11% of revenue for fiscal 2003, 2002, 2001, and 2000,
respectively. A fourth customer accounted for 16%, 11%, and 0% of revenue fiscal
2002, 2001, and 2000, respectively. The U.S. Government, representing various agencies accounted for 12%, 9%12%, and 11%9% of revenues during fiscal 2003, 2002, and 2001, respectively. Agilent accounted for 10%, 9% and 2000,1% of revenue for fiscal 2003, 2002, and 2001, respectively.
In April 2003, the Company signed a supply agreement with Sumitomo that covers shipments through June 2004. The amount of the contract was $100 million, subject to adjustments and cancellation provisions and end customer demand. The orders cover demand for the Company’s products in Japan and represent sales to approximately 20 LED packagers including Stanley Electronics, Citizen Electronics, Sharp Corporation and Rohm, Inc. The Company’s purchase agreement with Osram expires in September 2003, and the Company is currently negotiating a new purchase agreement with Osram. The loss of Osram, Agilent or any of Sumitomo’s large customers could have a material adverse effect on the Company.
The Company depends on single or limited source suppliers for a number of raw materials, equipment and components used in manufacturing its products. Any interruption in the supply of these key materials or components could have a significant adverse effect on the Company'sCompany’s operations.
Over 90%
Investments
Investments are accounted for using the specific identification method and in accordance with Statement of Cree Microwave revenues were derived from shipmentsFinancial Accounting Standards (“SFAS’) 115 “Accounting for Certain Investments in Debt and Equity Securities”. This statement requires certain securities to Spectrian in
fiscal 2002 as well as fiscal 2001. The Company's supply contract with Spectrian
commits them to a minimum purchase level of $16.3 million in fiscal 2003. If the
Company is unable to deliver qualified LDMOS 8 products; the amount of the
contractual supply agreement with Spectrian may be reduced significantly.
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| (a) | Securities Held-to-Maturity-Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. |
| (b) | Trading Securities-Debt and equity securities that are bought and held principally for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. |
| (c) | Securities Available-for-Sale-Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity. |
Earnings (Loss) Earnings Per Share
Basic earnings (loss) earnings per common share is computed using the weighted average number of common stock shares outstanding. Diluted earnings (loss) earnings per common share is computed using the weighted average number of common stock shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock, unless such incremental shares would be antidilutive.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Accounting for Stock Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, "Accounting“Accounting for Stock Issued to Employees" ("Employees” (“APB 25"25”), no compensation expense is recorded for stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the common stock price on the grant date.
In October 1995, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Statement of Financial Accounting Standards 123, "Accounting“Accounting for Stock Based Compensation" ("Compensation” (“SFAS 123"123”). SFAS 123 establishes fair value as the measurement basis for equity instruments issued in exchange for goods or services and stock-based compensation plans. Fair value may be measured using quoted market prices, option-pricing models or other reasonable estimation methods. SFAS 123 permits the Company to choose between adoption of the fair value based method or disclosing pro forma net income (loss)
income information. The Statement is effective for transactions entered into after December 31, 1995. The Company continues to account for stock-based compensation in accordance with APB 25, as amended, and provides the pro forma disclosures required by SFAS 123 as amended by Statements of Financial Accounting Standards 148 “Accounting for Stock-Based Compensation Incentive and Disclosure” (SFAS 148).
Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123. The Company computes fair value for this purpose using the Black-Scholes option valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company’s options have characteristics significantly different from traded options, and the input assumptions used in the model can materially affect the fair value estimate. The assumptions used in this model to estimate fair value and resulting values are as follows:
| Stock Option Plans | Employee Stock Purchase Plan | |||||||||||||||||||||||
June 29, 2003 | June 30, 2002 | June 24, 2001 | June 29, 2003 | June 30, 2002 | June 24, 2001 | |||||||||||||||||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||
Risk-free interest rate | 2.8 | % | 4.6 | % | 5.4 | % | 1.2 | % | 2.2 | % | 5.0 | % | ||||||||||||
Expected volatility | 90.0 | % | 90.0 | % | 90.0 | % | 90.0 | % | 90.0 | % | 90.0 | % | ||||||||||||
Expected life (in years) | 5.0 | 4.8 | 5.7 | 0.8 | 0.8 | 0.8 | ||||||||||||||||||
Weighted-average fair value per share | $ | 9.64 | $ | 14.52 | $ | 31.51 | $ | 8.96 | $ | 6.50 | $ | 16.73 | ||||||||||||
The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 (in thousands, except per share amounts):
| Year ended | ||||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||||
Net income (loss), as reported | $ | 34,901 | $ | (101,723 | ) | $ | 27,843 | |||||
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects | 317 | 341 | 293 | |||||||||
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (44,865 | ) | (62,269 | ) | (49,635 | ) | ||||||
Pro forma net income (loss) | $ | (9,647 | ) | $ | (163,651 | ) | $ | (21,499 | ) | |||
Basic earnings (loss) per share as reported | $ | 0.48 | $ | (1.40 | ) | $ | 0.39 | |||||
Pro forma basic net income (loss) per share | $ | (0.13 | ) | $ | (2.25 | ) | $ | (0.30 | ) | |||
Diluted earnings (loss) per share as reported | $ | 0.46 | $ | (1.40 | ) | $ | 0.37 | |||||
Pro forma diluted net income (loss) per share | $ | (0.13 | ) | $ | (2.25 | ) | $ | (0.30 | ) | |||
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Income Taxes
Income taxes have been accounted for using the liability method in accordance with FASB Statements of Financial Accounting Standards 109 "AccountingSFAS109 “Accounting for Income Taxes"Taxes”. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts.
Contingencies
The Company is involved in various legal proceedings related to the protection
of its intellectual property.proceedings. Although the final resolution of these matters cannot be determined, management'smanagement’s opinion is that the final outcome of these matters will not have a material adverse effect on the Company'sCompany’s consolidated financial position or results of operations. If an unfavorable resolution occurs in these legal proceedings, our business, results of operations and financial condition could be materially adversely affected.
3. ACCOUNTS RECEIVABLE, NET
Accounts Receivable, Net
The following is a summary of the components of accounts receivable, net:
Year Ended (in 000's)
-------------------------------------
June 30, 2002 June 24, 2001
---------------- ------------------
Billed trade receivables $32,708 $31,982
Unbilled contract receivables 2,339 3,218
---------------- ------------------
35,047 35,200
Allowance for sales returns (455) (350)
---------------- ------------------
Total accounts receivable, net $34,592 $34,850
================ ==================
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| Year Ended (in 000’s) | ||||||||
| June 29, 2003 | June 30, 2002 | |||||||
Billed trade receivables | $ | 42,702 | $ | 32,708 | ||||
Unbilled contract receivables | 1,843 | 2,339 | ||||||
| 44,545 | 35,047 | |||||||
Allowance for sales returns | (644 | ) | (455 | ) | ||||
Total accounts receivable, net | $ | 43,901 | $ | 34,592 | ||||
The following table summarizes the changes in the Company'sCompany’s allowance for sales returns for the years ended June 29, 2003, June 30, 2002 and June 24, 2001 and June 25, 2000:
| Year Ended (in 000’s) | |||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | |||||||
Balance at beginning of year | $ | 455 | $ | 350 | $ | 250 | |||
Charges to cost and expenses, net | 189 | 105 | 100 | ||||||
Balance at end of year | $ | 644 | $ | 455 | $ | 350 | |||
4. INVENTORY, NET
Inventory, Net
The following is a summary of inventory:
Year Ended (in 000's)
------------------------------------
| Year Ended (in 000’s) | ||||||||
| June 29, 2003 | June 30, 2002 | |||||||
Raw materials | $ | 4,410 | $ | 3,908 | ||||
Work-in-progress | 5,397 | 6,629 | ||||||
Finished goods | 9,944 | 9,724 | ||||||
| 19,751 | 20,261 | |||||||
Inventory reserve | (2,077 | ) | (2,295 | ) | ||||
Total inventory, net | $ | 17,674 | $ | 17,966 | ||||
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, June 24,
2002 2001
--------------- -----------------
Raw materials $ 3,908 $ 4,538
Work-in-progress 6,629 6,206
Finished goods 9,724 5,251
--------------- -----------------
20,261 15,995
Inventory reserve (2,295) (793)
--------------- -----------------
Total inventory, net $17,966 $15,202
=============== =================
29, 2003
The following table summarizes the changes in the Company'sCompany’s inventory reserve for the years ended June 29, 2003, June 30, 2002 and June 24, 20012001:
| Year Ended (in 000’s) | ||||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||||
Balance at beginning of year | $ | 2,295 | $ | 793 | $ | — | ||||||
Charges to cost and expenses | 2,659 | 6,234 | 1,293 | |||||||||
Disposals (write-offs to reserve) | (2,877 | ) | (4,732 | ) | (500 | ) | ||||||
Balance at end of year | $ | 2,077 | $ | 2,295 | $ | 793 | ||||||
5. Property and June 25, 2000:
Year Ended (in 000's)
------------------------------------------------------------------
June 30, 2002 June 24, 2001 June 25, 2000
------------------ ------------------ ------------------
Balance at beginning of year $ 793 $ -- $ --
Charges to cost and expenses 6,234 1,293 --
Disposals (write-offs to reserve) (4,732) (500) --
------------------ ------------------ ------------------
Balance at end of year $ 2,295 $ 793 $ --
================== ================== ==================
5. PROPERTY AND EQUIPMENT, NET
Equipment, Net
The following is a summary of property and equipment:
| Year ended (in 000’s) | ||||||||
| June 29, 2003 | June 30, 2002 | |||||||
Furniture and fixtures | $ | 5,552 | $ | 5,170 | ||||
Land and buildings | 99,917 | 93,148 | ||||||
Machinery and equipment | 210,872 | 149,723 | ||||||
Computer hardware and software | 7,160 | 5,810 | ||||||
Leasehold improvements | 5,903 | 5,735 | ||||||
| 329,404 | 259,586 | |||||||
Accumulated depreciation | (111,483 | ) | (69,830 | ) | ||||
| 217,921 | 189,756 | |||||||
Construction in progress | 33,425 | 21,929 | ||||||
Property and equipment, net | $ | 251,346 | $ | 211,685 | ||||
Depreciation and amortization of property and equipment totaled $41.7 million, $32.4 million;
$21.9 million and $10.8$21.9 million for the years ended June 29, 2003, June 30, 2002 and June 24, 2001, respectively.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
6. Investments
At June 29, 2003, the Company held no marketable equity securities. At June 30, 2002, the Company held marketable equity securities available-for-sale in Microvision, Inc. (Microvision) and Emcore Corporation (Emcore). At June 30, 2002, the Company owned 356,000 common shares in Microvision at a total cost of $14.3 million. The fair market value of these shares as of June 30, 2002 was $1.9 million. At June 30, 2002, the Company owned 691,000 common shares in Emcore at a total cost of $13.8 million. The fair market value of these shares as of June 30, 2002 was $4.1 million.
