1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 19993, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CREE, RESEARCH, INC.
(Exact name of registrant as specified in its charter)
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NORTH CAROLINA 56-1572719
(State or other jurisdiction of (I.R.S. Employer Identification No.)
of
incorporation or organization) Identification No.)
4600 SILICON DRIVE
DURHAM, NORTH CAROLINA 27703
(919) 313-5300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
F. NEAL HUNTER
CHAIRMANCYNTHIA B. MERRELL
CHIEF FINANCIAL OFFICER AND CHIEF EXECUTIVE OFFICERTREASURER
CREE, RESEARCH, INC.
4600 SILICON DRIVE
DURHAM, NORTH CAROLINA 27703
(919) 313-5300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
GERALD F. ROACH, ESQ. PHILLIPPHILIP P. ROSSETTI, ESQ.
AMY J. MEYERS, ESQ. HALE AND DORR LLP
SMITH, ANDERSON, BLOUNT, 60 STATE STREET
DORSETT, MITCHELL & JERNIGAN, L.L.P. BOSTON, MASSACHUSETTS 02109
2500 FIRST UNION CAPITOL CENTER (617) 526-6000
RALEIGH, NORTH CAROLINA 27601
(919) 821-1220
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
================================================================================
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PROPOSED PROPOSED
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATIONAMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
============================================================================================- -------------------------------------------------------------------------------------------------------------------------
Common Stock $0.005$0.0025 par value per
share ............... 1,495,000 $ 41.94 $62,700,300 $ 17,430.68
============================================================================================share.................................. 2,990,000 $77.2188 $230,884,063 $60,953.39
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(1) Includes 195,000390,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee, based
upon the average of the high and low prices of the Common Stock on the
Nasdaq National Market on January 13,December 27, 1999 in accordance with Rule 457(c).
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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Subject to Completion, Dated January 14, 1999
The information contained in this prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
1,300,0002
SUBJECT TO COMPLETION, DATED JANUARY 3, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2,600,000 SHARES
(CREE LOGO)[CREE, INC. LOGO]
COMMON STOCK
$ PER SHARE
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Cree, Research, Inc. is offering 1,300,0002,600,000 shares of common stock with this prospectus.
This is a firm commitment underwriting.
The common stock is listedtraded on the Nasdaq National Market under the symbol
"CREE." On January 12,December 30, 1999, the last reported sale price of the common stock
on the Nasdaq National Market was $48.50$84.875 per share.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
PER SHARE TOTAL
----------- ------------------- -------
Price to the public ...........public................................. $ $
Underwriting discount .........discount...............................
Proceeds to Cree ..............Cree....................................
Cree has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 195,000390,000 additional
shares from Cree within 30 days following the date of this prospectus to cover
over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC OPPENHEIMERWORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
INCORPORATEDBANC OF AMERICA SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP
MORGAN KEEGAN & COMPANY, INC.
The date of this Prospectus is , 19992000
3
Following the prospectus cover page are color photos of certain of the Company'sCree's
products:
o Blue and green LEDs
o Silicon carbide (SiC) waferwafers
o Gemstone crystalcrystals
o Microwave devicedevices
o Utility substation
(Photo courtesy of Carolina Power & Light)o Blue laser beam
In the center of the photo layout is the Cree logo over the title "Existing and
Planned Products"
Beside or beneath each photo is the following description:
LEDSo LEDs Cree has created high brightness blue and green LEDs through the
combination of SiC and GaN.nitride-based materials.
o SILICON CARBIDE WAFERS Cree is the leading worldwide supplier of SiC
wafers used by customers in research and development programs.
o GEMSTONE APPLICATIONS Cree manufactures near colorless SiC with
properties similar to diamond for use in unique gemstones.
o RADIO FREQUENCY "RF" AND MICROWAVE* Cree is developing devices for use
in RF and microwave applications, such as wireless base station transmitters.infrastructure,
digital broadcast and radar applications.
o POWER SEMICONDUCTORS* Cree is developing power semiconductor devices
for applications such as power conditioning for motor controlcontrols and high
voltage power transmission.
o LASERS* Cree is developing blue laser diodes designed to increase
optical storage capability.
*Currently under development
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TABLE OF CONTENTS
PAGE
---------
Forward-Looking Statements ........................................................... 3
Prospectus Summary ...................................................................Summary.......................................... 4
Risk Factors .........................................................................Factors................................................ 6
Forward Looking Statements.................................. 13
Use of Proceeds ...................................................................... 12Proceeds............................................. 14
Dividend Policy ...................................................................... 12Policy............................................. 14
Price Range of Common Stock .......................................................... 13
Capitalization ....................................................................... 14Stock................................. 15
Capitalization.............................................. 16
Selected Consolidated Financial Data ................................................. 15Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Business ............................................................................. 25
Management ........................................................................... 34
Principal Shareholders ............................................................... 36Operations................................. 18
Business.................................................... 28
Management.................................................. 41
Certain Transactions ................................................................. 38
Underwriting ......................................................................... 39Transactions........................................ 43
Underwriting................................................ 45
Legal Matters ........................................................................ 41
Experts .............................................................................. 41
Other Matters ........................................................................ 41Matters............................................... 47
Experts..................................................... 47
Where You Can Find More Information .................................................. 41Information......................... 47
Index to Consolidated Financial Statements ........................................................Statements.................. F-1
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As used in this prospectus, the terms "we," "us," "our," the "Company""our" and "Cree" mean Cree, Research,
Inc. and its subsidiaries (unless the context indicates a different meaning),
and the term "common stock" means the Company'sour common stock, $0.005$0.0025 par value per share.
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about , 1999,2000, against payment in immediately available
funds.
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FORWARD-LOOKING STATEMENTS
Information set forth3
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussionoffering and Analysis of Financial
Conditionour financial statements and Results of Operations," "Business" and "Use of Proceeds" contains
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, which represent our
judgment concerning the future and are subject to risks and uncertaintiesaccompanying notes that could cause our actual operating results and financial positions to differ
materially. Forward-looking statements are typically identified by the use of
terms such as "may," "will," "expect," "anticipate," "estimate" and similar
words, although some forward-looking statements are expressed differently. Our
actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including fluctuations
in our operating results, production yields in our manufacturing processes,
whether we can produce commercial quantities of high brightness blue and green
LEDs, our dependence on a few customers, whether we can manage our growth
effectively, assertion of intellectual property rights by others, adverse
economic conditions and insufficient capital resources. These and other factors
that could cause actual results to differ materially from such forward-looking
statements are set forth under the caption "Risk Factors" andappear
elsewhere in this prospectus.
3
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING AND OUR FINANCIAL STATEMENTS AND ACCOMPANYING NOTES THAT APPEAR
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANYABOUT CREE
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from silicon carbide, or SiC. We use our proprietary
compound semiconductor technology to make enabling compound semiconductorsproducts such as blue and
green light emitting diodes, or LEDs, SiC crystals used in the production of
unique gemstones, and SiC wafers that are sold for use in manufacturing and for
research and development.development, and radio frequency, or RF, transistors for wireless
and broadcast applications. We have new product initiatives based on our
expertise in SiC, including microwave transistors for use in wireless
base stationscommunications infrastructure and radar, blue laser diodes for optical storage
applications and high power devices for power conditioning and switching.
Our blue and green LEDs are sold to customers who package them for use in
applications such as backlighting for automotive dashboards and liquid crystal
displays, including wireless handsets.handsets and other consumer products. Other
applications include indoor and outdoor electronic displays, such as video
replay boards in indoor arenas.
Additionally, we recently began shipping LEDs for use inarenas and outdoor stadium signs, traffic signals and
miniature lighting. We have developed several generations of blueour LED products,
including a more robust conductive bufferhigh performance LEDs with increased brightness up to 300% over our
standard brightness products. Our SiC-based LEDs offer important benefits to our
customers, including an industry standard chip that is easier to build into
lampsstructure, small size, high
brightness and has a low unit price. Strategies Unlimited, an industry research
firm, has estimated that the market size for LEDs (all colors) was
approximately $1.8 billion in 1997 and has forecast that the blue and green LED
portion of the market will increase from approximately $204 million in 1998 to
approximately $430 million in 2001.
We believe that, for certain applications, SiC-based compound semiconductor devices offer significant
advantages over other semiconductor materials such as silicon and gallium
arsenide. In particular, the properties of SiC make it an excellent material for
extending existing semiconductor device technology where high power, high
temperature or short wavelengths are important for performance. For example, SiC
enables the manufacture of blue and green LEDs in an easier to use, industry
standard structure. SiC also permits a smaller LED chip size that we believe is
less expensive to produce than LEDs made using other materials. In addition,
researchers have demonstrated SiC-based microwave transistors canthat operate at
significantly higher power levels than existing silicon or gallium
arsenide-based devices. This characteristic willshould allow wireless systems to use
fewer transistors per base station with less complex circuitry, which should
result in a lower system cost.
Many of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material very difficult to
produce. Through our proprietary technology and over 1012 years of development and
manufacturing experience, we have succeeded in overcoming many difficulties in
processing SiC for commercial use.
Our objective is to continue to develop SiC materials and device technology with
low unit costs. We are using our materials and process technology to develop new
microwave, power and laser diode products while continuing to enhance our LEDs,
SiC wafers and gemstone crystals. We are also using our SiC technology to begin
production of our RF products. We have increased the performance and reduced the
cost of our LED chips over the last several years by using different materials
to create brighter LEDs, decreasing chip size, increasing wafer diameter and
enhancing our epitaxial
film deposition (wafer coating) and fabricationmanufacturing processes.
Effective January 1, 2000, we changed our name from "Cree Research, Inc." to
"Cree, Inc." Our principal executive offices are located at 4600 Silicon Drive,
Durham, North Carolina 27703. Our telephone number is (919) 313-5300.
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THE OFFERING
Common stock offered by Cree........................ 1,300,000
Common stock offered by Cree......................... 2,600,000 shares
Common stock to be outstanding after
the offering....................................... 32,099,499 shares
Use of proceeds...................................... For the expansion and acquisition of
facilities, the purchase of equipment,
research and development, working capital
and general corporate purposes.
Nasdaq National Market symbol........................ CREE
The number of shares outstanding after the offering... 14,219,818 shares(1)
Use of proceeds..................................... To purchase additional
manufacturing equipment
and build out the
Company's principal
manufacturing facility,
to repay indebtedness,
for research and
development, and for
working capital and
general corporate
purposes.
Nasdaq National Market symbol....................... CREE
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SIX MONTHS ENDED
----------------------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 28, DECEMBER 28, DECEMBER 27,
1996 1997 1998 1997 1998
----------- ------------ ------------ ------------- -------------
STATEMENT OF INCOME DATA:
Total revenue ......................... $15,057 $ 28,973 $ 42,531 $ 20,313 $ 26,317
Gross profit .......................... 3,568 9,878 14,552 6,696 12,273
Income (loss) from operations ......... (624) 3,112 8,145 3,401 7,111
Net income ............................ $ 243 $ 3,542 $ 6,275 $ 2,640 $ 5,217
======= ======== ======== ======== ========
Earnings per share:
Basic ............................... $ 0.02 $ 0.28 $ 0.49 $ 0.21 $ 0.41
======= ======== ======== ======== ========
Diluted ............................. $ 0.02 $ 0.27 $ 0.47 $ 0.20 $ 0.39
======= ======== ======== ======== ========
Shares used in per share calculation:
Basic ............................... 11,826 12,455 12,863 12,699 12,876
======= ======== ======== ======== ========
Diluted ............................. 12,615 13,126 13,493 13,522 13,541
======= ======== ======== ======== ========
DECEMBER 27, 1998
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ACTUAL AS ADJUSTED (2)
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BALANCE SHEET DATA:
Cash and cash equivalents ......................... $12,769 $ 61,859
Working capital ................................... 24,383 73,594
Total assets ...................................... 78,103 127,193
Long term debt, including current portion ......... 10,000 --
Shareholders' equity .............................. 59,989 119,079
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(1) Basedoffering is based on 12,919,81829,499,499
shares of common stock outstanding on December 27,
1998. Excludes 1,984,547September 26, 1999. This number excludes
4,072,633 shares of common stock reserved for issuance uponin connection with the
exercise of stock options and warrants outstanding at December 27,
1998,on September 26, 1999, of
which 78,513200,149 shares were issued between September 26, 1999 and December 27, 1998 and
January 11,26,
1999.
(2) Adjusted toSUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
The shares used in calculating earnings per share in the table below are
adjusted for our two-for-one stock split effective July 26, 1999. The as
adjusted balance sheet data in the table below give effect to the sale of
1,300,0002,600,000 shares of common stock
offered by Cree in this offering at an assumed public offering
price of $48.50$84.875 per share, and the application of the net proceeds from the
sale of the shares, after deducting the estimated underwriting discount and our estimated
offering expenses payable by Cree. See "Use of Proceeds."expenses.
YEARS ENDED THREE MONTHS ENDED
------------------------------ -----------------------------
JUNE 30, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1997 1998 1999 1998 1999
-------- -------- -------- ------------- -------------
STATEMENT OF INCOME DATA:
Total revenue........................ $28,973 $42,531 $60,050 $12,279 $20,048
Gross profit......................... 9,878 14,552 28,130 5,657 9,414
Income from operations............... 3,112 8,145 16,582 3,364 6,455
Net income........................... $ 3,542 $ 6,275 $12,702 $ 2,366 $ 4,636
======= ======= ======= ======= =======
Earnings per share:
Basic.............................. $ 0.14 $ 0.24 $ 0.47 $ 0.09 $ 0.16
======= ======= ======= ======= =======
Diluted............................ $ 0.13 $ 0.23 $ 0.45 $ 0.09 $ 0.15
======= ======= ======= ======= =======
Shares used in per share calculation:
Basic.............................. 24,911 25,726 27,015 25,840 29,337
======= ======= ======= ======= =======
Diluted............................ 26,251 26,987 28,432 26,498 31,214
======= ======= ======= ======= =======
SEPTEMBER 26, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 41,226 $250,869
Working capital............................................. 55,640 265,283
Total assets................................................ 149,105 358,748
Shareholders' equity........................................ 133,285 342,928
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE DECIDING TO INVEST
IN THE SHARES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW 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 IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF FUTURE OPERATIONS COULD BE MATERIALLY AND
ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THIS PROSPECTUS ALSO
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THE RISKS
FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. PLEASE REFER TO
"FORWARD-LOOKING STATEMENTS" ON PAGE 3.You should carefully consider the following factors before deciding to invest in
the shares. The risks and uncertainties described below 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 impair our business operations.
If any of the following risks actually occurs, our business, financial condition
or results of future operations could be materially and adversely affected. In
that event, our stock price could decline, and you may lose all or part of your
investment. This prospectus also contains forward looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward looking statements as a result of numerous
factors, including the risks described below and elsewhere in this prospectus.
Please refer to "Forward Looking Statements" on page 13.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO
MAINTAIN OUR EXISTING GROWTH RATE.
Although we have had significant revenue and earnings growth in recent quarters,
we may not be able to sustain these growth rates and we may experience
significant fluctuations in our revenue and earnings in the future. Our
operating results will depend on many factors, including the following:
o- - our ability to develop, manufacture and deliver products in a timely and
cost-effective manner;
o whether we encounter low levels of- - our ability to produce enough usable product produced during each manufacturing step
(our "yield");
o- - our ability to expand our production of SiC wafers and devices;
o- - demand for our products;
o- - demand for our customers' products;
o- - competition; and
o- - general industry and global economic conditions.
Our future operating results could be adversely affected by these or other
factors. IfAdditionally, if our future operating results are below the
expectations of stock
marketequity analysts or our investors, our stock price may decline.
IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR OPERATING RESULTS MAY SUFFER.
Our SiC products are very complex and are fabricatedmanufactured using technologies that are highly complex.
Our customers incorporate our products into high volume applications such as
automotive dashboards, wireless handsets full color video
displays and gemstones,other consumer products, and they
insist that our products meet exact specifications for quality, performance and
reliability.
The number of usable crystals, wafers and devices that result from our
production processes can fluctuate as a result of many factors, including the
following:
o- - impurities in the materials used;
o- - contamination of the manufacturing environment;
o- - equipment failure, power outages or variations in the manufacturing process;
oand
- - losses from broken wafers or other human error; and
o defects in packaging.error.
Because many of our manufacturing costs are fixed, if our yields decrease our
operating results would be adversely affected.
For this reason, we are
constantly trying to improve our yields.
In the past, we have experienced difficulties in achieving acceptable yields on
both new and older products, which hasand poor yields have adversely affected our
operating results. We may experience similar problems in the future and we
cannot predict when they may occur or their severity. TheseSuch problems could
significantly affect our future operating results.
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IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS BLUE AND
GREEN LEDS, OUR
OPERATING RESULTS MAY SUFFER.
We are currently beginning thehave made and continue to make substantial investments in equipment and
facilities to manufacture of commercial quantities of high brightness blue and green LEDs, and as a result, weLEDs. We have incurred certain fixed
costs. We believe that high volume production ofaccepted
orders for these products will be
important toin quantities that have sold out our future operating results. Achieving greater
6
existing and
planned increases in production capacity for the next few quarters. These
significant volumes requiresalso require improved production yields for these products.the products to
meet customer demand. Successful production of these products is subject to a
number of risks, including the following:
o- - our ability to consistently manufacture thesethe products in volumes large enough
to cover our fixed costs and satisfy our customers' requirements; oand
- - our ability to improve our yields and reduce the costs associated with the
manufacture of these products; and
o whether these products gain market acceptance.the products.
Our inability to produce adequate quantities of our high brightness blue and
green productsLEDs would have a material adverse effect on our business, results of
operations and financial condition. For example, our current contract with our
largest LED customer provides that the customer may recover liquidated damages,
or in some cases actual damages, if we materially default in meeting delivery
commitments.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The markets for our products are highly competitive. Our competitors offer blue
and green LEDs made from sapphire wafers that are brighter than the high
brightness LEDs we currently produce. In addition, some of our customers could
compete with us. For example, Osram Opto Semiconductors GMBH and Co. OHG, or
Osram OS, an indirect subsidiary of Siemens AG, and Shin-Etsu Handotai Co. Ltd.,
or Shin-Etsu, license some of our LED technology. Osram OS currently purchases
large volumes of our standard brightness blue LEDs but also manufactures some of
its volume requirements for these LEDs. Shin-Etsu may also seek to enter our LED
markets. The market for SiC wafers is likewise becoming competitive as other
firms have in recent years begun offering SiC wafer products or announced plans
to do so.
Also, other firms may develop new or enhanced products that are more effective
than any that we have developed or may develop. These firms may develop
technologies that enable the production of commercial products with
characteristics similar to SiC-based products but at a lower cost. Many existing
and potential competitors have far greater financial, marketing and other
resources than we do. We believe that present and future competitors will
aggressively pursue the development and sale of competing products. We also
expect significant competition for products we are currently developing, such as
those for use in microwave communications.
We expect competition to increase. This could mean lower prices or reduced
demand for our products and a corresponding reduction in our ability to recover
development, engineering and manufacturing costs. Any of these developments
could have an adverse effect on our business, results of operations and
financial condition.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
Our future success will dependdepends 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 high power radio
frequencyRF and
microwave devices, power devices, blue laser diodes and high temperature
devices. The successful development and
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9
introduction of these products depends on a number of factors, including the
following:
o- - achievement of technology breakthroughs required to make commercially viable
devices;
o- - the accuracy of our predictions of market requirements and evolving standards;
o- - acceptance of our new product designs;
o the availability of- - our ability to recruit qualified development personnel;
o- - our timely completion of product designs and development;
o- - our ability to develop repeatable processes to manufacture new products in
sufficient quantities for commercial sales; and
o- - acceptance of our customers' products by the market.
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-efficientcost-effective manner.
WE DEPEND ON A FEW LARGE CUSTOMERS.
Historically, a substantial portion of our revenue has come from large purchases
by a small number of customers. We expect thatthis trend to continue. For example,
for fiscal 19981999 our top five customers accounted for 81% of our total
revenue. For the six months ended December 27, 1998, our top five customers
accounted for 79% of our total revenue.
(These percentages consider sales to a distributor as sales to one customer).
Sales to Siemens AG during both periodsOsram OS accounted for 40% of our total revenue. In addition, sales to C3 accounted for 11%37% of our total revenue in fiscal 1998 and 18%1999. In
addition, sales to C3, Inc., or C3, accounted for 19% of our total revenue in
the six months
ended December 27, 1998.fiscal 1999. 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 stop purchasing our products and
our operating results will suffer. Our customers use our products as components
in their products. If other aspects of our customers' products infringe a third
party's intellectual property rights, and our customers are then prohibited from
selling their products, our business could be adversely affected. If we lose a
large customer and fail to add new customers to replace lost revenue, our
operating results may not recover.
Under an exclusive supply agreement with an initial term extending to 2005, C3
must purchase from us each calendar quarter at least 50% (by dollar volume) of
its requirements for SiC materials for use in production of gemstones during the
quarter. In the fall of 1999, C3 announced lower sales revenue and higher
inventory levels than anticipated, as well as the launch of a new marketing
campaign. Recently, we agreed that C3 could reschedule approximately one-half of
its purchase commitments from the first half of calendar 2000 to the second half
of the year. We anticipate that sales to C3 will decrease in calendar 2000. We
may use excess capacity from C3-dedicated equipment for other applications, but
if we are not able to replace these revenues with sales from other areas of our
business, our financial results may be materially adversely affected.
OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Other companies may hold or obtain patents on inventions or may otherwise claim
proprietary rights to technology necessary to our business. We cannot assure you
that third parties will not attempt to assert infringement claims against us
with respect to our current or future products, including our core products. We
cannot predict the extent to which such assertions may require us to seek
licenses or, if required, whether such licenses will be offered or offered on
acceptable terms or that disputes can be resolved without litigation. In
December 1999, one of our distributors in Japan was named in a lawsuit alleging
infringement of a Japanese patent and seeking an injunction that, if granted,
would preclude the distributor from selling certain of
8
10
our standard brightness blue LED products in Japan. We have intervened in the
action to assist in the defense against the claim of infringement. Subject to
contractual limitations, we have an obligation to indemnify our distributor for
certain patent infringement claims. An adverse judgment against the distributor
would restrict our ability to sell certain products in Japan without obtaining a
license. Litigation to determine the validity of infringement claims alleged by
third parties could result in significant expense to us and divert the efforts
of our technical and management personnel, whether or not the litigation is
ultimately determined in our favor. We cannot predict the occurrence of future
intellectual property claims that may prevent us from selling products, result
in litigation or give rise to indemnification obligations or damage claims.
WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
FACILITY.CAPACITY.
In order to increase production, we must expand our existing facilities or
acquire new facilities, as well as purchase new manufacturing equipment. We are
beginning to construct 125,000 square feet of additional space at our
newmanufacturing facility we must add critical new
equipment, move existing equipment and complete the remaining phases of
building out the facility. We are in the process of completing this build-out
and expect to construct additional facilities in the future.purchasing another 120,000
square foot facility under construction on a 17.5-acre site near our existing
facility. Expansion activities such as these are subject to a number of risks,
including the following:
o- - unforeseen environmental or engineering problems relating to existing or new
facilities;
o- - unavailability or late delivery of the advanced, and often customized,
equipment used in the production of our products;
o unavailability of funds necessary for expansion;
7
o- - work stoppages and delays; and
o- - delays in bringing production equipment on-line.
These and other risks may affect the ultimate cost and timing of the build-out
of our existing facility,current
construction, as well as the constructionacquisition of new facilities, which could
adversely affect our business, results of operations and financial condition.
THE ONGOING OPERATION OF OUR MANUFACTURING FACILITY IS CRITICAL TO OUR
BUSINESS.
In November 1997,For example, if we acquiredare not successful in meeting milestones associated with this
expansion, we could have difficulty making shipments of previously ordered
products; consequently, we could be in default under contracts with our
present facilities in Durham, North Carolina,
which include a total of 172,000 square feet. The ongoing operation of this
facility is crucialcustomers and/or subject to our strategy of expanding our manufacturing capacity to
meet demand for our SiC products now and in the future.
We began commercial production of products from our new facility in August
1998. We expect that production from the facility will increase throughout the
remainder of fiscal 1999 and into fiscal 2000. A number of factors will affect
the successful operation of this facility and our business, including the
following:
o demand for our products;
o our production yields;
o our ability to generate revenues in amounts that cover the significant
fixed costs of operating our facility;
o our ability to hire, train and manage qualified production personnel; and
o our inability to use all or a significant portion of our facility for
prolonged periods of time for any reason -- for example, a fire or
explosion caused by our use of combustible chemicals and high temperatures
during certain of our manufacturing processes.penalties.
WE FACE SIGNIFICANT CHALLENGES MANAGING OUR RAPID GROWTH.
We are experiencinghave experienced a period of significant growth that will continue to place
a great strain onhas strained our
management and other resources. We have grown from 188 employees on December 31,
1996 to 297478 employees on December 27, 199826, 1999 and from revenues of $29.0 million
for the fiscal year ended June 30, 1997 to $42.5$60.1 million for the fiscal year
ended June 28, 1998.27, 1999. To manage our growth effectively, we must continue to:
o- - implement and improve operational systems;
o- - maintain adequate physical plant, manufacturing facilities and equipment to meet customer
demand;
o- - add experienced senior level managers; and
o- - attract and retain qualified people with experience in engineering, design,
technical marketing and support.
We will spend substantial amounts of money in connection withsupporting our rapid 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.
THE MARKETS IN WHICHOUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE OPERATE ARE HIGHLY COMPETITIVE.
The market forENCOUNTER PROBLEMS
TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE.
Beginning in the second half of calendar 2000, we plan to begin shifting LED
production from
9
11
two-inch wafers to three-inch wafers. We must first qualify our products is highly competitive. Although we believe our
SiC-based LEDs offer substantial advantages, competitors currently sell blueproduction
processes on systems designed to accommodate the larger wafer size, and green LEDs made from sapphire wafers that are brighter than the high
brightness LEDs we currently produce. In addition, we believe that other firms
(including certainsome of
our customers) may seek to enterexisting production equipment must be refitted for the blue and green LED
marketlarger wafer size.