During the second quarter of fiscal 2003, the Company sold its remaining position in these publicly traded companies. The Company recorded a charge through non-operating expense on the consolidated statements of operations in June 2002, for an “other than temporary” decline in value which reduced the value of the Microvision investment to $1.9 million, which was the market value as of June 28, 2002. These shares were sold during the three months ended December 29, 2002 for $1.9 million, with a net loss on the sale recognized for $36,000 during the second quarter of fiscal 2003.
During the second quarter of fiscal 2003, the Company also sold 691,000 common shares of Emcore. These shares were purchased between June 2001 and October 2001. The Company recorded a charge through non-operating expense on the consolidated statements of operations in June 2002, for an “other than temporary” decline in value which reduced the value of this investment to $4.1 million, which was the market value as of June 28, 2002.These shares were sold during the three months ended December 29, 2002 for $2.1 million, with a net loss on the sale recognized for $2.0 million during the second quarter of fiscal 2003.
Management viewed both of these investments as strategic in nature, and therefore, the shares were accounted for as “available-for-sale” securities under SFAS 115. The Company carried these investments at fair value, based on quoted market prices, while unrealized gains and losses, net of taxes, were included in accumulated other comprehensive income (loss), which is a separate component of shareholders’ equity. Realized gains and losses were recognized upon sale. Declines in value, which were deemed to be “other than temporary” where recognized as losses on the consolidated statements of operations. The Company reviews equity holdings on a regular basis to evaluate whether or not each security has experienced an “other-than-temporary” decline in fair value. This policy requires, among other things, the Company to review each company’s cash position, earnings and revenue outlook, stock price performance, liquidity, ability to raise capital and management and ownership and other relevant considerations. If the Company determined that an “other-than-temporary” decline existed in the value of marketable equity securities, it is the Company’s policy to write-down these equity investments to the respective market value. Any related write-down is recorded as an investment loss in the Company’s consolidated statements of operations. In the fourth quarter of fiscal 2002, the Company determined that an “other-than-temporary” decline in market value had occurred Microvision and Emcore marketable equity investments. Accordingly, the Company wrote down these equity investments to their market values at June 30, 2002 and recorded the unrealized losses, most of which had previously been recorded as a comprehensive loss in shareholders’ equity, as a non-operating loss on the Company’s consolidated statements of operations for the year then ended. The total amount of the charge to non-operating expenses in the consolidated statements of operations for the year ended June 30, 2002 relating to these investments was $22.0 million on a pre-tax basis. A corresponding amount that would have been recorded through other comprehensive income (loss) was $17.2 million on an after-tax basis. The amount reported through other comprehensive income (loss) on an after-tax basis was
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
$15.8 million as the losses from the June 2002 period were directly charged to non-operating loss on the statement of operations. The Company recorded a combined realized net loss of $2.1 million to non- operating expense in the consolidated statement of operations for the fiscal year ended June 29, 2003 for the sale of these securities. The Company also recorded a $558,000 realized gain on the sale of other marketable trading securities in the second quarter of fiscal 2002.
At the time of the Company’s review to determine whether an “other-than-temporary” decline had occurred in the fair value of the Company’s investments in Emcore and Microvision, the Company considered that both investments had been made with a long-term investment horizon. The Emcore stock was determined to have experienced an “other-than-temporary” decline after Emcore indicated declining revenue as well as charges for write-downs taken in the quarter for inventory and other restructuring charges. Although Emcore’s stock price was less than the Company’s average cost for a period time at the end of March 2002, the Company determined that the decline was not “other-than-temporary” at that time in light of the high volatility of Emcore’s stock trading price, the significant potential advancements represented by its core technologies, its growth potential, the overall decline in the NASDAQ market, and the fact that none of the analysts following Emcore downgraded the stock during the quarter ended in March 2002.
The Company determined that the decline in its investment in Microvision was “other-than-temporary” at June 30, 2002 because the stock began trading negatively when compared to the NASDAQ market at that time. Moreover, a number of analysts forecast in June 2002 that the technology sector would not rebound until after the third quarter of 2002. Prior to that time, the Microvision stock had traded below our average cost for a prolonged time but the Company determined that the decline in Microvision stock prior to June 30, 2002 was not “other-than-temporary” for a number of reasons. First, the Company concluded that there were no Microvision specific factors that indicated that Microvision was not executing on its plan as expected. Microvision was incurring losses, but they were expected and the Company concluded that Microvision’s product development efforts were on track. The downward trend in Microvision’s stock price was reflective of the technology sector in general and, to the Company’s knowledge, did not result from reduced expectations of Microvision’s performance. Furthermore, each quarter prior to June 30, 2002, Microvision made public statements positively and aggressively promoting its current results and future prospects. The Company also considered that the Microvision stock price was highly volatile. Thus, the Company concluded that with high volatility and continued positive performance, a rapid rise in the stock price was possible.
The Company weighed these factors against the Microvision stock price decline and the decline in the overall market. The Company noted that the Microvision stock had experienced 100% volatility and that the analysts’ recommendations at the time included upgrades, not merely maintaining a buy rating. As far as the overall market, the events of September 11, 2001 required the Company to determine whether an “other-than-temporary” decline in the overall market had occurred. In September 2001, it was clear that the market and Microvision’s stock price had reacted to the events of that day. What was not clear, however, was whether the decline caused by September 11 was “other-than-temporary”. In fact, in the fourth quarter of calendar 2001, both the overall market and Microvision’s stock rose significantly. At year-end, Microvision’s stock price was at its quarterly high, with the prospects that the overall market and the Microvision stock price could continue to improve in the first quarter of calendar 2002. Accordingly, it was not until a number of analysts concluded in June 2002 that the technology sector would not rebound until after the third quarter of 2002 and the Microvision stock price fell below the NASDAQ trendline that the Company concluded that an “other-than-temporary” decline had occurred in the overall stock market and in the Company’s Microvision investment.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Microvision, also is one of the companies in which the Company invested in funded a research and development project for custom light emitting diodes, or LEDs, and laser diodes. The amount of funding received by the Company in connection with the contracts was $4.4 million and $4.7 million for fiscal years ended June 30, 2002 and June 25, 2000,24, 2001, respectively. 6. ACCRUED EXPENSES
The amount of the research and development funding received from Microvision was recorded as an offset to research and development expense. There was no funding received from Microvision during the fiscal year ended June 29, 2003 as the contract expired during fiscal 2002. The Company does not anticipate additional funding for research and development from this company in the future.
As of June 29, 2003, the Company’s short-term investments held to maturity included $75.2 million in high-grade corporate bonds and other debt securities that mature within one year. As of June 30, 2002, the Company’s short-term investments held to maturity totaled $32.4 million consisting of high-grade corporate bonds. The Company purchased these investments with a portion of the proceeds from its public stock offering in January 2000. The Company has the intent and ability to hold these securities until maturity; therefore, they are accounted for as “securities held-to-maturity” under SFAS 115. The securities are reported on the consolidated balance sheets at amortized cost, as a short-term investment with unpaid interest included in interest receivable. The Company believes that there is no difference between the amortized cost of these securities and their fair value at the time the security is purchased because premiums or discounts are assigned to the securities if a different interest rate is paid than the current prevailing market rate. This premium or discount is amortized or accreted over the remaining life of the security and charged as an increase or decrease to interest income. Over time if interest rates continue to decline, the fair value of the security may be higher than the book value as the interest rate less the premium may be higher than current interest rates. As of June 29, 2003 and June 30, 2002, the Company calculated market value to be in excess of book value by approximately $1.1 million and $78,000, respectively, on combined short term and long term asset balances of $134.0 million and $97.0 million, respectively.
As of June 29, 2003, the Company’s long-term investments held to maturity consisted of $58.8 million in high-grade corporate bond holdings and other debt securities that mature after June 28, 2004. As of June 30, 2002, the Company’s long-term investments held to maturity consisted of $64.2 million in high-grade corporate bond holdings and other debt securities that mature after June 29, 2003. The Company purchased the corporate bonds with a portion of the proceeds from the public stock offering in January 2000. The Company has the intent and ability to hold these securities until maturity; therefore, they are accounted for as “securities held-to-maturity” under SFAS 115. The securities are reported on the consolidated balance sheets at amortized cost, as a long-term held to maturity investment with unpaid interest included in interest receivable if interest is due in less than 12 months, and as a long-term other asset if interest is due in more than 12 months. These investments mature over periods ranging from 13 to 24 months.