Delays in the future. For example, Siemens AG and Shin-Etsu Handotai Co. Ltd.
license certain of our LED technology, which may facilitate their entrance into
our LED markets. 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.
Also, other firms may develop new or enhanced products that are more effective
than any that we have developed or may develop. These firms may develop
technology that produces commercial products with characteristics similar to
SiC-based products, but at a lower cost. Many existing and potential
competitors have far greater financial, marketing and other resources than we
do. We believe that present and future competitors will
8
aggressively pursue the development and sale of competing products. We also
expect significant competition for products we are currently developing, such
as those for use in microwave communications.
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. Any of
these developmentsthis process could have an adverse effect on our business,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 use of 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.
THE ONGOING OPERATION OF OUR MANUFACTURING FACILITY IS CRITICAL TO OUR BUSINESS.
Our principal manufacturing facility in Durham, North Carolina currently
includes a total of operations214,000 square feet. The ongoing operation of this facility
is crucial to our strategy of expanding manufacturing capacity to meet demand
for our SiC products now and financial condition.in the future.
We began commercial production of products from our present facility in August
1998. We expect that production from this facility will increase throughout the
remainder of fiscal 2000 and into fiscal 2001. Our inability to use all or a
significant portion of our facilities for prolonged periods of time for any
reason could have an adverse impact on our business. For example, a fire or
explosion caused by our use of combustible chemicals and high temperatures
during certain of our manufacturing processes would render some or all of our
facility inoperable for an indefinite period of time. Our manufacturing process
requires highly specialized customized equipment that is not easily replaced.
Consequently, damage to or destruction of any or all of our facility could
impair our ability to manufacture products for our customers.
WE RELY ON A FEW KEY SUPPLIERS.
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our SiC products, including key materials,
components 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 suchour suppliers. If we were to lose
such key suppliers, our manufacturing efforts could be hampered significantly.
Although we believe our relationship with our suppliers is good, we cannot
assure you that we will continue to maintain good relationships with such
suppliers or that such suppliers will continue to exist.
OUR BUSINESS MAY SUFFER IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE
THEIR FUNDING FOR OUR RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.DEVELOPMENT.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support 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.
WE DEPEND HEAVILY ON KEY PERSONNEL.
Our success depends in part on keeping key technical and management personnel.
For example, some of the equipment used in the production of our products must
be modified before it is put to use and only a limited number of employees
possess the expertise needed to perform these modifications. Furthermore, the
number of individuals with experience in the production of SiC and related
products is limited, and our future success depends in part on retaining those
individuals who are already employees.
We must also continue to attract qualified personnel. The competition for
qualified personnel is intense, and the number of people with the experience
that we need is limited. We cannot be sure that we will be able to continue
10
12
to attract and retain other skilled personnel in the future.
THERE ARE LIMITATIONS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY.
Our proprietary technology is critical to our business, and our business could
suffer if we are unable to sufficiently protect our intellectual property
rights. Our intellectual property position is based in part on patents owned by
us and on patents exclusively licensed to us by North Carolina State University,
also known as N.C. State, and on patents
owned by us. The licensed patents give us rights to our SiC crystal growth
process. The expiration dates on the U.S. patents we license from N.C. State
run from 2007 to 2009. We also own 43 U.S. patents relating to various aspects
of our technology and have other patent applications pending. The issued U.S.
patents we own expire between 2008 and 2016. We have obtained (or licensed from
N.C. State) a number of patents covering these same technologies in key foreign
jurisdictions.State.
We intend to continue to file patent applications in the future, where
appropriate, and to pursue such applications with the U.S. and foreign patent
authorities, but we cannot be sure that any other patents will be issued on such
applications or that our patents will not be contested. In the past, one of the
important patents we license from N.C. State relating to SiC crystal growth was
subject to re-examinationa reissue proceeding in the U.S. but we prevailed in; however, the proceeding.patent was
successfully reissued. Currently, thea corresponding European patent is being
challenged, which means that we could lose patent protection in certain European countriesEurope for this
particular method. There is no assurance that other of our patents will not be
contested. Also, because 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 N.C. State or other parties and
licensed to us) will provide significant commercial protection.
In addition to patent protection, we also rely on trade secrets, technical
know-how and other unpatented proprietary information relating to our 9
product
development and manufacturing activities. We try to protect this information
withthrough the use of confidentiality agreements with our employees and other
parties. We cannot be sure that these agreements will not be breached, that we
would have adequate remedies for any breach or that our trade secrets and
proprietary know-how will not otherwise become known or independently discovered
by others.
OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Particular aspectsWe may initiate litigation in the future to enforce our intellectual property
rights. Litigation can be protracted, costly and distracting to key personnel.
We cannot assure you that we will prevail in any litigation we initiate and, if
we are not successful, the scope of our technologyrights to important intellectual
property could be found to infringe the claims of
other existingdiminished or future patents. Other companies may hold or obtain patents on
inventions, or may otherwise claim proprietary rights to technology necessary
to our business. We cannot predict the extent to which we may be required to
seek licenses.eliminated.
WE ARE SUBJECT TO RISKS FROMASSOCIATED WITH INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 69% of our
revenue in fiscal 1996, about 79% of our
revenue in fiscal 1997, about 74% of our revenue in fiscal 1998, and about 62%
of our revenue in the first six months
of fiscal 1999.
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, the
emergencetrends in
use of the Euro, trading restrictions, tariffs, trade barriers and taxes. Also,
future U.S. Government or military export restrictions could limit or
prohibitlaws restrict sales of some of our products to customers in certain
countries because of their uses in militarynational security or surveillance applications.other concerns.
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, 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.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION.
We are subject to a variety of government regulations pertaining to chemical and
waste discharges and other aspects of our manufacturing process. For example, we
are responsible for the management of the hazardous materials we use and
disposal of hazardous waste resulting from our manufacturing process. The proper
handling and disposal of such hazardous material and waste requires us to comply
with certain government
rules and11
13
regulations. We believe we are in full compliance with such regulations as of
the date of this prospectus, but any failure, whether intentional or
inadvertent, to comply with such regulations could have an adverse effect on our
business. In addition, these regulations may affect our ability to expand or
change our manufacturing facility.
THE VOLATILITY OF OUR STOCK PRICE COULD AFFECT AN INVESTMENT IN OUR STOCK.
The market price of our common stock has been and may continue to be subject to
wide fluctuations. Factors affecting our stock price may include:
o- - variations in operating results from quarter to quarter;
o- - changes in earning estimates by analysts;
o- - market conditions in the industry; and
o- - general economic conditions.
Our stock price has fluctuated widely. For example, between November 1997 and
January 1998 the price of our common stock dropped from approximately $29.50$14.75 to
$13.50$6.75 per share. Between August 1998 and January 11,December 26, 1999, the price of our
common stock rose from approximately $10.50$5.25 to $53.25$79.00 per share. Consequently,
the current market price of our common stock may not be indicative of future
market prices, and you may not be able to sustain or increase the value of your
investment in our common stock.
WE FACE RISKS CONCERNING YEAR 2000 ISSUES.
We are evaluating all of our internal computers, computer equipmentEven though the date is now past January 1, 2000, and other
equipment with embedded technology againstwe have not experienced
any immediate adverse impact from the transition to the Year 2000, concerns. Although we believecannot
provide assurance that our planning efforts are adequatesuppliers and customers have not been affected in a
manner that is not yet apparent. In addition, certain computer programs which
were date sensitive to addressthe Year 2000 may not have been programmed to process the
Year 2000 as a leap year, and any negative consequential effects remain unknown.
As a result, we will continue to monitor our Year 2000 concerns, it
is still possible that we could experience negative consequencescompliance and material
costs caused by
10
undetected errors or defects in the technology used in our internal systems.
Our most significant Year
2000 risk iscompliance of our suppliers and customers.
12
14
FORWARD LOOKING STATEMENTS
Information set forth in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
contains various "forward looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. These statements
represent our judgment concerning the future and are subject to risks and
uncertainties that the systems of other parties on
which we rely, specificallycould cause our key suppliers, will not be compliant on a
timely basis. Any disruption in delivery of supplies to us that is caused by a
third party's failure to address Year 2000 issues would affect our ability to
manufacture our products, which could result in a material adverse effect on
our business,actual operating results and financial
condition.
Atpositions to differ materially. Forward looking statements are typically
identified by the use of terms such as "may," "will," "expect," "anticipate,"
"estimate" and similar words, although some forward looking statements are
expressed differently. Our actual results could differ materially from those
contained in the forward looking statements due to a number of factors,
including fluctuations in our operating results, production yields in our
manufacturing processes, whether we can produce sufficient quantities of high
brightness blue and green LEDs to meet demand, our dependence on a few
customers, whether we can manage our growth effectively, assertion of
intellectual property rights by others and adverse economic conditions. These
and other factors that could cause actual results to differ materially from such
forward looking statements are set forth under the caption "Risk Factors" and
elsewhere in this time, we are unable to estimate the most likely worst-case effects of
the arrival of the Year 2000 and we do not have a contingency plan for any
unanticipated negative effects.
11prospectus.
13
15
USE OF PROCEEDS
The Company estimatesWe estimate that the net proceeds from the sale of the 2,600,000 shares of
common stock it iswe are offering will be approximately $59.1$209.6 million. If the
underwriters fully exercise the over-allotment option, the net proceeds will be
approximately $68.1$241.2 million. For the purpose of estimating net proceeds, the
Company iswe are
assuming that the public offering price will be $48.50$84.875 per share. "Net
proceeds" is what the Company expectswe expect to receive after paying the underwriting discount
and other estimated expenses of thethis offering.
Cree willWe expect to use the net proceeds of the offering as follows:
o- - approximately $35$50 million to $45$60 million of the net proceeds will be used to fund the build-outexpansion
and expansionacquisition of the Company's facilities, as well as theto purchase of equipment; o approximately $10 million of the net proceeds will be used to repay the
outstanding balance on the Company's term loan, which has an interest rate
of 8.0% and
matures on December 10, 2011; and
o- - the balance of the net proceeds, if any, will be used for general corporate purposes, including working
capital, and research and development.
The Company reservesdevelopment, and potential acquisitions of or
investments in complementary businesses.
We reserve the right to vary the use of proceeds among the categories listed
above because the Company'sour ability to use the proceeds in the approximate amounts listed
is dependent on a number of factors, including the unexpected costs of equipment
and other capital expenditures, the progress of new product research and
development and the continued success of the Company'sour products. Pending such uses, the Company intendswe
intend to invest the net proceeds from this offering in investment grade,
interest-bearing securities.
From time to time we evaluate potential opportunities for acquisitions of and
investments in complementary businesses, but we cannot assure you that we will
complete any particular acquisition or investment. We have no present commitment
or agreement with respect to a material acquisition of or investment in another
business.
DIVIDEND POLICY
The Company hasWe have never declared or paid cash dividends on itsour common stock and doesdo not
anticipate that itwe 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, the Companyus from paying dividends on itsour common stock, but applicable state law may limit the payment of dividends.
Thestock.
Our present policy of the Company is to retain earnings, if any, to provide funds for the
operation and expansion of itsour business.
1214
16
PRICE RANGE OF COMMON STOCK
The Company'sOur common stock has traded publiclybegan trading on the Nasdaq National Market under the symbol
"CREE" sinceCREE on February 8, 1993, the date of the Company's
initial public offering.1993. The following table sets forth the high and low sales
prices for the Company'sour common stock for the periods indicated as reported byon the Nasdaq
National Market.Market and as adjusted for the two-for-one stock split effective July
26, 1999.
HIGH LOW
------------ --------------- ---
FISCAL 19971998:
First Quarter ....................................Quarter............................................. $ 15.75010.250 $ 8.2505.875
Second Quarter ................................... 14.000 8.875Quarter............................................ 14.750 7.813
Third Quarter .................................... 15.875 9.375Quarter............................................. 9.813 6.750
Fourth Quarter ...................................Quarter............................................ 8.813 7.000
FISCAL 1999:
First Quarter............................................. $ 8.750 $ 5.250
Second Quarter............................................ 23.500 6.813
Third Quarter............................................. 26.625 15.125
9.500Fourth Quarter............................................ 36.688 18.625
FISCAL 19982000:
First Quarter ....................................Quarter............................................. $ 20.50044.750 $ 11.75023.500
Second Quarter ................................... 29.500 15.625
Third Quarter .................................... 19.625 13.500
Fourth Quarter ................................... 17.625 14.000
FISCAL 1999
First Quarter .................................... $ 17.500 $ 10.000
Second Quarter ................................... 47.000 13.625Quarter............................................ 79.000 32.125
Third Quarter (through January 11,December 30, 1999) ......... 53.250 41.750................. 88.500 74.375
On January 12,December 30, 1999, the last reported sale price reported on the Nasdaq National Market
for theour common stock was $48.50$84.875 per share. On December 27, 1998,30, 1999, there were
approximately 386436 holders of record of theour common stock.