As of June 29, 2003, the Company maintained $15.6 million of net investments in privately held companies, which are included in other assets on the consolidated balance sheets. Since the Company does not have the ability to exercise significant influence over the operations of these companies, these investment balances are carried at cost and accounted for using the cost method of accounting. Because the shares of stock the Company received in these investments are not publicly traded, there is no established market for these securities. The Company reviews the fair value of these investments on a regular basis to evaluate the carrying value of such investments. This review includes, but is not limited to, an analysis of each of the companies’ cash position, financing needs, earnings and revenue outlook, operational performance, management or ownership changes and competition. The evaluation process is based on information requested from the privately held companies by the Company. This information is not subject to the same disclosure regulations as U.S. public companies, and as such, the basis for these evaluations is subject to the
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
timing and the accuracy of the data received from these companies. If the Company determines that the carrying value of an investment is at an amount in excess of fair value, it is the Company’s policy to record a write-down of the investment. This write-down is estimated based on the information described above, and it is recorded as an investment loss on the Company’s consolidated statement of operations. During fiscal 2002 and fiscal 2001, the Company recorded write-downs of these investments of $20.4 million pre-tax and $4.6 million pre-tax, respectively, representing the Company’s best estimate of “other-than-temporary” declines in value. These impairment charges were included as an “other non-operating loss” on the consolidated statements of operations. During the fiscal year ended June 29, 2003, there were no additional write-downs taken on these investments and one of the private companies was sold to another company during the second quarter of fiscal 2003 with proceeds of $636,000 received from the sale. The Company’s investment in this company was written down to reflect the fair value based on the expected sales proceeds in the fourth quarter of fiscal 2002.
Two of these private companies in which the Company was a shareholder entered into contracts to fund development programs conducted by the Company. During the first quarter of fiscal 2003, Lighthouse, which is one of these companies, completed funding of a development program that commenced in a prior year and was directed to the development of brighter LEDs. Xemod, which was another of these companies also had commenced a research and development funding project in a prior year directed to the development of SiC RF transistors. The total amount of funding received by the Company from these companies was $500,000, $3.5 million and $5.2 million for the fiscal years ended June 29, 2003, June 30, 2002 and June 24, 2001, respectively. The amount of the research and development funding received from the companies was recorded as an offset to research and development expense. The Company does not anticipate additional funding from these companies in the future as both programs have now ended.
7. Accrued Expenses
The following table reflects the components of other accrued expenses:
Year ended (in 000's)
-------------------------------------
June 30, 2002 June 24, 2001
---------------- ----------------
| Year ended (in 000’s) | ||||||
| June 29, 2003 | June 30, 2002 | |||||
Accrued legal fees | $ | 444 | $ | 1,806 | ||
Accrued taxes | 805 | 945 | ||||
Accrued warranty costs | 341 | 673 | ||||
Other accrued liabilities | 497 | 804 | ||||
Total accrued expenses | $ | 2,087 | $ | 4,228 | ||
Accrued legal fees $1,806 $1,356
Accrued taxes 945 1,357
Deferredexpenses include amounts accrued for product warranty expenses at the Cree Microwave segment. Cree Microwave accrues 0.5% of product revenue 741 91
Otheras a warranty liability each month and maintains the reserve for 36 months after the date of sale pursuant to our warranty terms with our customers. During fiscal year 2003, approximately $10,000 was accrued liabilities 1,477 2,352
---------------- ----------------
Total accrued expenses $4,969 $5,156
================ ================
7. SHAREHOLDERS' EQUITY
for additional warranty expense while $331,000 was reversed from the liability due to prior period overstatement of the reserve and $11,000 was used to satisfy warranty claims.
8. Shareholders’ Equity
On January 18, 2001, Cree announced that its Board of Directors had authorized the repurchase of up to four million shares of its outstanding common stock through January 2002. Additionally, on March 22, 2001, Cree announced that its Board of Directors had increased the repurchase limits under the stock repurchase
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
program announced in January 2001 to include an additional three million shares. In February 2002, the Board of Directors approved the renewal of this program through January 2003. In January 2003, the Board of Directors approved the renewal of this program through January 2004. During fiscal year ended June 30, 2002, the Company repurchased 1.5 million shares at an average price of $13.63 per share with an aggregate value of approximately $20.3 million. Since the inception of the stock repurchase program, Cree has repurchased 3.3 million shares of its common stock at an average price of $15.26 per share, with an aggregate value of $51.0 million.
The Company intends to use available cash to finance purchases under the program. At the discretion of the Company'sCompany’s management, the repurchase program can be implemented through open market or privately negotiated transactions. The Company will determine the time and extent of repurchases based on its evaluation of market conditions and other factors.
On January 20, 2000, the Company completed a public offering of 6,578,000 shares
of its common stock. The price received in the offering was $42.56 per share.
The Company received net aggregate proceeds of approximately $266.1 million
after deducting underwriting discounts and commissions and estimated offering
costs. The net proceeds are being used primarily for manufacturing facility
expansion and purchase of additional equipment, the acquisition of an additional
facility, research and development, and general corporate purposes.
At June 27, 1999, the Articles of Incorporation of the Company authorized the
Company to issue up to 30,000,000 shares of common stock, with a par value of
$0.005 per share, and 3,000,000 shares of preferred stock, with a par value of
$0.01 per share. The preferred stock may be issued in one or more classes or
series with the number of shares, designation, relative rights, preferences, and
limitations of each class or series to be determined by resolution of the Board
of Directors. The Articles of Incorporation were amended, effective at the close
of business on July 26, 1999, to effect a two-for-one split of the common stock.
Effective November 14, 2000 the Articles of Incorporation were amended to
-66-
increase the authorized number of common shares to 100,000,000, with a par value
of $0.0025. In addition, the Company split its stock again on December 1, 2000.
As a result, as of December 1, 2000, the Articles of Incorporation authorize the
Company to issue up to 200,000,000 shares of common stock, with a par value of
$0.00125 per share. The amendments did not change the number of authorized
shares or other provisions relating to the preferred stock. On July 30, 1999 and
December 1, 2000, the Company issued to each holder of record of common stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and per common
share data have been adjusted to reflect the two common stock splits.
On May 29, 2002, the Company's boardCompany’s Board of directorsDirectors adopted a shareholder rights plan, pursuant to which stock purchase rights were distributed to shareholders at a rate of one right with respect to each share of common stock held of record as of June 10, 2002. The rights plan is designed to enhance the board'sboard’s ability to prevent an acquirer from depriving shareholders of the long-term value of their investment and to protect shareholders against attempts to acquire the Company by means of unfair or abusive takeover tactics. The rights become exercisable based upon certain limited conditions related to acquisitions of stock, tender offers and certain business combinations involving the Company. The Company amended the Articles of Incorporation to designate 200,000 shares of preferred stock as "Series“Series A Preferred Stock"Stock” in connection with the implementation of a shareholders'shareholders’ rights plan. At June 30, 2002, rights to purchase 100,000 shares of Preferred Stock had been distributed to shareholders.
At June 30, 2002,29, 2003, the Company had reserved a total of 18,202,00016,915,294 shares of its common stock and 100,000 shares of its Series A preferred stock for future issuance as follows:
| Number of shares | ||
For exercise of outstanding common stock options | 12,804,196 | |
For future common stock option awards | 3,504,277 | |
For | 606,821 | |
Total common shares reserved | 16,915,294 | |
Series A Preferred Stock reserved for exercise of rights issued under | 100,000 | |
9. Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (the "ESPP"“ESPP”) on November 2, 1999. The ESPP provides employees of the Company, and its majority-owned subsidiaries, with an opportunity to purchase common stock through payroll deductions. The purchase price is set at 85% of the fair market value of common stock at the beginning of the participation period, or 85% of the price on the purchase date, whichever is lower. Contributions are limited to 15% of an employee'semployee’s compensation. The participation periods have a 12 month duration, with new participation periods beginning in November and May of each year. Each participation period has two purchase dates, one in October and the other in April. The Board of Directors has reserved 600,0001,350,000 shares of common stock for issuance under the ESPP. As of June 30, 2002, 437,30529, 2003, 743,179 shares of common stock had been purchased under the ESPP.