1315
17
CAPITALIZATION
The following table sets forth theour capitalization of the Company as of December
27, 1998September 26, 1999 on an
actual and as adjusted basis to reflect the sale of 1,300,0002,600,000 shares of common
stock offered by the Company hereby,that we are offering with this prospectus, at an estimatedassumed offering price of
$48.50$84.875 per share, after deducting the estimated underwriting discount and theour estimated
offering expenses payable by the Company and the application
ofapplying the net proceeds. See "UseThe total number of Proceeds."shares of
our common stock outstanding as of September 26, 1999, as adjusted for this
offering in the table below, excludes 4,072,633 shares of common stock reserved
for issuance in connection with the exercise of stock options and warrants
outstanding at September 26, 1999, of which 200,149 shares were issued between
September 26, 1999 and December 26, 1999.
DECEMBER 27, 1998
-----------------------------SEPTEMBER 26, 1999
----------------------
ACTUAL AS ADJUSTED(1)ADJUSTED
-------- ----------- ---------------
(IN THOUSANDS)
Cash and cash equivalents .......................................equivalents................................... $ 12,769 $ 61,85941,226 $250,869
======== ========
Long-term debt, less current portion ............................ $ 9,879 $ --
Shareholders' equity:
Preferred stock, $0.01 par value; 3,000 shares authorized;
none issued and outstanding .......................................outstanding............................ $ -- $ --
Common stock, $0.005$0.0025 par value; 30,00060,000 shares authorized;
12,92029,500 shares issued and outstanding; 14,220outstanding actual; 32,100
shares issued and outstanding as adjusted (1) .................................. 65 71adjusted.............. 74 80
Additional paid-in capital ..................................... 49,583 108,667capital................................ 112,180 321,817
Retained earnings ............................................... 10,341 10,341earnings........................................... 21,031 21,031
-------- --------
Total shareholders' equity ................................... 59,989 119,079equity.................................. 133,285 342,928
-------- --------
Total capitalization ........................................ $ 69,868 $119,079capitalization........................................ $133,285 $342,928
======== ========
- -------------------
(1) Excludes 1,984,547 shares of common stock reserved for issuance upon the
exercise of stock options and warrants outstanding at December 27, 1998, of
which 78,513 shares were issued between December 27, 1998 and January 11,
1999.
1416
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SELECTED CONSOLIDATED FINANCIAL DATA
The CompanyWe derived the statement of income data for the years ended June 30, 1996 and 1997, June
28, 1998 and June 28, 1998,27, 1999 and balance sheet data as of June 28, 1998 and June
27, 1999 from the audited financial statements included in this prospectus. The
financial statements for the periods ended June 30, 1997 and June 28, 1998 from the audited financial statements in this prospectus. Those
financial statements were
audited by PricewaterhouseCoopers LLP, independent accountants. The Companyfinancial
statements for the year ended June 27, 1999 were audited by Ernst & Young LLP,
independent auditors. We derived the statement of income data for the years
ended June 30, 19941995 and 19951996 and the balance sheet data as of June 30, 1994,
1995,
1996 and 19961997 from audited financial statements that are not included in this
prospectus. The CompanyWe derived the statement of income data for the sixthree months ended
December 28, 1997September 27, 1998 and December 27, 1998September 26, 1999 and balance sheet data at December 27, 1998September
26, 1999 from the unaudited financial statements included in this prospectus. The Company's management believesWe
believe that the unaudited historical financial statements contain all
adjustments needed to present fairly the information included in those
statements, and that the adjustments made consist of normal recurring
adjustments. Historical results are not necessarily indicative of results of
operations to be expected in the future, and the results for the sixthree months
ended December 27, 1998September 26, 1999 are not necessarily indicative of results to be
expected for the entire year. The following
selected consolidated financial datashares used in calculating earnings per share
in the table below are adjusted for our two-for-one stock split effective July
26, 1999. You should be read this information in conjunction with our financial
statements and other financial data included elsewhere in this prospectus or
incorporated by reference from our reports filed with the Company's Consolidated Financial StatementsSecurities and
notes thereto,Exchange Commission and with
Management'sthe section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.Operations."
YEARS ENDED ----------------------------------------------------------------
JUNE 30,THREE MONTHS ENDED
---------------------------------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 28, 1994(1)JUNE 27, SEPT. 27, SEPT. 26,
1995 1996 1997 1998 ----------- ------------ ----------- -------------1999 1998 1999
-------- -------- -------- -------- -------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenue:
Product revenue, net ................... $ 3,534 $ 5,989 $ 9,689 $ 19,823 $ 34,891
Contract revenue, net .................. 3,956 3,011 3,945 6,535 7,640
License fee income ..................... -- -- 1,423 2,615 --
------- -------- ------- --------- ---------
Total revenue ....................... 7,490 9,000 15,057 28,973 42,531
Cost of revenue:
Product revenue, net ................... -- 4,244 8,411 13,388 21,727
Contract revenue, net .................. -- 1,773 3,078 5,707 6,252
------- -------- ------- --------- ---------
Total cost of revenue ............... 5,923 6,017 11,489 19,095 27,979
------- -------- ------- --------- ---------
Gross profit ............................ 1,567 2,983 3,568 9,878 14,552
Operating expenses: .....................
Research and development ............... 712 1,194 1,286 1,826 1,774
Sales, general and administrative ...... 1,740 2,268 2,917 4,301 4,131
Other (income) expense .................. 3 (1) (11) 639 502
------- -------- ------- --------- ---------
Income (loss) from operations ........... (888) (478) (624) 3,112 8,145
Interest income, net .................... 457 461 867 607 730
------- -------- ------- --------- ---------
Income (loss) before income taxes ...... (431) (17) 243 3,719 8,875
Income tax expense ...................... -- -- -- 177 2,600
------- -------- ------- --------- ---------
Net income (loss) ....................... $ (431) $ (17) $ 243 $ 3,542 $ 6,275
======= ======== ======= ========= =========
Earnings per share:
Basic .................................. $ (0.04) $ 0.00 $ 0.02 $ 0.28 $ 0.49
======= ======== ======= ========= =========
Diluted ................................ $ (0.04) $ 0.00 $ 0.02 $ 0.27 $ 0.47
======= ======== ======= ========= =========
Shares used in per share calculation:
Basic .................................. 10,337 10,367 11,826 12,455 12,863
======= ======== ======= ========= =========
Diluted ................................ 10,337 10,367 12,615 13,126 13,493
======= ======== ======= ========= =========
SIX MONTHS ENDED
---------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
------------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
STATEMENT OF INCOME DATA:
Revenue:
Product revenue, net ...................net.................... $ 16,3695,989 $ 23,5259,689 $19,823 $34,891 $53,464 $10,720 $18,257
Contract revenue, net .................. 3,944 2,792net................... 3,011 3,945 6,535 7,640 6,586 1,559 1,791
License fee income .....................income...................... -- 1,423 2,615 -- -- --------- ----------- --
------- ------- ------- ------- ------- ------- -------
Total revenue ....................... 20,313 26,317revenue......................... 9,000 15,057 28,973 42,531 60,050 12,279 20,048
Cost of revenue:
Product revenue, net ................... 10,365 11,792net.................... 4,244 8,411 13,388 21,727 26,977 5,415 9,498
Contract revenue, net .................. 3,252 2,252
--------- ---------net................... 1,773 3,078 5,707 6,252 4,943 1,207 1,136
------- ------- ------- ------- ------- ------- -------
Total cost of revenue ............... 13,617 14,044
--------- ---------revenue................. 6,017 11,489 19,095 27,979 31,920 6,622 10,634
------- ------- ------- ------- ------- ------- -------
Gross profit ............................ 6,696 12,273profit.............................. 2,983 3,568 9,878 14,552 28,130 5,657 9,414
Operating expenses:
.....................
Research and development ............... 920 1,927development................ 1,194 1,286 1,826 1,774 4,443 806 931
Sales, general and administrative ...... 1,985 2,668administrative....... 2,268 2,917 4,301 4,131 6,064 1,218 1,927
Other (income) expense .................. 390 567
--------- ---------expense.................... (1) (11) 639 502 1,041 269 101
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations ........... 3,401 7,111operations............. (478) (624) 3,112 8,145 16,582 3,364 6,455
Interest income, net .................... 332 135
--------- ---------net...................... 461 867 607 730 1,060 115 569
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes ...... 3,733 7,246taxes....... (17) 243 3,719 8,875 17,642 3,479 7,024
Income tax expense ...................... 1,093 2,029
--------- ---------expense........................ -- -- 177 2,600 4,940 1,113 2,388
------- ------- ------- ------- ------- ------- -------
Net income (loss) ................................................ $ 2,640(17) $ 5,217
========= =========243 $ 3,542 $ 6,275 $12,702 $ 2,366 $ 4,636
======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ..................................Basic................................... $ 0.210.00 $ 0.41
========= =========
Diluted ................................0.01 $ 0.200.14 $ 0.39
========= =========0.24 $ 0.47 $ 0.09 $ 0.16
======= ======= ======= ======= ======= ======= =======
Diluted................................. $ 0.00 $ 0.01 $ 0.13 $ 0.23 $ 0.45 $ 0.09 $ 0.15
======= ======= ======= ======= ======= ======= =======
Shares used in per share calculation:
Basic .................................. 12,699 12,876
========= =========
Diluted ................................ 13,522 13,541
========= =========Basic................................... 20,734 23,652 24,911 25,726 27,015 25,840 29,337
======= ======= ======= ======= ======= ======= =======
Diluted................................. 20,734 25,230 26,251 26,987 28,432 26,498 31,214
======= ======= ======= ======= ======= ======= =======
JUNE 30,
---------------------------------------------------------------------- JUNE 28, DECEMBERJUNE 27, 1994SEPT. 26,
1995 1996 1997 1998 1998
--------- --------- ----------- ----------- -----------1999 1999
------- ------- ------- -------- -------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 4,902equivalents........................ $ 3,748 $10,162 $10,448 $17,680 $ 10,16242,506 $ 10,448 $ 17,680 $ 12,76941,226
Working capital ................................... 11,006capital.................................. 9,970 18,596 21,013 27,603 24,38360,222 55,640
Total assets ...................................... 20,018assets..................................... 20,924 43,796 50,137 72,724 78,103
Long-term debt, including current portion ......... 14 -- -- -- 8,667 10,000144,217 149,105
Shareholders' equity .............................. 19,334equity............................. 19,504 40,672 45,125 54,865 59,989130,022 133,285
- -------------------
(1) During this period, the Company did not report cost of revenue by type.
1517
19
MANAGEMENT'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 MARKETS FOR OUR PRODUCTS AND TRENDS IN REVENUE, GROSS
MARGINS AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS INCLUDING
WORDS SUCH AS "MAY,All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in revenue, gross
margins and anticipated expense levels, as well as other statements, including
words such as "may," "WILL,"will," "ANTICIPATE,"anticipate," "BELIEVE,"believe," "PLAN,"plan," "ESTIMATE,"estimate,"
"EXPECT,"expect," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, 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 "RISK FACTORS" AS WELL AS OTHER RISKS AND
UNCERTAINTIES REFERENCED IN THIS PROSPECTUS."intend" and other similar expressions constitute forward looking
statements. These forward looking statements are subject to business and
economic risks and uncertainties, 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 "Risk Factors" as well as other risks and
uncertainties referenced in this prospectus.
OVERVIEW
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC. We recognize product revenue at the time
of shipment or in accordance with the terms of the relevant contract. We derive
the largest portion of our revenue from the sale of blue and green LED products.
We offer LEDs at two brightness levels --levels: high brightness blue and green products
and standard brightness blue products. Our LED devices are utilized by end users
for automotive dashboard backlighting, liquid crystal display, ("LCD")or LCD,
backlighting, (including use inincluding wireless handsets),handsets and other consumer products, indicator
lamps, miniature white light conversion
(as replacements for miniature incandescent bulbs),lights, indoor sign and arena displays, outdoor full
color stadium displays, traffic signals and other lighting applications. LED
products represented 48%51% of our revenue in both
fiscal 19981999 and the first six months of48% in fiscal 1999.
The high brightness products, which were introduced to the market in September
1998 in limited quantities, are currently being integrated into our
manufacturing facility for full production.1998.
During the first six monthsquarter of fiscal 1999, margins realized on the2000, revenues derived from sales of high
brightness productsLEDs were substantially lowergreater than those derived from our standard blue50% of the total LED product, as
the yield was lower than the standard product.sales mix. Historically,
we have experienced low margins with many new product introductions, and we are workingincluding
the high brightness products. We have continued to make improvements to output
and yield during the second half of fiscal 1999.
We anticipate thatsince the high brightness products will contribute greater volumes
as yield improvements are obtained.
We believe thatwere introduced in order to increase market demandfiscal 1999.
During the first quarter of fiscal 2000, improved yields for all of ourthe high brightness
LED products we must continuecontributed to substantially lower average sales prices. Historically, we
have been successfula 16% reduction in achieving lowerunit costs forfrom the standard blue product.fourth
quarter of fiscal 1999. During the remainder of fiscal 1999,2000, we plan to focus on
reducing unit costs through higher production yields and from higherincreased volumes as
fixed costs are spread over a greater number of units.