9. STOCK OPTIONS AND STOCK WARRANTS
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
10. Stock Options and Stock Warrants
The Company has stock option plans to provide incentives to eligible employees, officers, and directors in the form of incentive stock options and non-qualified stock options. The Board of Directors determines the option price (not to be less than fair market value) at the date of grant. Options, particularly those assumed or exchanged as a result of acquisitions, have various vesting schedules and -67-
Stock option activity during the periods ending as indicated is as follows (in 000's,000’s, except per share data):
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||||||||||
| Number of Options | Weighted Average Price | Number of Options | Weighted Average Price | Number Options | Weighted Average Price | |||||||||||||
Outstanding—beginning of year | 14,684 | $ | 25.86 | 13,522 | $ | 26.93 | 8,180 | $ | 13.55 | |||||||||
Granted | 1,521 | $ | 13.64 | 3,375 | $ | 20.48 | 6,566 | $ | 41.41 | |||||||||
Exercised | (1,093 | ) | $ | 8.67 | (1,054 | ) | $ | 4.01 | (797 | ) | $ | 5.19 | ||||||
Forfeited | (2,308 | ) | $ | 48.65 | (1,159 | ) | $ | 42.50 | (427 | ) | $ | 33.80 | ||||||
Outstanding—end of year | 12,804 | $ | 21.77 | 14,684 | $ | 25.86 | 13,522 | $ | 26.93 | |||||||||
Exercisable—end of year | 6,628 | $ | 21.35 | 5,947 | $ | 20.39 | 3,878 | $ | 11.83 | |||||||||
As permitted by SFAS 123, the Company has elected to follow APB 25 and related interpretations and amendments in accounting for its employee stock option plans. In connection with restricted stock grants and discounted stock options assumed by the options obtained through theCompany in its acquisition of Nitres, Inc. (“Nitres”) on May 1, 2000, the Company recognized compensation expense of $478,000, $515,000, and $501,000 during the years ended June 29, 2003, June 30, 2002, and June 24, 2001, respectively. As of June 29, 2003, June 30, 2002, and June 24, 2001, the Company had deferred compensation balances of $218,000, $696,000, and $1.2 million, and
$1.8 million at June 30, 2002, June 24, 2001, and June 25, 2000, respectively. This amount represents the difference between the grant price and the deemed fair value of stock and stock options granted previously. Of this
Due to the cancellation of a stock option held by an employee during the year ended June 29, 2003, a separate stock option granted to the same employee less than six months previously is subject to variable accounting. Accordingly, the Company recognized compensation expense of $50,000 during the year ended June 29, 2003 and has included $11,000 in deferred compensation $515,000, $501,000, and $980,000 was amortized for the years endedas of June 30, 2002, June 24, 2001, and June 25, 2000, respectively.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
Company computes fair value for this purpose using the Black-Scholes pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The Company's options have characteristics significantly different
from traded options, and the input assumptions used in the model can materially
affect the fair value estimate. The assumptions used in this model to estimate
fair value and resulting values are as follows:
Selected information regarding stock options as of June 30, 200229, 2003 is as follows (in 000's,000’s, except per share data):
| Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Number of Options | Weighted-Average in Years | Weighted-Average Exercise Price | Number of Options | Weighted-Average Exercise Price | |||||||
$ 0.01-$ 6.16 | 2,407 | 4.64 | $ | 3.53 | 2,218 | $ | 3.55 | |||||
$ 10.25-$ 13.92 | 2,341 | 6.03 | $ | 12.63 | 295 | $ | 12.52 | |||||
$ 14.49-$ 20.24 | 2,310 | 5.82 | $ | 18.90 | 928 | $ | 18.76 | |||||
$ 21.59-$ 33.50 | 3,137 | 5.62 | $ | 25.62 | 1,527 | $ | 26.17 | |||||
$ 34.63-$ 71.53 | 2,609 | 7.14 | $ | 44.71 | 1,660 | $ | 43.74 | |||||
| 12,804 | 5.85 | $ | 21.77 | 6,628 | $ | 21.35 | ||||||
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
On March 17, 2003, the Company made an offer to exchange options to purchase an aggregate of 3,482,128 shares of the Company’s common stock held by eligible employees (the “Offer”). Directors and executive officers were not eligible to participate in the Offer. The options subject to the Offer were granted under the Company’s Equity Compensation Plan and 2001 Stock Option Bonus Plan granted at exercise prices greater than $30.00 per share. The Offer, including all withdrawal rights, expired at 12:00 midnight Eastern Time on Friday, April 11, 2003. On April 12, 2003, the Company accepted for cancellation options to purchase 1,663,600 shares of its common stock, tendered by 91 eligible employees, representing approximately 48% of the options that were eligible to be tendered in the Offer. Subject to the terms and conditions of the Offer, the Company will grant new options to purchase approximately 562,852 shares of its common stock on October 13, 2003 in exchange for the options tendered and accepted. The new options will be granted under the Company’s Equity Compensation Plan with an exercise price equal to the last sale price of the Company’s common stock reported by the Nasdaq National Market on the new option grant date. The new options will not vest for six months after the new option grant date after which the vesting schedule of each new option will be the same as the corresponding canceled option in percentage terms.
In connection with the Company'sCompany’s September 1995 private placement, the Company issued warrants to purchase 1.2 million shares of the Company'sCompany’s common stock. These warrants had a 5-year term and an exercise price of $6.81 per share, which represents fair value on the date of grant. Warrants to purchase 462,000 and
54,000, shares of common stock were exercised during the fiscal yearsyear ended June 24, 2001, and June 25, 2000, respectively.2001. As of June 24, 2001, all warrants issued under this private placement had been exercised. In conjunction with the Company'sCompany’s acquisition of Nitres in May 2000, the Company assumed outstanding warrants that had been previously issued by Nitres in February 2000. These warrants had a 7-year term and an exercise price of $1.28 per share. During the year ended June 24, 2001, the remaining warrants to purchase 31,360 shares of the Company'sCompany’s common stock were exercised.
10. LEASE COMMITMENTS
11. Lease Commitments
The Company currently leases sixfour facilities. These facilities are comprised of both office and manufacturing space. The first facility has a remaining lease term for the first facility began
in September 1995approximately seven and a renewal option was exercised in September 1999.one-half years. The lease on this facility expires in September 2002. The lease for the second
facility runs month to month with a 90-day termination clause, which has been
exercised, and will terminate in August 2002. The third facility lease expires in approximately threetwo years. The third and fourth facility has a remaining sub-lease termleases are for approximately nine and one-half years. The lease for the fifth facility
expiressales offices that expire in June 2005. The lease for the sixth facility expires in February 2003.2005 and July 2004, respectively. All of the remaining lease agreements provide for rental adjustments for increases in base rent (up to specific limits) property taxes and general property maintenance.
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CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Rent expense associated with these and other expired operating leases totaled $1.8 million, $1.7 million and $1.2 million and $420,000 for the years ended June 29, 2003, June 30, 2002, and June 24, 2001, and June 25, 2000, respectively. Sublease income was $173,000, $224,000 $166,000
and $0$166,000 for the years ended June 29, 2003, June 30, 2002 and June 24, 2001, and June 25, 2000, respectively. Future minimum rentals as of June 30, 200229, 2003 under these leases are as follows:
Minimum Rental
Amount
Fiscal Years Ended (in 000's)
----------------------------- ---------------------
June 29, 2003 $ 1,732
June 27, 2004 1,697
June 26, 2005 1,697
June 25, 2006 1,029
June 24, 2007 907
Thereafter 4,006
---------------------
Total $ 11,068
=====================
Income
Fiscal Years Ended | Minimum Rental (in 000’s) | ||
June 27, 2004 | $ | 1,783 | |
June 26, 2005 | 1,766 | ||
June 25, 2006 | 1,085 | ||
June 24, 2007 | 961 | ||
June 30, 2008 | 961 | ||
Thereafter | 3,285 | ||
Total | $ | 9,841 | |
Future minimum sub lease rental income generated from subleases is targeted to be $185,000$194,000 and $191,000$16,000 for the fiscal years ended June 27, 2004 and June 26, 2005, respectively.
During July 2003, Cree entered into an agreement to lease certain research and development equipment to a customer for the following twelve-month period. As of June 29, 2003, the equipment cost is $1.7 million with accumulated depreciation of $632,000. The future minimum rental income as of June 29, 2003 under this lease is $484,000 and June 27,$21,000 for fiscal 2004 respectively.
11. LONG-TERM DEBT
In December 1998, Cree Lighting (previously Nitres) received a $431,000 bridge
loan from a group of investors to finance its working capital needs. The bridge
loan was made to Cree Lighting subject to conversion rights that would result in
conversion to shares of Nitres common stock in the event of a financing or one
year passing. In February 2000, the $431,000 bridge loan was converted to shares
of Nitres common stock, which were converted into 168,750 shares of the
Company's common stock at the time of the Company's acquisition of Nitres in May
2000.
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $3.0 million was disbursed
under the loan to finance the initial purchase of the facility with the
remaining proceeds disbursed on a monthly basis based on actual expenditures
incurred. The loan, which was collateralized by the purchased property and
subsequent upfits, accrued interest at a fixed rate of 8% and carried customary
covenants, including the maintenance of a minimum tangible net worth and other
requirements. On February 17, 1999, the entire $10.0 million indebtedness was
repaid with proceeds received from the public stock offering. Interest expense
was $0, $0 and $13,000 for the years ended June 30, 2002, June 24, 2001 and June
25, 2000,fiscal 2005, respectively.
12. INCOME TAXES
Income Taxes
The Company accounts for its income taxes under the provisions of SFAS 109. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
The actual income tax expense for the years ended June 29, 2003, June 30, 2002, and June 24, 2001,
and June 25, 2000, differed from the amounts computed by applying the U.S. federal tax rate of 35% to pretax earnings as a result of the following:
| Year Ended (in 000’s) | ||||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||||
Federal income tax provision at statutory rate | $ | 16,507 | $ | (45,644 | ) | $ | 17,565 | |||||
State tax provision | 318 | (3,009 | ) | 1,439 | ||||||||
Increase (decrease) in income tax expense resulting from: | ||||||||||||
Foreign sales corporation | (1,800 | ) | — | (2,108 | ) | |||||||
Investments | — | 20,562 | — | |||||||||
Research and development | (2,285 | ) | (600 | ) | (538 | ) | ||||||
Amortization | (406 | ) | — | (203 | ) | |||||||
In process research and development | — | — | 6,090 | |||||||||
Other | (71 | ) | — | 98 | ||||||||
Income tax expense (benefit) | $ | 12,263 | $ | (28,691 | ) | $ | 22,343 | |||||
The following are the components of the provision for income taxes for the years ended June 29, 2003, June 30, 2002 and June 24, 2001 and June 25, 2000:
| Year Ended (in 000’s) | ||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||
Current: | ||||||||||
Federal | $ | 1,874 | $ | (2,200 | ) | $ | 7,111 | |||
State | 388 | — | 832 | |||||||
| 2,262 | (2,200 | ) | 7,943 | |||||||
Deferred: | ||||||||||
Federal | 9,291 | (23,482 | ) | 13,988 | ||||||
State | 710 | (3,009 | ) | 412 | ||||||
| 10,001 | (26,491 | ) | 14,400 | |||||||
Net Provision | $ | 12,263 | $ | (28,691 | ) | $ | 22,343 | |||
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
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Year Ended (in 000's)
June 30, 2002 June 24, 2001 June 25, 2000
------------------ ------------------ --------------------
Current deferred tax asset (liability):
Compensation $ 522 $ 491 $ 268
Inventory 374 544 202
Bad debt 230 129 93
Marketable equity securities and other (4) 3,008 (1,018)
------------------ ------------------ --------------------
Net current deferred tax asset (liability) 1,122 4,172 (455)
Non current deferred tax asset (liability):
Alternative minimum tax -- 2,295 1,690
Net operating loss carryforwards 9,059 421 11,641
Research tax credits 2,869 2,369 785
Fixed assets (12,763) (7,925) (6,060)
Goodwill 31,501 -- --
State tax credits and other (3,301) (1,010) 2,568
------------------ ------------------ --------------------
Net non current deferred tax asset
(liability) 27,365 (3,850) 10,624
------------------ ------------------ --------------------
Net deferred tax asset $ 28,487 $ 322 $ 10,169
================== ================== ====================
| Year Ended (in 000’s) | |||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | |||||||||
Current deferred tax asset: | |||||||||||
Compensation | $ | 578 | $ | 522 | $ | 491 | |||||
Inventory | 1,068 | 374 | 544 | ||||||||
Bad debt | 275 | 230 | 129 | ||||||||
Marketable equity securities and other | (58 | ) | (4 | ) | 3,008 | ||||||
Net current deferred tax asset | 1,863 | 1,122 | 4,172 | ||||||||
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
| Year Ended (in 000’s) | ||||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||||
Non current deferred tax asset (liability): | ||||||||||||
Alternative minimum tax | 2,448 | — | 2,295 | |||||||||
Net operating loss carryforwards | 4,150 | 9,059 | 421 | |||||||||
Research tax credits | 5,046 | 2,869 | 2,369 | |||||||||
Fixed assets | (16,421 | ) | (12,763 | ) | (7,925 | ) | ||||||
Goodwill | 28,898 | 31,501 | — | |||||||||
State tax credits and other | (3,187 | ) | (3,301 | ) | (1,010 | ) | ||||||
Net non current deferred tax asset (liability) | 20,934 | 27,365 | (3,850 | ) | ||||||||
Net deferred tax asset | $ | 22,797 | $ | 28,487 | $ | 322 | ||||||
As of June 30, 2002,29, 2003, the Company has Federalfederal net operating loss carryforwards of approximately $20.0$9.2 million and state net economic loss carryovers of approximately $26.0$20.0 million. The Federalfederal net operating loss will begin to expire in 2021. The state net economic loss carryforward will expire beginning in 2011. Research and development tax credits begin to expire in 2011. State incentive tax credits begin to expire in 2004.
13. RETIREMENT PLAN
Contingencies
On June 10, 2003, the Trustees of Boston University and Cree Lighting Company commenced a patent infringement lawsuit against AXT, Inc., a manufacturer of gallium nitride-based LEDs and other products, by filing a complaint in the U.S. District Court for the Northern District of California. In the complaint Boston University and Cree Lighting allege that AXT is infringing U.S. Patent No. 5,686,738, entitled “Highly Insulating Monocrystalline Gallium Nitride Thin Films,” by, among other things, importing, selling and/or offering for sale gallium nitride-based LEDs covered by one or more claims of the patent. Effective June 29, 2003, Cree Lighting Company was merged into Cree, Inc. The ‘738 patent is owned by Boston University and is licensed to the Company on an exclusive basis. The complaint seeks damages and an injunction against infringements. On July 23, 2003, AXT filed an answer and counterclaim. In its answer, AXT denies infringement and alleges that the patent is invalid. AXT also filed a counterclaim alleging among other things that the lawsuit is objectively baseless and was brought for improper purposes. AXT further alleges various antitrust, unfair competition, interference with contract and related claims. AXT’s counterclaim seeks damages, declaratory relief and an injunction against acts in violation of certain antitrust and other laws. The plaintiffs’ replies to AXT’s counterclaim denying the allegations were filed on August 29, 2003. The Company intends to pursue this complaint vigorously.
On June 12, 2003, Eric Hunter, and his wife Jocelyn Hunter, filed a lawsuit in United States District Court for the Middle District of North Carolina in Greensboro, North Carolina naming the Company and Neal Hunter, Eric Hunter’s brother and the Company’s current chairman, as defendants. The complaint alleged claims for defamation and harassment as well as violations of employment and federal securities laws related to transactions with C&C, and other matters. The Hunters sought personally to recover damages in excess of $3 billion for unspecified harm resulting from the alleged conduct, as well as a preliminary injunction against future harassment. On June 26, 2003, the Company filed a motion to dismiss the lawsuit and requested a hearing on the motion. On the same date, the Hunters filed a motion to amend their complaint to add additional state law claims. The Hunters subsequently sought to file three further amendments to their complaint to add additional allegations and parties, including Bank of America N.A.,
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
CIBC Worlds Markets, Prudential Securities, Soundview Technology Group, Inc., Morgan Keegan & Company, Inc. and Ernst & Young. In a hearing on August 14, 2003, the court denied the Hunters’ motion for a preliminary injunction, finding that there was not enough evidence presented by the Hunters to even infer that Cree or Neal Hunter was responsible for the harassment that the Hunters alleged to have occurred. The court granted the Hunters’ motions to amend, but indicated that no further amendments would be allowed unless the Hunters could show extremely exceptional or unusual circumstances. On September 19, 2003, the Company filed a renewed motion to dismiss the Hunters’ complaint, as amended, and the Company intends to continue to vigorously defend the litigation. As a result of the commencement of the litigation, on June 14, 2003, the Company’s Board of Directors created a litigation committee, comprised of directors Mr. Dolph W. von Arx and Mr. James E. Dykes, to direct the litigation and any related litigations, including the shareholder class action lawsuits described below.
Between June 16 and August 18, 2003, nineteen purported class action lawsuits were filed in the United States District Court for the Middle District of North Carolina by certain alleged purchasers of the Company’s stock. The lawsuits name the Company, certain of its officers and current and former directors. These complaints allege, among other things, violations of federal securities laws, including violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5. In addition, among other claims, one or more of the complaints allege that the Company made certain false and misleading statements in connection with its acquisition of the UltraRF division of Spectrian, its supply agreement with Spectrian, its investment in World Theater, Inc. and its agreements with C&C. The complaints seek unspecified damages, plus costs and expenses, including attorney fees and experts’ fees. As is usual in these types of cases, the Company anticipates that all of the pending class actions will be consolidated and that an amended consolidated complaint will be filed, to which the Company intends to respond in due course. The Company intends to defend the cases vigorously.
In July 2003, the Securities and Exchange Commission (the “SEC”) initiated an informal inquiry of us and requested that the Company voluntarily provide certain information. The Company is cooperating with the SEC in this informal inquiry and has provided the SEC with written responses and documents. At this time, the Company is unable to determine whether this informal inquiry may lead to potentially adverse action, although it does not believe that grounds justifying any enforcement action exist.
On August 7, 2003, the Nasdaq Stock Market, Inc. (“Nasdaq”) requested information from the Company regarding the informal inquiry being conducted by the SEC and its pending litigation. The Company is cooperating with this request and have provided Nasdaq with written responses and documents. At this time, the Company is unable to determine whether this request may lead to potentially adverse action.
The Company currently is a party to other legal proceedings incidental to its business. If an unfavorable resolution occurs in these other legal proceedings or the matters described above, our business, results of operations and financial condition could be materially adversely affected.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
14. Retirement Plan
The Company maintains an employee benefit plan (the "Plan"“Plan”) pursuant to Section 401(k) of the Internal Revenue Code. Under the Plan, there is no fixed dollar amount of retirement benefits, and actual benefits received by employees will depend on the amount of each employee'semployee’s account balance at the time of retirement. All employees are eligible to participate under the Plan on the first day of a new fiscal month after date of hire. The Pension Benefit Guaranty Corporation does not insure the Plan. The Company may, at its discretion, make contributions to the Plan. However, the Company did not make any contributions to the Plan during the years ended June 29, 2003, June 30, 2002 and June 24, 2001 and June 25,
2000.
14. (LOSS) EARNINGS PER SHARE
2001.
15. Earnings (Loss) Per Share
The following computation reconciles the differences between the basic and diluted earnings per share presentations:
Year Ended (in 000’s, except per share data) | ||||||||||
| June 29, 2003 | June 30, 2002 | June 24, 2001 | ||||||||
Basic: | ||||||||||
Net income (loss) | $ | 34,901 | $ | (101,723 | ) | $ | 27,843 | |||
Weighted average common shares | 73,196 | 72,718 | 72,243 | |||||||
Basic earnings (loss) per share | $ | 0.48 | $ | (1.40 | ) | $ | 0.39 | |||
Diluted: | ||||||||||
Net income (loss) | $ | 34,901 | $ | (101,723 | ) | $ | 27,843 | |||
Weighted average common shares-basic | 73,196 | 72,718 | 72,243 | |||||||
Dilutive effect of stock options and warrants | 2,107 | — | 3,492 | |||||||
Weighted average common shares-diluted | 75,303 | 72,718 | 75,735 | |||||||
Diluted earnings (loss) per share | $ | 0.46 | $ | (1.40 | ) | $ | 0.37 | |||
Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive. In accordance with Statement of Financial Accounting StandardsSFAS 128, "Earnings“Earnings Per Share"Share”, and these shares were not included in calculating diluted earnings per share. For the year
endedAs of June 29, 2003, June 30, 2002 there were 10.4 million shares considered to be
antidilutive. As ofand June 24, 2001, there were 9.2 million, 10.4 million and 6.4 million shares, respectively, that wereare not included in calculating diluted earnings per share because their effect was antidilutive. As of June 25, 2000, there were no potential shares considered to
be antidilutive.