We also derive revenue from the sale of advanced materials made from SiC wafers that are used primarily for device
production and research and development. We alsoIn addition, we sell SiC crystals to
C3, Inc. ("C3"), which incorporatesuses them in gemstone applications. During late
fiscal 1998 and the first six months of fiscal 1999, C3 purchased equipment
from us, which has more than doubled the capacity for the production of
crystals for C3. Sales of advanced materials made
from SiC represented 34%38% of our revenue in fiscal 19981999 and approximately 41%34%
during fiscal 1998. During late fiscal 1998, fiscal 1999 and early fiscal 2000,
C3 purchased crystal growth equipment we constructed but retain to use in
manufacturing material for C3; this equipment has more than doubled our capacity
allocated to the production of crystals for C3. In the fall of 1999, C3
announced lower sales revenue and higher inventory levels than anticipated as
well as launched a new marketing campaign for its gemstone products. Recently,
we agreed that C3 could reschedule approximately one-half of its purchase
commitments from the first six monthshalf of fiscal 1999.calendar 2000 to the second half of the year.
We anticipate that overall sales to C3 will decrease in calendar 2000 and we may
use manufacturing capacity that becomes available due to a reduction in sales to
C3 for our other product applications.
The balance of our revenue, 11% for fiscal 1999 and 18% for fiscal 1998, and 11% for the first six
months of fiscal 1999, is
derived from government contract funding. Under various programs, U.S.
Government entities furthersupport the development of our technology by supplementing
our research and development efforts. All resultingfunding. We retain ownership of patent rights on
technology obtained through these efforts remains our property after the
completion of the contract,developed under such contracts, subject to certain license rights
retained by the
18
20
government. Contract revenue includes funding of 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 the contract
(i.e., certain cost-share arrangements), we report direct costs as research and
development expenses with related reimbursements recorded as an offset to those
expenses.
16
In June 1999, we announced the introduction of the first of a family of RF and
microwave transistor products made from SiC. These products are designed for use
in a variety of power amplification applications. A second phase of transistor
products is expected to be available in fiscal 2000. We expect that these
products will be marketed to a variety of amplifier producers for a number of
uses, including wireless base station and digital broadcast applications. While
distribution of these products on a sample basis commenced in early fiscal 2000,
we believe that these products will be sold in limited quantities as evaluation
kits during fiscal 2000 since design cycles for the target applications
generally exceed six months. There can be no assurance that customers will
develop applications requiring commercially significant volumes of our RF
products or that such products will be successful in the market.
In September 1996, we entered into an agreement with Siemens AG ("Siemens")
under which Siemens
agreed to purchase a fixed quantity of our blue LED chips. In December 1998,
this agreement was amended to provide for additional shipments of LED products
including our high brightness LEDs, through September 1999. This contract calls
for declining prices based onwas assigned to Osram OS, an increase in the numberindirect
subsidiary of units shipped.
Siemens, effective January 1, 1999. Siemens (including its Osram
OS subsidiary) accounted for 40%37% of our revenue for fiscal 1999 and 40% in
fiscal 1998.
In August 1999, we entered into a new purchase agreement with Osram OS pursuant
to which Osram OS agreed to purchase, and we are obligated to ship, stipulated
quantities of both fiscal 1998standard brightness and high brightness LED chips, as well as
SiC wafers, through September 2000. This contract gives Osram OS limited rights
to defer shipments. It also provides for recovery of liquidated damages, and
actual damages in some instances, if we materially default in meeting shipment
schedules. The contract provides for higher unit prices early in the first six
monthscontract
term, with unit price reductions becoming available as the cumulative volume of
fiscal 1999.products shipped increases.
We are also area party to certain license agreements related to our technology for
the manufacture of blue and green LEDs under which we have received one-time license fees. Under theseThe
license agreements,fee revenue was recognized in the year our obligation to transfer the
licensed technology was completed infulfilled.
RECENT DEVELOPMENTS
On January 3, 2000, we announced preliminary unaudited results for the year thatquarter
ended December 26, 1999. For the license feequarter, our revenue increased 70% to $23.9
million from $14.0 million for the quarter ended December 27, 1998. Operating
income for the quarter ended December 26, 1999 was recognized.
On September 24, 1997,$8.2 million compared to $3.7
million for the Board of Directors changed our fiscal year fromquarter ended December 27, 1998. Net income for the twelve months ending June 30,quarter
ended December 26, 1999 was $5.8 million compared to a 52 or 53 week year ending on$2.9 million for the
last Sunday
inquarter ended December 27, 1998. Earnings per diluted share for the month of June. Our 1998 fiscal year extended from July 1, 1997quarter
ended December 26, 1999 were $0.18 compared to June
28,$0.10 for the quarter ended
December 27, 1998.
19
21
RESULTS OF OPERATIONS
The following table shows our statement of operationsincome data expressed as a percentage
of total revenue for the periods indicated:
THREE MONTHS
YEARS ENDED SIX MONTHS ENDED
--------------------------------- ----------------------------------------------------------- ---------------------
JUNE 30, JUNE 30,28, JUNE 30, DECEMBER 28, DECEMBER 27, 1996SEPT. 27, SEPT. 26,
1997 1998 19971999 1998 1999
-------- -------- -------- --------- --------- --------- ------------- -------------
Revenue:
Product revenue, net ...................... 64.3%net......................... 68.4% 82.0% 80.6% 89.4%89.0% 87.3% 91.1%
Contract revenue, net ..................... 26.2net........................ 22.6 18.0 19.4 10.611.0 12.7 8.9
License fee income ........................ 9.5income........................... 9.0 -- -- -- --
----- ----- ----- ----- -----
Total revenue ...........................revenue............................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue, net ...................... 55.9 46.2 51.1 51.0 44.844.9 44.1 47.4
Contract revenue, net ..................... 20.4net........................ 19.7 14.7 16.0 8.68.3 9.8 5.6
----- ----- ----- ----- -----
Total cost of revenue ................... 76.3revenue..................... 65.9 65.8 67.0 53.453.2 53.9 53.0
----- ----- ----- ----- -----
Gross margin ............................... 23.7margin................................... 34.1 34.2 33.0 46.646.8 46.1 47.0
Operating expenses:
Research and development .................. 8.5development..................... 6.3 4.2 4.5 7.37.4 6.6 4.6
Sales, general and administrative ......... 19.4administrative............ 14.9 9.6 9.8 10.1 9.9 9.6
Other expense ............................. --expense................................ 2.2 1.2 1.91.7 2.2 0.4
----- ----- ----- ----- -----
Income (loss) from operations ........... (4.2)operations.................... 10.7 19.2 16.8 27.027.6 27.4 32.2
Interest income, net ....................... 5.8net........................... 2.1 1.7 1.6 0.51.8 0.9 2.8
----- ----- ----- ----- -----
Income before income taxes .............. 1.6taxes................ 12.8 20.9 18.4 27.529.4 28.3 35.0
Income tax expense ......................... -- 0.6 6.1 5.4 7.78.2 9.0 11.9
----- ----- ----- ----- -----
Net income .............................. 1.6%income................................ 12.2% 14.8% 13.0% 19.8%21.2% 19.3% 23.1%
===== ===== ===== ===== =====
SIXTHREE MONTHS ENDED DECEMBERSEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
AND DECEMBER 28, 1997
REVENUE.Revenue. For the quarter ended September 26, 1999, we reported revenue of $20.0
million reflecting a 63% increase over the first quarter of fiscal 1999. First
quarter product revenue of $18.3 million, which includes sales of LEDs and
materials, increased 70% over the first quarter of fiscal 1999. Higher product
revenue was primarily the result of LED revenue growth of 92% in the first
quarter of fiscal 2000 as compared to the same period in the prior year. Much of
this growth was attributed to a 121% increase in LED volumes over the comparable
period with a substantially higher mix of high brightness blue and green LED
products. During the first quarter of fiscal 2000, revenue from high brightness
chips surpassed revenues from our standard brightness products although unit
volumes of the standard brightness product were higher. Average LED sales prices
paid by customers declined 15% in the first quarter of fiscal 2000 compared with
the first quarter of fiscal 1999. During the remaining quarters of fiscal 2000,
average sales prices for standard brightness and high brightness LED products
are expected to remain stable or decline slightly at a reduced pace from
reductions experienced in previous years. We believe that increased volumes will
offset any decline in average LED sales prices during the remaining quarters of
fiscal 2000.
LED shipments also increased as a result of the new Osram OS contract which
calls for a 44% increase in chip shipments over the previous agreement and
extends the Osram OS purchase commitment through the first quarter of fiscal
2001. While we believe that Osram OS will continue
20
22
to be our largest customer during fiscal 2000, we expect that the percentage of
our revenue attributable to Osram OS will decline as shipments increase to other
customers. However, there can be no assurance that revenue from new or existing
customers will reduce the concentration of our total revenues derived from the
Osram OS contract.
Revenue attributable to sales of SiC materials was 46% higher in the first
quarter of fiscal 2000 than in the same period of fiscal 1999. The increased
30%revenue was due to significant contributions made by our gemstone products and
improvements in throughput and yield in wafer production. Gemstone product sales
during the period benefited from $20.3the added capacity provided under the C3 supply
agreement; however, as a result of rescheduling purchase commitments from C3, we
anticipate that revenue from sales of gemstone products to C3 will be lower in
calendar 2000. Wafer volume has also increased. We believe this increase is due
in large part to our continued success in offering wafer products with lower
defect densities, which enable customers to conduct advanced research for
microwave and power applications. Contract revenue received from U.S. Government
agencies increased 15% during the first quarter of fiscal 2000 as compared to
the same quarter in the prior year due to additional contract awards received in
late fiscal 1999 and in the first quarter of fiscal 2000.
Gross Profit. Our gross margin was 47% for the quarter ended September 26, 1999
as compared to 46% for the same period in the prior year. Our sustained
profitability stems from higher throughput and manufacturing yield on LED and
materials products, thereby lowering our cost per unit and successfully matching
or offsetting lower sales prices. We have also been successful in increasing LED
revenue by lowering prices and raising the volume of high brightness products
produced. For the remainder of fiscal 2000, we plan to continue the strategy of
seeking to lower LED costs and anticipate that the greatest cost saving benefits
will be derived from greater volume and higher yields on our high brightness
products. During the second half of calendar 2000, we plan to begin a migration
of LED production from two-inch wafers to three-inch wafers in order to increase
efficiency and lower cost. As is typical with previous transitions to larger
size wafers, we may experience lower yields for a period of time until the
production process is normalized. We believe that continued yield improvement on
our two-inch process will substantially offset lower yields that we may
experience with our migration to the three-inch process, although we cannot
assure you of such results. Lower costs also have been achieved on wafer
products due to improved efficiency. Margins from gemstone products have also
improved due to higher yields.
Research and Development. Research and development expenses for the quarter
ended September 26, 1999 increased 16% over the comparable prior year period.
This was due to increases in internal research and development efforts not
included in the scope of government contract funding as well as unreimbursed
development costs under our contract with Microvision, Inc. In May 1999, we
signed an agreement with Microvision under which Microvision is providing $2.6
million for the development of edge-emitting LEDs and blue laser diodes. As
development costs are incurred under this program, funding from Microvision is
offset against these expenses. During the quarter ended September 26, 1999,
spending under our development program with Microvision was higher than funding
received.
Sales, General and Administrative. Sales, general and administrative expenses
for the quarter ended September 26, 1999 increased by 58% over the same period
in the prior year due to increased costs to support the growth of our business.
As a percentage of revenue, sales, general and administrative costs remained at
10% of revenue in the first quarter. We expect this percentage to remain
comparable for the remainder of fiscal 2000.
Other Expense. During the first quarter of fiscal 2000, we continued to perform
under an agreement with C3 to sell equipment we manufacture to C3 at cost plus a
comparable overhead allocation to those incurred from government contracts. The
overhead allocation was recorded as "other operating
21
23
income;" however, the amount was more than offset by unrelated asset writeoffs
for the first quarters of fiscal 2000 and of fiscal 1999.
Interest Income, Net. Net interest income increased by $454,000 in the first
quarter of fiscal 2000 over the first quarter of fiscal 1999. This was due
primarily to the investment of cash proceeds from our common stock offering in
February 1999. In addition, a portion of the proceeds from the offering were
used to repay a $10.0 million loan balance in the third quarter of fiscal 1999;
therefore, no interest expense was incurred in the first quarter of fiscal 2000.
Interest expense incurred with the loan was capitalized as a part of the
construction improvements made to our facility in fiscal 1999. When
manufacturing operations were moved to the new site in the first quarter of
fiscal 1999, portions of the interest associated with the completed work were
expensed. For the first quarter of 1999 total interest incurred was $196,000
with only $84,000 being eligible for capitalization, and therefore $112,000 was
expensed.
Income Tax Expense. Income tax expense for the first quarter of fiscal 2000 was
approximately $2.4 million compared to $1.1 million in the first six monthsquarter of
fiscal 1999. This increase resulted from increased profitability during the
first quarter of fiscal 2000 over the same period of fiscal 1999.