15. NEW ACCOUNTING PRONOUNCEMENTS
In
16. Recent Accounting Pronouncements
Effective July 2001,1, 2002, the FASB issued Statement of Financial Accounting Standards. 141,
"Business Combinations," ("SFAS 141) and Statement ofCompany adopted Financial Accounting Standards No 142, "Goodwill“Goodwill and Other Intangible Assets" ("Assets” (“SFAS 142"142”). Under SFAS 141
requires that all business combinations be accounted for under the purchase
method only142, goodwill and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill'sindefinite lives are no longer amortized but are reviewed annually, or more frequently if impairment and thatindicators arise for impairments. Separable intangible assets other than goodwillthat are not deemed to have an indefinite life will continue to be amortized over thetheir estimated useful life.lives. The nonamortization provisions of SFAS 141 is effective for all business
combinations initiated after June 30, 2001142 apply to goodwill and for all business combinations
accounted for by the purchase method for which the date of acquisition isindefinite lived intangible assets acquired after June 30, 2001. The Company wrote off all of its goodwill and intangible assets in March 2002, therefore amortization ceased beginning April 2002.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Actual results of operations and pro forma results of operations for the years ended June 29, 2003, June 30, 2002 and June 24, 2001 had we applied the nonamortization provisions of SFAS 142 will be effective for fiscal years
beginning after December 15, 2001, and will be adopted byin the Company in fiscal
2003. The Company does not expect the adoption of SFAS 141 and SFAS 142 to have
a material impact on the Company's results of operations, financial position, or
cash flows.
period are as follows:
| Year Ended | ||||||||||
June 29 2003 | June 30, 2002 | June 24, 2001 | ||||||||
| (in thousands) | ||||||||||
Reported net income (loss) | $ | 34,901 | $ | (101,723 | ) | $ | 27,843 | |||
Goodwill and intangible amortization, net of tax | — | 5,277 | 3,040 | |||||||
Proforma net income (loss) | $ | 34,901 | $ | (96,446 | ) | $ | 30,883 | |||
Basic income (loss) per share: | ||||||||||
Reported net income (loss) | $ | 0.48 | $ | (1.40 | ) | $ | 0.39 | |||
Goodwill and intangible amortization | — | 0.07 | 0.04 | |||||||
Proforma net income (loss) | $ | 0.48 | $ | (1.33 | ) | $ | 0.43 | |||
Diluted income (loss) per share: | ||||||||||
Reported net income (loss) | $ | 0.46 | $ | (1.40 | ) | $ | 0.37 | |||
Goodwill and intangible amortization | — | 0.07 | 0.04 | |||||||
Proforma net income (loss) | $ | 0.46 | $ | (1.33 | ) | $ | 0.41 | |||
In August 2001, the FASB issued Statement of Financial Accounting Standards 143, "Accounting“Accounting for Asset Retirement Obligations" ("Obligations” (“SFAS 143"143”). SFAS 143 requires an entity to record a liability for an obligation associated with the retirement of an asset at the time that the liability is incurred. This is done by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. The standardStatement is effective for financial statements for fiscal years beginning after June 15, 2002 and will behas been adopted by the Company in fiscal 2003. The Company does not
expect the adoption of SFAS 143 todid not have a material impact on the Company'sCompany’s results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting Standards 144, "Accounting“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS"Of” (“SFAS 144”). SFAS 144 addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange or distribution to owners. The new provisions supersede SFAS 121, which addressed asset impairment and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment.segment, including discontinued operations. This pronouncementStatement requires
expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than at the measurement date. Under SFAS 144, more dispositions may qualify for discontinued operations treatment in the income statement. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company will adopthas adopted SFAS 144 in fiscal 2003. The Company does not expect
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the adoption of SFAS 144 todid not have a material impact on the Company'sCompany’s results of operations, financial position or cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards 145, "Rescission“Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections" ("Corrections” (“SFAS 145"145”). SFAS 145 requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement 4. Extraordinary treatment will be required for certain extinguishments as provided in APB 30. SFAS 145 also amends Statement 13 to require that certain modifications to capital leases be treated as a sale-leaseback and
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). In addition, SFAS 145 rescinded Statement 44 addressing the accounting for intangible assets of motor carriers and made numerous technical corrections. SFAS 145 is effective for all fiscal years beginning after May 15, 2002 and will behas been adopted by the Company on July 1,in fiscal 2003. The Company does not expect the adoption of SFAS 145 todid not have a material impact on the Company'sCompany’s results of operations, financial position or cash flows.
flow.
In July 2002, the FASB issued Statement of Financial Accounting Standards 146, "Accounting“Accounting for Costs Associated with Exit or Disposal Activities" ("Activities” (“SFAS 146"146”). SFAS 146, which nullified EITF Issue 94-3, "Liability“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"”, requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost was recognized at the date of an entity'sentity’s commitment to an exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS 146 to have a material impact on the Company'sCompany’s results of operations or financial position or cash flows.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure” (“SFAS 148”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition disclosure requirements of SFAS 148 are effective for fiscal year 2003. The interim and annual disclosure requirements were effective for the third quarter of 2003. The adoption of SFAS 148 did not have a material effect on the Company’s financial condition, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45,”Guarantor’s Accounting and Disclosure Requirements for Guarantees” (“FIN 45”). FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing the guarantee. The Company will apply FIN 45 to guarantees, if any, issued after December 28, 2002. At adoption, FIN 45 did not have a material impact on the Company’s results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires an investor with a majority of the variable interests in a variable interest entity (“VIE”) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with VIEs created prior to January 31, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The Company is currently reviewing its investments and other arrangements to determine whether any of its investee companies are VIEs. The Company does not expect to identify any significant VIEs that would be consolidated, but may be required to make additional disclosures. The provisions of FIN 46 are effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. The Company has not invested in any new VIEs created after January 31, 2003.
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 29, 2003
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by Form 10-K, our disclosure controls and procedures provide reasonable assurances that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period required by the United States Securities and Exchange Commission’s rules and forms. There have been no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plans
The following table provides information, as of June 29, 2003, for all of the Company’s compensation plans (including individual arrangements) under which we are authorized to issue equity securities.
Equity Compensation Plan Information
Plan Category | (a) Number of securities to | (b) Weighted average | (c) Number of securities (excluding securities reflected in column (a))(1) | ||||||
Equity compensation plans approved by security holders | 9,483,046 | (2) | $ | 22.71 | 4,111,098 | (3) | |||
Equity compensation plans not approved by security holders | 3,321,150 | (4) | $ | 19.07 | 0 | ||||
Total | 12,804,196 | $ | 21.77 | 4,111,098 | |||||
| (1) | Refers to shares of the Company’s common stock. All amounts are as of June 29, 2003. |
| (2) | Includes shares issuable upon exercise of outstanding options under the following plans in the amounts indicated: Equity Compensation Plan—9,291,046 shares; and Stock Option Plan for Non-Employee Directors—192,000 shares. |
| (3) | Includes shares remaining for future issuance under the following plans in the amounts indicated: Equity Compensation Plan—3,504,277 shares and 1999 Employee Stock Purchase Plan—606,821 shares. |
| (4) | Includes shares issuable upon exercise of outstanding options under the following plans in the amounts indicated: 2001 Nonqualified Stock Option Plan—2,876,120 shares; Fiscal 2002 Stock Option Bonus Plan—58,698 shares; Fiscal 2001 Stock Option Bonus Plan—245,515 shares; and Nitres, Inc. 1999 Stock Option/Issuance Plan—140,817 shares. The options outstanding under the Nitres, Inc. 1999 Stock Option/Issuance Plan, which have a weighted average exercise price of $0.01 per share, were assumed by the Company in connection with its acquisition of Nitres, Inc. in May 2000. |
Other than the 1999 Employee Stock Purchase Plan, the only compensation plans or arrangements under which the Company is authorized to issue equity securities are the following (collectively, the “Option Plans”): (1) the Equity Compensation Plan; (2) the 2001 Nonqualified Stock Option Plan; (3) the Fiscal 2002 Stock Option Bonus Plan; (4) the Fiscal 2001 Stock Option Bonus Plan; (5) the Stock Option Plan for Non-Employee Directors; and (6) options assumed under the Nitres, Inc. 1999 Stock Option/Issuance Plan in connection with the Company’s acquisition of Nitres, Inc. in May 2000. The only Option Plan under which the Company remains authorized to make future awards is the Equity Compensation Plan.
The 1999 Employee Stock Purchase Plan and all of the Option Plans, have been previously approved by the shareholders with the exception of the 2001 Nonqualified Stock Option Plan, the two Stock Option Bonus Plans, and the options assumed under the Nitres, Inc. 1999 Stock Option/Issuance Plan. The Equity
Compensation Plan was originally adopted by the Board of Directors in 1989 and approved by the shareholders in 1995. As permitted by its terms, the Equity Compensation Plan was amended by the Board of Directors in 1999 and 2000, without a shareholder vote, to authorize an additional 859,800 shares for nonqualified stock option grants to newly hired employees where the grants were deemed essential to induce such individuals to accept employment with the Company. A further amendment of the Equity Compensation Plan, increasing the shares authorized for issuance under the plan since its adoption to a total of 19,819,800 shares (including the 859,800 shares previously authorized by the Board of Directors) was approved by the shareholders in October 2000.