FISCAL YEARS ENDED JUNE 27, 1999, JUNE 28, 1998 AND JUNE 30, 1997
Revenue. Revenue grew 41% from $42.5 million in fiscal 1998 to $26.3$60.1 million in the first six months of
fiscal 1999. This increase was attributable to an increase inhigher product revenue, of 44%which
rose 53% from $16.4$34.9 million in the first six months of fiscal 1998 to $23.5$53.5 million in the first
six months of fiscal 1999. This
riseincrease in product revenue was a result of the 128% increase62% rise in sales of our LED
products and 58% increase in the first six months ofmaterials revenue in fiscal 1999 compared to the first six months of fiscal
1998.
Growth in LED volume was
due in part toresulted from the introduction of the new high brightness
devices but mostly
was a result of
17
and improvements in the product design of and strong demand for theour
standard brightness product. ThisWhile we continue to improve our manufacturing
process and yields on our high brightness products, we must continue to
significantly increase our production output to meet the growing demands of our
customers. We believe that our LED products are particularly attractive to the
marketplace due to our low prices and industry standard vertical structure.
During fiscal 1999, LED volume increase was partly offset by a 40% decline in
thegrew 160% while average sales price of the standard blue LED chip during this same period.prices declined
38%.
We believeexpect that in order to increase volume,market demand for all of our LED products,
we must continue to lower average sales prices.prices, although pricing is anticipated
to be more stable in fiscal year 2000 than in prior years. Historically, we have
been successful in matching lower sales prices with lower costs. During fiscal
2000, we plan to focus on reducing costs through higher production yields and
from greater volumes as fixed costs are spread over a greater number of units.
We are continuing to ramp up production volume for our high brightness LED
products, which were introduced during fiscal 1999. During the fourth quarter of
fiscal 1999, revenue from high brightness products made up more than 25% of our
total LED revenue. We believe revenues from these products will surpass revenues
from our standard brightness product during fiscal 2000; however, there can be
no assurance that the product volumes will increase or that we will achieve the
required yield improvements.
Revenue attributable to sales of SiC material was 84%58% higher in the first six
months of fiscal 1999 than
in the same period of fiscal 1998 due to a significant increase in sales to C3
for gemstone applications.applications and strong demand for wafer products. During the first
six months of fiscal
1998, C3 was in initial stages of operation; therefore, unit sales were limited.
Revenue from sales of SiC wafers increased 43%were higher in the
first six months of fiscal 1999 as compared to the first six months of
fiscal 1998, due to quality improvements in wafers, along with the availability
of the
larger two-inch waferwafers during fiscal 1999.
22
24
During the first six months of fiscal 1999, sales from our displays business declined 96% overfrom the prior
year period as we have chosenchose to de-emphasize thisdiscontinue that product line. Contract revenue
received from U.S. Government agencies also declined 29%14% during the first six months of fiscal 1999
compared to the first six months of fiscal 1998, as a significant contract that funded optoelectronic
research was exhausted in early fiscal 1999. GROSS PROFIT. Gross margin climbed to 47% of revenue during the first six
months of fiscal 1999 as compared to 33% during the first six months of fiscal
1998. This increase is predominantly attributable to design and manufacturing
improvements that occurred over the past year resulting in significant
reductions in cost. With the introduction of the new conductive buffer LED
technology in the fourth quarter of fiscal 1998, we were able to significantly
lower costs of production due to fewer manufacturing steps required with the
new chip structure and improved yield. During the first six months of fiscal
1998, we introduced a smaller LED chip size and, in December 1997, we began to
fabricate devices on a larger two-inch wafer. As of December 1997, we were
still in the process of establishing these new manufacturing designs and had
not achieved production efficiency. In addition, the larger two-inch wafer had
not been in full production for much of the period; therefore, average die
yields during the first six months of fiscal 1998 were significantly lower.
Wafer costs for SiC material sales also declined 47% during the first six
months of fiscal 1999 over the comparative period due to more efficient
processes and improved yield.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 109% in
the first six months of fiscal 1999 to $1.9 million from $0.9 million in the
first six months of fiscal 1998. Much of this increase was caused by
significantly higher costs for the initial development of the new high
brightness LED product. We anticipate that internal funding for the development
of new products will continuecontract revenue to
grow in future periods, while we believe that
government funding for our development projects will remain constant or
decrease.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expenses
increased 34% in the first six months of fiscal 1999 to $2.7 million from $2.0
million in the first six months of fiscal 1998 due primarily to two insurance
events that were recorded in the second quarter of fiscal 1998. As a result of
the dismissal of a securities class action lawsuit in November 1997, we were
reimbursed $0.2 million for costs incurred in connection with the lawsuit. Most
of these expenses were recordedincrease slightly in fiscal 1997. In addition,2000 as we received a $0.2
million reimbursement of medical expenses due to a negotiated cost capadditional contract awards in
a
partially self-funded insured health plan. As a result of our increased
profitability during the first six months oflate fiscal 1999 over the first six
months of fiscal 1998, the profit sharing accrual (which is based on 5% of net
income) has also grown $0.2 million. We anticipate that total sales, general
and administrative costs will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue they will remain
constant or possibly decline.
OTHER (INCOME) EXPENSE. Other expense increased 45% to $0.6 million during the
first six months of fiscal 1999 from $0.4 million for the first six months of
fiscal 1998. In the first six months of fiscal 1999, we realized impairments to
leasehold costs as a result of management's decision to move equipment from our
leased facility to our new manufacturing site. This was offset somewhat by
income recognized under our equipment build-out agreement with C3. In 1998, we
sold to C3 equipment manufactured by us at cost plus a reasonable overhead
allocation. The overhead allocation was recorded as "Other income."
18
INTEREST INCOME, NET. Interest income, net has decreased 59% to $0.1 million in
the first six months of fiscal 1999 from $0.3 million in the first six months
of fiscal 1998 due to interest expense incurred. In November 1997, we obtained
a term loan from NationsBank to fund the acquisition and construction of our
manufacturing facility in Durham, North Carolina. While much of the interest
was capitalized during the last half of fiscal 1998, the majority of the
interest incurred in the first half of fiscal 1999 has been expensed.
INCOME TAX EXPENSE. Income tax expense for the first six months of fiscal 1999
was $2.0 million compared to $1.1 million in the first six months of fiscal
1998. This increase resulted from increased profitability during the first six
months of fiscal 1999 over fiscal 1998. Our effective tax rate during the first
six months of fiscal 1999 was 28% compared to 29% in the first six months of
fiscal 1998.
FISCAL YEARS ENDED JUNE 28, 1998 AND JUNE 30, 1997 AND 1996
REVENUE.1999.
Revenue increased 47% from $29.0 million in fiscal 1997 to $42.5 million in
fiscal 1998. A significant portion of the rise was attributable to the 132%
increase in LED volume sold pursuant to an amendment to theour purchase agreement
with Siemens. This agreement and two subsequent amendments provided $6.8 million
in additional revenue in fiscal 1998 over fiscal 1997. This significant increase
in volume sold was offset by a 32% decline in our average sales price per LED
sold.
Wafer and other materials revenue increased 110% in fiscal 1998 over fiscal 1997
due to a 29% increase in wafer volume associated with greater interest inby the
worldwide research community forin SiC-based products, as well as revenues from C3, which increased 89% in fiscal 1998 over fiscal 1997.C3.
C3 activity grew as a result of the execution in July 1997 of the new supply agreement and
development agreement.agreements. Revenues for theour displays business increased 37% in
fiscal 1998 over fiscal 1997 due to increased interest among customers for
indoor video displays.
Contract revenue increased 17% to $7.6 million during fiscal 1998 as compared to
fiscal 1997, as a result of a change in the mix of funding from available
contracts. FundingContracts funded for fiscal 1997 included a higher amount of proceeds
recognized under two cost-share arrangements. For these arrangements, funds are
recorded as a reduction in research and development expense rather than as
contract revenue. As funds associated with these two programs were exhausted
during fiscal 1998, we shifted our resources to programs under a cost-plus or
catalog price arrangement, in which funding is recorded as contract revenue.
Therefore, contract revenue was higher in fiscal 1998 than 1997.
Included in revenue for fiscal 1997 is a one-time license fee of $2.6 million.
This license fee was earned pursuant to a License and Technology Transfer
Agreement entered into in September 1996 with Shin-Etsu Handotai Co. Ltd.
("Shin-Etsu").Shin-Etsu. Pursuant to this
agreement, we granted Shin-Etsu a license to use certain epitaxial and device
fabrication process technology forused in the manufacture of our standard
brightness blue LED product. We did not record any license fee revenue during
fiscal 1998.
InGross Profit. Gross margin climbed to 47% of revenue during fiscal 1997, our revenue of $29.0 million represented a 92%1999 as
compared to 34% during fiscal 1998. This increase over
fiscal 1996 revenue of $15.1 million. The most substantial increase in revenueis predominantly attributable
to design and manufacturing improvements that occurred in fiscal 1999 resulting
in significant reductions in cost. With the introduction of our new conductive
buffer LED product line as a 70% increasetechnology in sales was recorded. Muchthe fourth quarter of this increase was attributablefiscal 1998, we were able to
higher volume stemming fromsignificantly lower costs of production due to fewer manufacturing steps
required with the original
purchase agreementnew chip structure and first amendment with Siemens. Fiscal 1997 wasimproved yield. During the first year our LEDssix
months of fiscal 1998, we introduced a smaller LED chip size and, in December
1997, we began to fabricate devices on larger two-inch wafers. During much of
fiscal 1998, we were incorporated into automotive backlighting applications.
During fiscal 1997, wafer sales grew 60% over fiscal 1996 due to a greater
acceptance of SiC materialstill in the marketplace.process of establishing these new
manufacturing designs and had not achieved production efficiency. In addition,
the larger two-inch wafer had not been in full production for much of fiscal
1998; therefore, average die yields were significantly lower. During fiscal
1999, margins realized on high brightness products were lower than those derived
from our standard brightness blue LED product, as the yield from the
manufacturing process was less than our standard brightness product.
Average wafer costs for SiC material sales price per wafer was also increaseddeclined 32% during fiscal 19971999
over the comparative period due to the availability
of higher quality premium wafer products. Revenues for the displays business
increased 76% in fiscal 1997 from fiscal 1996 due to the introduction of the
modules products in that year for indoor arena applications.
Contract revenue grew 66% to $6.5 million in fiscal 1997 over fiscal 1996 due
largely to increased funding from the U.S. Government for certain research
contracts, primarily in the areas of microwave, power, blue lasermore efficient processes and basic
material development.
Results for fiscal 1996 include $1.4 million in one-time net license fee
revenue. This license fee was earned pursuant to a development license and
supply agreement entered into with Siemens in October 1995, under which we
granted Siemens a license to use certain technology to manufacture blue and
green LED products.
19
GROSS PROFIT.improved yield.
Our gross profit increased 47% to $14.6 million in fiscal 1998 over fiscal 1997.
Our gross margin was 34% for both fiscal 1998 and fiscal 1997. License fees,
which have no corresponding cost, were
23
25
included in fiscal 1997 results. Without license fee revenue, gross profit would
have been $7.3 million or 28% of revenue for fiscal 1997. The overall increase
in gross profit in fiscal 1998 resulted from higher revenue and lower LED and
material costs per unit. The lower LED and wafer costs were recognized due to
higher throughput, which more effectively utilized plant capacity and yield
efficiencies. The greater throughput enabled us to spread fixed cost investments
over a larger volume of product.products. Greater yield in LED applications resulted
from a combination of a new smaller die size and a new larger two-inch diameter
wafer, and in the fourth quarter of fiscal 1998, the introduction of the
conductive buffer technology. Yield was also higher for LED and materials due to
plant processing efficiency and a higher quality of wafer materials used in
these products.
The cost of contract revenue has increased in fiscal 1998 over fiscal 1997, due to
the change in the mix of funding from available contracts. Costs for fiscal 1997
included a higher amount of expenses recognized under two cost-share
arrangements. For these arrangements, costs are recorded as research and
development expenses rather than cost of contract revenue. When funding under
these two contracts was completed in the second quarter of fiscal 1998, all
resources were shifted to cost-plus and catalog priced contracts, where expenses
are recorded as a cost of contract revenue.
InResearch and Development. Research and development expenses increased 150% in
fiscal 1997 as1999 to $4.4 million from $1.8 million in fiscal 1998. Much of this
increase was caused by significantly higher costs for the initial development of
our new high brightness LED products. During fiscal 1999, approximately $500,000
of funding provided under our contract with Microvision was offset against
research and development expenses. The remaining $2.1 million of funding is
anticipated to be applied to research and development expenses in fiscal 2000.
We expect that including the offset of Microvision funds in fiscal 2000,
research and development expenses will remain relatively stable compared to
fiscal 1996, our gross margin climbed to 34% from
24%, respectively. License fee revenue, which has no corresponding cost, was
recorded in both years. Without license fees, gross margin would have been 28%
in fiscal 1997 as compared to 16% in fiscal 1996. Higher gross profit recorded
in fiscal 1997 stemmed from significantly improved yields and manufacturing
processes, as compared with fiscal 1996, when we experienced difficulty with
the ramp of LED production due to poor epitaxial yields. These processes were
corrected during the first six months of fiscal 1997.
Contract cost of revenue was significantly higher in fiscal 1997 than fiscal
1996 due largely to increased funding from the U.S. Government for certain
research contracts, primarily in the areas of microwave, power, blue laser and
basic material development.
RESEARCH AND DEVELOPMENT.1999 amounts.
Research and development costs decreased by 3% to approximately $1.8 million in
fiscal 1998 from approximately $1.8 million in fiscal 1997 due to a reduction in
work performed under two cost-share contracts to further theour blue laser
research. Net costs to us for these projects were
$0.3 million and $0.7 million for fiscal 1998 and 1997, respectively. These cost-share contracts concluded during the first half of fiscal
1998. Additionally, research and development costs for fiscal 1997 included a
one-time write-off of $0.1 millionapproximately $100,000 for the closure of our Eastern
European Division, located in St. Petersburg, Russia.
ResearchSales, General and development spending was higherAdministrative Expenses. Sales, general and administrative
expenses increased 47% in fiscal 1999 to $6.1 million from $4.1 million in the
fiscal 1998 due primarily to the general growth in our business. In addition, in
fiscal 1998 two insurance events were recorded that reduced expenses by
approximately $400,000. As a result of the dismissal of a securities class
action lawsuit in November 1997, thanwe were reimbursed approximately $200,000 for
costs incurred in connection with the lawsuit. Most of these expenses were
recorded in fiscal 19961997. In addition, we received approximately $200,000 in
reimbursement of medical expenses due to a negotiated cost cap in a partially
self-funded insured health plan. Also as a result of our increased profitability
during fiscal 1999 over fiscal 1998, the work performed underprofit sharing accrual (which was based
on 5% of operating income) grew approximately $400,000. We anticipate that total
sales, general and administrative costs will increase in connection with the
cost-share arrangements. These cost-share
contracts were not in place in fiscal 1996.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES.growth of our business; however, we believe that as a percentage of revenue they
will remain constant or possibly decline.
Sales, general and administrative expenses decreased 4% to $4.1 million for
fiscal 1998 from $4.3 million in fiscal 1997 due to the receipt of two one-time
insurance payments. As a result of the dismissal in November 1997 of a
securities class action lawsuit filed in October 1996, we were reimbursed
$0.2 millionapproximately $200,000 from our insurance carrier for costs incurred in defense
of the suit. In addition, as a result of a negotiated cost cap, we received a $0.2 millionan
approximate $200,000 reimbursement of medical expenses that were incurred under
a partially self-funded insured health
24
26
plan. As a percentage of revenue, these costs have decreased to 10% in fiscal
1998 from 15% in fiscal 1997.
Total sales, general and administrative expensesOther Expense. Other expense increased 47%107% to $4.3$1.1 million during fiscal 1999
from approximately $500,000 in fiscal 19971998. During fiscal 1999, we realized
impairments to leasehold costs as a result of our decision to move equipment
from $2.9 million inour leased facility to our new manufacturing site. We also wrote-off other
assets that had no future value to us. These write-offs were slightly offset by
income recognized under our equipment build-out agreement with C3. In fiscal
1996 due1998 and 1999, we sold equipment manufactured by us to higher costs associated
with additional sales personnelC3 at cost plus an
overhead allocation equivalent to focusthat recognized on our government contracts.
The overhead allocation was recorded as "Other income," however, the business on gaining new LED
customers,amount was
more than offset by the Shin-Etsu license agreement commission fee of $0.2 million and
greater legal fees in connection with the defense of a securities class action
lawsuit.
OTHER (INCOME) EXPENSE.other write-offs.
In fiscal 1998, other expense included a net loss recorded on the write-down of
leasehold improvements associated with a leased facility in Durham, North
Carolina and disposal of certain other fixed assets and a write-off of $66,000
for the remaining value of goodwill associated with the 20
acquisition of theour Real
Color Displays subsidiary. In addition, we entered into an agreement with C3 to
sell equipment manufactured by us at cost plus a reasonable overhead allocation.
The overhead allocation was recorded as "Other income;" however, the amount was
more than offset by leasehold write-offs associated with the move to our new
facility and other asset disposals. Other expense for fiscal 1997 was higher
than that recorded in fiscal 1998 as large fixed asset write-downs were recorded
as the result of a physical plant inventory. These write-downs were greater than
those recorded in fiscal 1998.
INTEREST INCOME, NET.Interest Income, Net. Interest income, net increased 45% to $1.1 million in
fiscal 1999 from $700,000 in fiscal 1998 due to higher average cash balances
being available in fiscal 1999 as a result of a public stock offering completed
in February 1999. A portion of the proceeds received from the offering was used
to repay all debt that was outstanding; therefore, during much of the third
quarter and all of the fourth quarter of fiscal 1999, there was no interest
expense incurred. In November 1997, we obtained a term loan from NationsBank to
fund the acquisition and construction of our manufacturing facility in Durham,
North Carolina. Most of that interest was capitalized during fiscal 1998.
Interest income, net increased by $0.1 millionapproximately $100,000 in fiscal 1998 over
fiscal 1997 and decreased by $0.3 million when comparing fiscal 1997
to fiscal 1996 due to higher investable cash balances available in fiscal 1998
and fiscal 1996.1998.
Cash balances were higher in fiscal 1998 as we generated approximately $12.1 million from
operations compared to approximately $6.1 million in fiscal 1997.
Also, we concluded a private equity placement in
September 1995 that increased available cashIncome Tax Expense. Income tax expense for fiscal 1999 was $4.9 million
compared to $2.6 million in fiscal 1996.
INCOME TAX EXPENSE.1998. This increase resulted from increased
profitability during fiscal 1999 over fiscal 1998. Our effective tax rate during
fiscal 1999 was 28% compared to 29% in fiscal 1998.
Our effective income tax rate increased to 29% for fiscal 1998 from a 5%
effective rate during fiscal 1997. The lower rate for fiscal 1997 resulted from
the utilization of net operating loss carryforwards.
We had
no tax provision in fiscal 1996 as we generated a net operating loss for tax
purposes.
2125
27
QUARTERLY RESULTS OF OPERATIONS
The following table showstables are our unaudited quarterly results of operations in dollar
amounts and as a percentage of revenue for the periods indicated. We have
prepared this information on a basis consistent with our audited financial
statements and included all adjustments that we consider necessary for a fair
presentation of the information for the periods presented. Amounts used in
calculating earnings per share reflect the two-for-one stock split effective
July 26, 1999. Results of operations for any fiscal quarter are not necessarily
indicative of results for any future period.
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPT. 28,-----------------------------------------------------------------------------------------
DEC. 28, MARCH 29, JUNE 28, SEPT. 27, DEC. 27, MARCH 28, JUNE 27, SEPT. 26,
1997 1997 1997 1997
----------1998 1998 1998 1998 1999 1999 1999
-------- --------- ------------ ------------------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Product revenue, net ................... $ 5,571 $ 6,940 $ 8,206 $ 8,164
Contract revenue, net .................. 1,395 1,539 2,001 1,942
-------- -------- -------- --------
Total revenue ......................... 6,966 8,479 10,207 10,106
Cost of revenue:
Product revenue ........................ 3,488 4,691 5,419 4,946
Contract revenue ....................... 1,244 1,245 1,653 1,600
-------- -------- -------- --------
Total cost of revenue ................. 4,732 5,936 7,072 6,546
-------- -------- -------- --------
Gross profit ............................ 2,234 2,543 3,135 3,560
Operating expenses:
Research and development ............... 485 579 394 527
Sales, general and administrative ...... 1,079 1,252 1,140 850
Other expense (income) ................. 204 256 (6) 390
-------- -------- -------- --------
Income from operations ................ 466 456 1,607 1,793
Interest income, net .................... 138 145 164 169
-------- -------- -------- --------
Income before income taxes ............ 604 601 1,771 1,962
Income tax expense (benefit) ............ 50 (123) 602 490
-------- -------- -------- --------
Net income ............................. $ 554 $ 724 $ 1,169 $ 1,472
======== ======== ======== ========
Earnings per share:
Basic .................................. $ 0.04 $ 0.06 $ 0.09 $ 0.12
======== ======== ======== ========
Diluted ................................ $ 0.04 $ 0.05 $ 0.09 $ 0.11
======== ======== ======== ========
Shares used in per share calculation:
Basic .................................. 12,326 12,455 12,609 12,789
Diluted ................................ 13,056 13,003 13,408 13,636
THREE MONTHS ENDED
------------------------------------------------
MARCH 29, JUNE 28, SEPT. 27, DEC. 27,
1998 1998 1998 1998
---------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Product revenue, net ................... $ 8,929net................ $8,164 $8,929 $ 9,593 $ 10,720 $ 12,805$10,720 $12,805 $14,084 $15,855 $18,257
Contract revenue, net ..................net............... 1,942 1,742 1,955 1,559 1,233 -------- -------- -------- --------1,951 1,843 1,791
------ ------ ------- ------- ------- ------- ------- -------
Total revenue .........................revenue..................... 10,106 10,671 11,548 12,279 14,038 16,035 17,698 20,048
Cost of revenue:
Product revenue, ........................net................ 4,946 5,510 5,852 5,415 6,377 6,794 8,391 9,498
Contract revenue, .......................net............... 1,600 1,430 1,573 1,207 1,045 -------- -------- -------- --------1,503 1,188 1,136
------ ------ ------- ------- ------- ------- ------- -------
Total cost of revenue .................revenue............. 6,546 6,940 7,425 6,622 7,422 -------- -------- -------- --------8,297 9,579 10,634
------ ------ ------- ------- ------- ------- ------- -------
Gross profit ............................profit.......................... 3,560 3,731 4,123 5,657 6,616 7,738 8,119 9,414
Operating expenses:
Research and development ...............development............ 527 367 487 806 1,121 1,515 1,001 931
Sales, general and administrative ......administrative... 850 1,041 1,105 1,218 1,450 1,568 1,828 1,927
Other expense (income) .................expense....................... 390 31 79 269 298 -------- -------- -------- --------311 163 101
------ ------ ------- ------- ------- ------- ------- -------
Income from operations ................operations............ 1,793 2,292 2,452 3,364 3,747 4,344 5,127 6,455
Interest income, net ....................net.................. 169 180 217 115 20 -------- -------- -------- --------347 578 569
------ ------ ------- ------- ------- ------- ------- -------
Income before income taxes ............taxes........ 1,962 2,472 2,669 3,479 3,767 4,691 5,705 7,024
Income tax expense (benefit) ............expense.................... 490 717 790 1,113 916 -------- -------- -------- --------1,314 1,597 2,388
------ ------ ------- ------- ------- ------- ------- -------
Net income ............................. $ 1,755income.......................... $1,472 $1,755 $ 1,879 $ 2,366 $ 2,851 ======== ======== ======== ========$ 3,377 $ 4,108 $ 4,636
====== ====== ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ..................................Basic............................... $ 0.06 $ 0.07 $ 0.07 $ 0.09 $ 0.11 $ 0.13 $ 0.140.15 $ 0.180.16
====== ====== ======= ======= ======= ======= ======= =======
Diluted............................. $ 0.22
======== ======== ======== ========
Diluted ................................0.05 $ 0.130.07 $ 0.07 $ 0.09 $ 0.10 $ 0.12 $ 0.14 $ 0.18 $ 0.21
======== ======== ======== ========0.15
====== ====== ======= ======= ======= ======= ======= =======
Shares used in per share calculation:
Basic .................................. 13,028 13,026 12,920 12,832
Diluted ................................ 13,501 13,429 13,249 13,834Basic............................... 25,578 26,056 26,052 25,840 25,664 27,266 27,015 29,337
Diluted............................. 27,272 27,002 26,858 26,498 27,668 29,770 28,432 31,214
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 28,-----------------------------------------------------------------------------------------
DEC. 28, MARCH 29, JUNE 28, SEPT. 27, DEC. 27, 1997 1997 1997MARCH 28, JUNE 27, SEPT. 26,
1997 1998 1998 1998 1998 ----------1999 1999 1999
-------- --------- ------------------ --------- ------------------ --------- ------------------ ---------
Revenue:
Product revenue, net .................. 80.0% 81.8% 80.4%net................ 80.8% 83.7% 83.1% 87.3% 91.2% 87.8% 89.6% 91.1%
Contract revenue, net ................. 20.0 18.2 19.6net............... 19.2 16.3 16.9 12.7 8.8 12.2 10.4 8.9
----- ----- ----- ----- ----- ----- ----- -----
Total revenue .......................revenue..................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue, ....................... 50.1 55.3 53.1net................ 48.9 51.6 50.7 44.1 45.4 42.4 47.4 47.4
Contract revenue, ...................... 17.9 14.7 16.2net............... 15.8 13.4 13.6 9.8 7.4 9.3 6.7 5.6
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenue ............... 68.0 70.0 69.3revenue............. 64.7 65.0 64.3 53.9 52.8 51.7 54.1 53.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit ........................... 32.0 30.0 30.7margin.......................... 35.3 35.0 35.7 46.1 47.2 48.3 45.9 47.0
Operating expenses:
Research and development .............. 7.0 6.8 3.9development............ 5.2 3.4 4.2 6.6 8.0 9.4 5.7 4.6
Sales, general and administrative ..... 15.5 14.8 11.2administrative... 8.4 9.8 9.5 9.9 10.3 9.9 10.3 9.6
Other expense (income) ................ 2.9 3.0 (0.1)expense....................... 3.9 0.3 0.8 2.2 2.1 1.9 0.9 0.6
----- ----- ----- ----- ----- ----- ----- -----
Income from operations .............. 6.6 5.4 15.7operations............ 17.8 21.5 21.2 27.4 26.8 27.1 29.0 32.2
Interest income, net ................... 2.0 1.7 1.6net.................. 1.7 1.7 1.9 0.9 0.1 2.2 3.2 2.8
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes .......... 8.6 7.1 17.3taxes........ 19.5 23.2 23.1 28.3 26.9 29.3 32.2 35.0
Income tax expense (benefit) ........... 0.7 (1.5) 5.9expense.................... 4.8 6.7 6.9 9.1 6.5 8.2 9.0 11.9
----- ----- ----- ----- ----- ----- ----- -----
Net income ............................ 7.9% 8.6% 11.4%income........................ 14.7% 16.5% 16.2% 19.2% 20.4% 21.1% 23.2% 23.1%
===== ===== ===== ===== ===== ===== ===== =====
2226
28
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. As of December 27, 1998,September 26, 1999, we had
working capital of approximately $24.4$55.6 million, including $13.7$41.2 million in cash and cash
equivalents and liquid marketable securities.equivalents. Operating activities generated $4.2$7.5 million for the first quarter
of fiscal 2000 compared with $1.2 million generated during the comparative
period in fiscal 1999. The increase was primarily attributable to higher
profitability and was supplemented by timing differences and the net increase in
accounts payable and accrued expenses.