The following description of the Company’s Option Plans is merely a summary of some of their respective terms and provisions, is not intended to be a complete description and is qualified in its entirety by reference to the full text of the applicable plan.
Option Plans—General. The Option Plans are administered under the direction of the Compensation Committee of the Board of Directors, which is comprised entirely of directors not employed by the Company. The Committee has broad discretion to determine the terms and conditions of options granted under the Option Plans and must approve, among other things, recommendations regarding grants and grant guidelines with respect to: (1) the individuals to whom option grants are to be made; (2) the time or times at which options are granted; (3) the number of shares subject to each option; (4) the vesting terms of each option; and (5) the term of each option. The Option Plans prohibit the grant of options with an exercise price less than the fair market value of the Company’s common stock on the date of grant.
Each of the Option Plans provides that the option price, as well as the number of shares subject to options granted or to be granted under the plan, shall be appropriately adjusted in the event of any stock split, stock dividend, recapitalization or other specified events involving a change in the capitalization of the Company. The terms of the Option Plans generally permit the Board of Directors to amend or terminate the plans, provided that no modification or termination may adversely affect prior awards without the participant’s approval and subject, in the case of the Equity Compensation Plan, to obtaining shareholder approval to the extent required for incentive stock option grants under Section 422 of the Code.
Equity Compensation Plan. The Equity Compensation Plan provides for grants to participants in the form of both incentive stock options and nonqualified stock options. Incentive stock options are awards intended to qualify for certain favorable tax treatment under Section 422 of the Internal Revenue Code, as amended (the “Code”). To date no incentive stock options have been granted under the plan and none are presently contemplated. The Compensation Committee has the exclusive right to determine those persons eligible to participate in the Equity Compensation Plan. Subject to the foregoing, any of the Company’s employees (including of our controlled subsidiaries) or any other person, including directors, may participate in the Equity Compensation Plan if the Committee determines such participation is in the best interest of the Company. As of June 29, 2003, there were outstanding nonqualified stock options to purchase 9,291,046 shares, and 3,504,277 options remained available for future awards under the plan. During fiscal 2003, options to purchase a total of 1,139,931 shares were granted under the Equity Compensation Plan at an average exercise price of $13.47 per share.
Non-Employee Director Stock Option Plan. The Stock Option Plan for Non-Employee Directors (the “Director Plan”) was adopted by the Board of Directors and approved by the shareholders in 1995. The Director Plan provided for fixed annual grants to the Company’s non-employee directors of nonqualified stock options to purchase shares of the Company’s common stock. The Director Plan was terminated as to future grants in 1997. As of June 29, 2003, there were options to purchase 192,000 shares outstanding under the Director Plan.
2001 Nonqualified Stock Option Plan. The 2001 Nonqualified Stock Plan (the “Nonqualified Plan”) was adopted by the Board of Directors in April 2001. The Nonqualified Plan provided for grants to eligible
participants of nonqualified stock options to purchase shares of the Company’s common stock. None of the Company’s directors or officers were eligible to receive awards under the Nonqualified Plan. During fiscal 2003, options to purchase a total of 380,811 shares were granted under the Nonqualified Plan at an average exercise price of $14.17 per share. The Nonqualified Plan terminated as to additional grants in January 2003. As of June 29, 2003, there were options to purchase 2,876,120 shares outstanding under the Nonqualified Plan.
Fiscal 2001 and Fiscal 2002 Stock Option Bonus Plans. The Board of Directors adopted the Fiscal 2001 Stock Option Bonus Plan (“Fiscal 2001 Bonus Plan”) in October 1999 in order to provide for grants of nonqualified stock options to the Company’s eligible employees (including its controlled subsidiaries) for each quarter of fiscal 2001 if we achieved pre-established financial targets for the quarter. None of the Company’s directors and officers were eligible to receive awards under the plan, and employees participating in the Company’s cash incentive compensation programs did not participate in the plan. Participants in the Fiscal 2001 Bonus Plan received stock option grants for all four quarters of fiscal 2001 representing rights to purchase a total of 372,400 shares at an average exercise price of $29.34 per share. The Fiscal 2001 Bonus Plan terminated as to additional grants in September 2001. As of June 29, 2003, there were options to purchase 245,515 shares outstanding under the Fiscal 2001 Bonus Plan.
The Fiscal 2002 Stock Option Bonus Plan (“Fiscal 2002 Bonus Plan”) was adopted by the Company’s Board of Directors in July 2001 with substantially the same terms as the Fiscal 2001 Bonus Plan. Under the Fiscal 2002 Bonus Plan, participants received only the first of the four potential option grants for fiscal 2002, with the options awarded representing rights to purchase a total of 84,306 shares at an average exercise price of $18.75 per share. The Fiscal 2002 Bonus Plan terminated as to additional grants in September 2002. As of June 29, 2003, there were options to purchase 58,698 shares outstanding under the Fiscal 2002 Bonus Plan.
Nitres, Inc. 1999 Stock Option/Issuance Plan. In connection with the acquisition of Nitres, Inc. in May 2000, pursuant to which Nitres became a wholly-owned subsidiary of the Company and changed its name to Cree Lighting Company, the Company assumed certain outstanding stock options granted under the Nitres, Inc. 1999 Stock Option/Issuance Plan (the “Nitres Plan”). Since the closing of the acquisition, no additional stock options have been awarded, nor are any authorized to be awarded, under the Nitres Plan. As of June 29, 2003, there were 140,817 nonqualified stock options outstanding under the Nitres Plan.
Item 13. Certain Relationships and Related Transactions
The information
Item 14. Principal Accounting Fees and Services
Information called for in items 10, through11, 12, 13 and 14 is incorporated by reference from the Company'sour definitive proxy statement relating to its annual meeting of stockholders,shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2002.
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PART IV
Item 14. 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial statements and financial statement schedule - schedule—the financial statements and reports of independent auditors are filed as part of this report (see index to Consolidated Financial Statements at Part II Item 7 on page 39 of this Form 10-K)8). The financial statement schedules are not included in this item as they are either not applicable or are included as part of the consolidated financial statements.
(a) (3) The following exhibits have been or are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation, as amended
3.2 Bylaws, as amended (1)
4.1 Specimen Common Stock Certificate
4.2 Rights Agreement dated as of May 30, 2002 between the Company and
American Stock Transfer & Trust Company, including the form of
Rights Certificate and the Summary of Rights to Purchase Preferred
Stock, attached thereto as Exhibits B and C, respectively (2)
10.1
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation, as amended (1) | |
| 3.2 | Bylaws, as amended (2) | |
| 4.1 | Specimen Common Stock Certificate (1) | |
| 4.2 | Rights Agreement dated as of May 30, 2002 between the Company and American Stock Transfer & Trust Company, including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock, attached thereto as Exhibits B and C, respectively (3) | |
| 10.1 | Equity Compensation | |
| 10.2 | Stock Option Plan for Non-Employee Directors (terminated as to future grants pursuant to Board action dated September 1, 1997) (5)* | |
| 10.3 | Nitres, Inc. 1999 Stock Option/Issuance Plan (terminated as to future grants—following the acquisition of Nitres, Inc. by the Registrant effective May 1, 2000) (1)* | |
| 10.4 | 2001 Nonqualified Stock Option Plan (1)* | |
| 10.5 | Fiscal 2001 Stock Option Bonus Plan (plan expired September 30, 2001) (1)* | |
| 10.6 | Fiscal 2002 Stock Option Bonus Plan (plan expired September 30, 2002) (1)* | |
| 10.7 | Fiscal 2004 Management Incentive Compensation* | |
| 10.8 | Fiscal 2002 Management Incentive Compensation Plan (6)* | |
| 10.9 | Fiscal Year 2003 Management Incentive Compensation Plan (7)* | |
| 10.10 | Employment Agreement, dated as of December 1, 2000, between the Company and M. Todd Tucker (8)* | |
| 10.11 | Letter Agreement, dated as of January 16, 2003, between the Company and M. Todd Tucker (9)* | |
| 10.12 | License Agreement between the Company and North Carolina State University, dated December 3, 1987 (10) | |
| 10.13 | Amendment to License Agreement between the Company and North Carolina State University, dated September 11, 1989 (10) | |
| 10.14 | Sublease Agreement, dated December 29, 2000, between Zoltar Acquisition Inc. (now Cree Microwave, Inc.) and Spectrian Corporation (11) | |
| 10.15 | Purchase and Supply Agreement, dated December 29, 2000, between Spectrian Corporation and Zoltar Acquisition, Inc. (now Cree Microwave, Inc.) (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| Exhibit No. | Description | |
| 10.16 | Amendment of Purchase and Supply Agreement, dated October 19, 2001, between Spectrian Corporation and UltraRF, Inc. (now Cree Microwave, Inc.) (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.17 | Amendment No. 2 to Purchase and Supply Agreement, effective as of March 31, 2002, between Spectrian Corporation and UltraRF, Inc. (now Cree Microwave, Inc.) (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.18 | Settlement Agreement and Release, effective as of November 15, 2002, among Spectrian Corporation, the Company and Cree Microwave, Inc. | |
| 10.19 | Distribution Agreement, dated April 5, 2002, between the Company and Sumitomo Corporation (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.20 | Letter Agreement, dated March 14, 2003, between the Company and Sumitomo Corporation (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.21 | Letter Agreement, dated January 31, 1996, between C3 Diamante, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.22 | Letter Agreement, dated February 12, 1996, between C3 Diamante, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.23 | Amended and Restated Exclusive Supply Agreement, effective as of June 6, 1997, between C3, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.24 | Letter Agreement, dated July 14, 1997, between C3, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.25 | Letter Agreement, dated July 14, 1997, between C3, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.26 | Letter Agreement, dated August 5, 2002, between Charles & Colvard, Ltd. and Cree, Inc. (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.27 | Contract No. N00014-02-C-0302, dated June 28, 2002, between the Company and the Office of Naval Research, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.28 | Contract No. N00014-02-C-0306, dated June 28, 2002, between the Company and the Office of Naval Research, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| Exhibit No. | Description | |
| 10.29 | Contract No. N00014-02-C-0250, dated July 3, 2002, between the Company and the Office of Naval Research, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.30 | Contract No. F33615-99-C-5316, dated August 30, 1999, between the Company and Air Force Research Laboratories, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.31 | Contract No. DAAD17-02-C-0073, dated March 20, 2002, between the Company and US Army Robert Morris Acquisition Center, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 21.1 | Subsidiaries of Registrant | |
| 23.1 | Consent of Independent Auditors | |
| 31.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.3 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 31.4 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| (1) | Incorporated by reference herein. Filed as an exhibit to the Company’s Annual Report filed on Form 10-K with the Securities and Exchange Commission on August 19, 2002. |
| (2) | Incorporated by reference herein. Filed as an exhibit to the Company’s Annual Report filed on Form 10-K with the Securities and Exchange Commission on August 27, 2001. |
| (3) | Incorporated by reference herein. Filed as an exhibit to the Company’s Registration Statement filed on Form 8-A with the Securities and Exchange Commission on May 30, 2002. |
| (4) | Incorporated by reference herein. Filed as an exhibit to the Company’s Quarterly Report filed on Form 10-Q with the Securities and Exchange Commission on February 2, 2001. |
| (5) | Incorporated by reference herein. Filed as an exhibit to the Company’s Registration Statement filed on Form S-8, Registration No. 33-98958, and effective with the Securities and Exchange Commission on November 3, 1995. |
| (6) | Incorporated by reference herein. Filed as an exhibit to the Company’s Quarterly Report filed on Form 10-Q with the Securities and Exchange Commission on February 5, 2002. |
| (7) | Incorporated by reference herein. Filed as an exhibit to the Company’s Quarterly Report filed on Form 10-Q with the Securities and Exchange Commission on October 29, 2002. |
| (8) | Incorporated by reference herein. Filed as an exhibit to the Company’s Quarterly Report filed on Form 10-Q with the Securities and Exchange Commission on November 2, 2001. |
| (9) | Incorporated by reference herein. Filed as an exhibit to the Company’s Quarterly Report filed on Form 10-Q with the Securities and Exchange Commission on April 29, 2003. |
| (10) | Incorporated by reference herein. Filed as an exhibit to the Company’s Registration Statement filed on Form SB-2, Registration No. 33-55998, and declared effective by the Securities and Exchange Commission on February 8, 1993. |
| (11) | Incorporated by reference herein. Filed as an exhibit to the Company’s Current Report filed on Form 8-K with the Securities and Exchange Commission on January 12, 2001. |
| * | Management Contract or Compensatory Plan |
(b) Reports on Form 8-K.
On May 30, 2002June 13, 2003 the Company filedfurnished a Current Report on Form 8-K announcingattaching two press releases describing a dividend
distributionlawsuit that had been filed in federal district court in Greensboro, North Carolina by former Company CEO and current part-time employee, Eric Hunter, and his wife, Jocelyn Hunter, naming Neal Hunter, Eric Hunter’s brother and current Company chairman, and the Company as defendants. Information furnished in the Form 8-K referenced in the prior sentence is not deemed to be filed with the SEC.
On April 29, 2003, the Company furnished a Current Report on Form 8-K containing the certifications of one preferred stock purchase right for each outstanding
shareits chief executive officer and chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Company's common stock, $.00125 par valueSarbanes-Oxley Act of 2002 its Quarterly Report related to shareholders of
record at the close of businessCompany’s Quarterly Report for the quarter ended March 30, 2003 on June 10, 2002.
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On April 16, 2003, the Company furnished a Current Report on Form 8-K containing its press release on its earnings results for the quarter ended March 30, 2003. Information furnished in the Form 8-K referenced in the prior sentence is not deemed to be filed with the SEC.
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CREE, INC.
Date: August 16, 2002
By: /s/ Charles M. Swoboda
------------------------
Charles M. Swoboda
Chief Executive Officer
September 25, 2003
| CREE, INC. | ||
By: | /s/ CHARLES M. SWOBODA | |
Charles M. Swoboda Chief Executive Officer | ||
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/S/ F. NEAL HUNTER F. Neal Hunter | Chairman | September 25, 2003 | ||
/S/ CHARLES M. SWOBODA Charles M. Swoboda | Chief Executive Officer and | September 25, 2003 | ||
/S/ CYNTHIA B. MERRELL Cynthia B. Merrell | Chief Financial Officer and | September 25, 2003 | ||
/S/ JAMES E. DYKES James E. Dykes | Director | September 25, 2003 | ||
/S/ WILLIAM J. O’MEARA William J. | Director | September 25, 2003 | ||
/S/ JOHN W. PALMOUR, PH.D. John W. Palmour, Ph.D. | Director | September 25, 2003 | ||
/S/ ROBERT J. POTTER, PH.D. Robert J. Potter, Ph.D. | Director | September 25, 2003 | ||
/S/ DOLPH W.VON ARX Dolph W. von Arx | Director | September 25, 2003 | ||
EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation, as amended (1) | |
| 3.2 | Bylaws, as amended (2) | |
| 4.1 | Specimen Common Stock Certificate (1) | |
| 4.2 | Rights Agreement dated as of May 30, 2002 between the Company and American Stock Transfer & Trust Company, including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock, attached thereto as Exhibits B and C, respectively (3) | |
| 10.1 | Equity Compensation Plan, as amended and restated December 1, 2000 (4)* | |
| 10.2 | Stock Option Plan for Non-Employee Directors (terminated as to future grants pursuant to Board action dated September 1, 1997) (5)* | |
| 10.3 | Nitres, Inc. 1999 Stock Option/Issuance Plan (terminated as to future grants—following the acquisition of Nitres, Inc. by the Registrant effective May 1, 2000) (1)* | |
| 10.4 | 2001 Nonqualified Stock Option Plan (1)* | |
| 10.5 | Fiscal 2001 Stock Option Bonus Plan (plan expired September 30, 2001) (1)* | |
| 10.6 | Fiscal 2002 Stock Option Bonus Plan (plan expired September 30, 2002) (1)* | |
| 10.7 | Fiscal 2004 Management Incentive Compensation Plan* | |
| 10.8 | Fiscal 2002 Management Incentive Compensation Plan (6)* | |
| 10.9 | Fiscal Year 2003 Management Incentive Compensation Plan (7)* | |
| 10.10 | Employment Agreement, dated as of December 1, 2000, between the Company and M. Todd Tucker (8)* | |
| 10.11 | Letter Agreement, dated as of January 16, 2003, between the Company and M. Todd Tucker (9)* | |
| 10.12 | License Agreement between the Company and North Carolina State University, dated December 3, 1987 (10) | |
| 10.13 | Amendment to License Agreement between the Company and North Carolina State University, dated September 11, 1989 (10) | |
| 10.14 | Sublease Agreement, dated December 29, 2000, between Zoltar Acquisition Inc. (now Cree Microwave, Inc.) and Spectrian Corporation (11) | |
| 10.15 | Purchase and Supply Agreement, dated December 29, 2000, between Spectrian Corporation and Zoltar Acquisition, Inc. (now Cree Microwave, Inc.) (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.16 | Amendment of Purchase and Supply Agreement, dated October 19, 2001, between Spectrian Corporation and UltraRF, Inc. (now Cree Microwave, Inc.) (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.17 | Amendment No. 2 to Purchase and Supply Agreement, effective as of March 31, 2002, between Spectrian Corporation and UltraRF, Inc. (now Cree Microwave, Inc.) (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.18 | Settlement Agreement and Release, effective as of November 15, 2002, among Spectrian Corporation, the Company and Cree Microwave, Inc. | |
| Exhibit No. | Description | |
| 10.19 | Distribution Agreement, dated April 5, 2002, between the Company and Sumitomo Corporation (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.20 | Letter Agreement, dated March 14, 2003, between the Company and Sumitomo Corporation (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.21 | Letter Agreement, dated January 31, 1996, between C3 Diamante, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.22 | Letter Agreement, dated February 12, 1996, between C3 Diamante, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.23 | Amended and Restated Exclusive Supply Agreement, effective as of June 6, 1997, between C3, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.24 | Letter Agreement, dated July 14, 1997, between C3, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.25 | Letter Agreement, dated July 14, 1997, between C3, Inc. and the Company (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.26 | Letter Agreement, dated August | |
| 10.27 | Contract No. N00014-02-C-0302, dated June 28, 2002, between the Company and the Office of Naval Research, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.28 | Contract No. N00014-02-C-0306, dated June 28, 2002, between the Company and the Office of Naval Research, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.29 | Contract No. N00014-02-C-0250, dated July 3, 2002, between the Company and the Office of Naval Research, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.30 | Contract No. F33615-99-C-5316, dated August 30, 1999, between the Company and Air Force Research Laboratories, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |
| 10.31 | Contract No. DAAD17-02-C-0073, dated March 20, 2002, between the Company and US Army Robert Morris Acquisition Center, as amended (asterisks located within the exhibit denote information which has been deleted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) | |