We invested $9.8 million in cashcapital expenditures during the first sixthree months
of fiscal 1999. This was attributable primarily2000 compared to net income of $5.2$4.1 million and other non cash expenses of $3.3 million. These amounts were partly offset
by an increase of $2.0 millionduring the same period in accounts receivable, a $0.9 million rise in
inventory and a $3.1 million decrease in accounts payable.
Mostthe prior
fiscal year. The majority of the $10.4 million of cash used by investing activitiesincrease in the first six
months of fiscal 1999spending was relateddue to expenditures associated with the continued
construction ofnew equipment
additions to increase manufacturing capacity in our new manufacturing facility in Durham, North Carolina.crystal growth and epitaxy
areas. We also increased manufacturing capacity by adding new equipmentcontinue to support the
epitaxial deposition and clean room fabrication processes.
The $1.2 million of cash provided by financing activities in the first six
months of fiscal 1999 related primarily to the receipt of $1.8 million and $0.7
million in proceeds from the exercise of stock warrants and stock options from
the Company's employee stock option plan, respectively. In addition, $0.6
million was received from a Director as payment of profits from a short-swing
transaction inexpand facilities at our securities and $1.3 million was funded as the final draw
from the long term debt arrangement with NationsBank. We currently have a $10.0
million loan outstanding from NationsBank. This loan is also expected to be
paid off with proceeds from this offering. These cash proceeds were offset by a
$3.2 million cash outlay for the repurchase of our common stock. This stock was
repurchased at an average price of $13.68. The stock warrants exercised were
distributed in connection with our September 1995 private placement and have an
exercise price of $27.23. The remaining 234,575 warrants outstanding as of
December 27, 1998, will expire in September 2000.production site near
Research Triangle Park, North Carolina.
We are currently engaged in construction activities relatedrelating to a newexpansion of our
epitaxial and clean room fabrication facility.facilities. We also intend to expand our
facility for new crystal
growthRF and microwave test and packaging areas in calendar 1999. These2000. We
believe these additions will allow us to consolidate alldramatically increase capacity at our
facility for LED, RF and wafer manufacturing facilities to one site
with improved manufacturing capabilities. In addition, in order to keep pace
with anticipated growth in LED and wafer sales and provide expanded facilities
for our new microwave product line, we anticipate a second phase of expansion
to facilities and infrastructure to begin in early fiscal 2000.products. We anticipate total costs for these
expenses to be between $15$20.0 million and $20$25.0 million. Estimates for equipment
costs relatedrelating to this expansion total between $20$20.0 million and $25$25.0 million.
We also recently committed to purchase a 120,000 square foot facility under
construction on 17.5 acres of land near our present facility. We plan to use
this facility for sales, general and administrative and research and development
personnel, as well as for general employee services functions. The cost to
acquire this facility (not including the upfit costs for completing the shell
building) is $8.1 million. We plan to fund all of these capital projects fromexpansion activities
with the net proceeds of this offering.
In
addition,Although from time to time we areevaluate potential acquisitions of and investments
in complementary businesses and anticipate continuing to make such evaluations,
we have no present commitments or agreements with respect to the potential
acquisition of or investment in another business.
Cash provided by financing activities during fiscal 2000 reflected the receipt
of $1.0 million in proceeds from the exercise of stock options from our employee
stock option plan.
At September 27, 1998, we had a loan outstanding for $10.0 million from a
commercial bank to finance portions of the upfit of the production facility. The
final draw to this loan was made during the first quarter of fiscal 1999 for
$1.3 million. The loan was subsequently paid off in the processthird quarter of purchasing a 79-acre site closefiscal
1999. We also committed $3.2 million during the first quarter of fiscal 1999 to
our
present facility for $1.5 million.repurchase common stock.
We anticipate that internally generated cash plus the proceeds of this offering
will be sufficient to fund our capital requirements for the next 12 months.
IMPACT OF THE YEAR 2000
STATE OF READINESS
We have adopted a YearEven though the date is now past January 1, 2000 compliance plan and formed a team of information
technology professionals assigned to the task of identifying and resolving any
Year 2000 issues that may affect our business. Our compliance plan has four
phases: inventory, assessment, remediation and testing. We have completed an
inventory for all of our computer systems, computer related equipment and
equipment with embedded processors, as well as our products, and are in the
process of assessing those systems. We have completed this assessment with
respect to approximately 80% of our systems and expect to complete our
assessment of the remaining systems by February 1999. In addition, we have determined that our products are of a nature that they are not subjectexperienced any
immediate adverse impact from the transition to
failure as a result of Year 2000 issues. Although we cannot control whether and
how third parties will address the Year 2000, issue, we also arecannot provide
assurance that our suppliers and customers have not been affected in the process
of contacting critical vendors and suppliersa manner
that is not yet apparent. In addition, certain computer programs which were date
sensitive to assess their ability to ensure
smooth delivery of products without disruptions caused bythe Year 2000 problems.
Inmay not process the course of our assessment, we have not yet identified any Year 2000 issues that would affect our ability to do business; however, our assessment is
not complete,as a leap year, and there can be no assurance that
23
there are no Year 2000 issues that may affect us. Once we complete the
assessment phase,any
negative consequential effects remain unknown. As a result, we will prioritize and implement necessary repairs or
replacementscontinue to
equipment and software to achieve Year 2000 compliance. We
expect to complete this phase by March 1999. The final phase will consist of a
testing program for all repairs. We anticipate that all testing will be
completed by April 1999.
COSTS
We have not prepared estimates of costs to remediate Year 2000 problems;
however, based on currently available information, including the results of our
assessment to date and our replacement schedule for equipment, we do not
believe that the costs associated with Year 2000 compliance will have a
material adverse effect on our business, results of operations or financial
condition.
YEAR 2000 RISKS
Although we believe thatmonitor our Year 2000 compliance plan is adequate to address
Year 2000 concerns, there can be no assurance that we will not experience
negative consequences as a result of undetected defects or the non-compliance
of third parties with whom we interact. Furthermore, there can be no assurance
that there will not be a delay in, or increased costs associated with, the
implementation of corrections asand the Year 2000 compliance plan is performed,
such as unexpected costs of correcting equipment that has not yet been fully
evaluated. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
We believe that our greatest risk stems from the potential non-compliance of
our suppliers. We depend on a limited number of suppliers for certain raw
materials, components and equipment necessary for the manufacture of our
products. Accordingly, if those suppliers are unable to process or fill our
orders or otherwise interact with us because of Year 2000 problems, we could
experience material adverse effects to our business. We are in the process of
assessing the Year 2000 status of our suppliers
and are investigating
alternative sources of supply. As a consequence of our dependence on limited
sources of supply, we generally maintain a significant inventory of certain
critical materials and require suppliers to keep certain amounts of inventory
available for us; however, there can be no assurance that we will have enough
materials on hand to continue production without interruption in the event one
or more of our suppliers experiences Year 2000 problems that affect its (their)
ability to supply us. Any supply chain disruptions would affect our ability to
manufacture our products which could result in material adverse consequences to
our business, results of operations and financial condition.
CONTINGENCIEScustomers.
27
29
BUSINESS
OVERVIEW
We have not yet developed a contingency plan to address what would happen in
the event we are unable to address the Year 2000 issue. The contingency plan is
expected to be completed after the inquiry of vendors and customers is
completed.
24
BUSINESS
INTRODUCTION
Cree is the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC. Using itsour proprietary compound
semiconductor technology, the Company produceswe produce LEDs for use in automotive and LCD
backlighting, indicator lamps, full color LED displays and other lighting
applications. The CompanyWe also manufacturesmanufacture SiC crystals used in the production of unique
gemstone products and SiC wafers sold for the manufacture of LEDs and for
research directed to optoelectronics, microwave and power applications.
SiC-based compound semiconductor devices offer significant advantages over
competing products based on silicon, gallium arsenide, ("GaAs")or GaAs, and other
materials for certain electronic applications. The Company hasWe have new product initiatives
based on SiC, including RF and microwave devices for wireless infrastructure,
such as base stations, multi-channel, multi-point distribution service and
radar systems,wireless local loop networks, and for radar. We also have new product
initiatives for larger and clearerhigher quality crystals for moissanite gemstones,
blue laser diodes for optical storage applications and power devices for power
conditioningconversion or switching uses. We recently introduced the first RF transistor
available using SiC technology with initial samples. This product is designed
for use in wireless and switching and other uses.broadcast applications.
BACKGROUND
Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon evolved as the dominant semiconductor material because it is relatively
easy to grow into large, single crystals and is suitable for fabricating most
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, LED, laser and other optoelectronicsolid state
devices. However, GaAs, silicon and other commercially available semiconductor
materials have certain physical and electronic characteristics that limit their
usefulness in many applications. For example, silicon and GaAs-based
semiconductors are not suitable for the fabrication of short wavelength
optoelectronic 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 many commercial and military aerospace applications.
Furthermore, few silicon or GaAs devices can operate effectively at temperatures
above 400|SD400 degrees F. This is a major limitation in applications such as advanced
electronic systems for high power density electric motors, jet engines and satellites.
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, (aa requirement in the production of most semiconductors)semiconductors, which
also possess physical and electronic properties that meaningfully increase
device performance over products fabricated from currently available
semiconductor materials.materials in
general use. Of the few potential candidates, the properties of SiC make it an
excellent material for extending existing semiconductor device technology where
high power, high temperature or short wavelengths are important for performance.
SIC OVERVIEW
SiC has many physical characteristics that make the materialit very difficult to produce.
For example, in a typical semiconductor manufacturing process, the semiconductor
material is grown in single crystal form and sliced into wafers. The wafers are
then polished and chemically etched, coated with a thin filmcrystalline 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|SDF,3,500 degrees F, it is
28
30
difficult to grow large single crystals that are homogeneous in 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 crystaltheir growth, affecting the
electrical integrity of the wafer and reducing the usability of portions of the
wafer for certain applications. Furthermore, 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.
Many of the same physical characteristics that make SiC difficult to produce
also make it an excellent material for certain semiconductor applications. The
following characteristics distinguish SiC from 25
conventional silicon and
GaAs-based semiconductor materials, resulting in significant advantages if
production hurdles can be overcome:
o WIDE ENERGY BANDGAP.- - Wide Energy Bandgap. Bandgap is the amount of energy required to ionize an
electron from the valence band to the conduction band. SiC is classified as a
"wide bandgap" semiconductor material, meaning that more energy is required
for ionization. Electronic devices made from this material can operate more
efficiently and at much higher temperatures than devices made from other
common semiconductor materials.
o HIGH BREAKDOWN ELECTRIC FIELD.- - 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 has a much higher breakdown
electric field than silicon or GaAs. This characteristic allows SiC devices to
operate at much higher voltage levels. Additionally, it allows SiC power
devices to be significantly smaller while carrying the same as or greater
power levels than comparable silicon andor GaAs-based devices.
o HIGH THERMAL CONDUCTIVITY.- - High Thermal Conductivity. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This feature enables
SiC-based devices to operate at high power levels and still dissipate the
excess heat generated.
o HIGH SATURATED ELECTRON DRIFT VELOCITY.- - High Saturated Electron Drift Velocity. SiC has a "saturated electron drift
velocity" 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-based microwave transistors that operate at
significantly higher power levels than current silicon andor GaAs-based devices.
o ROBUST MATERIAL.- - Robust Material. SiC has an extremely high melting point and is one of the
hardest known materials in the world. SiC is also extremely resistant to
chemical breakdown and can operate in a hostile environment. As a result, SiC can withstand much
higher electrical pulses and is much more radiation-
resistantradiation-resistant than silicon or
GaAs. o GEMOLOGICAL APPEAL.SiC is also extremely resistant to chemical breakdown and can operate in
harsh environments.
- - Gemological Appeal. In the gemstone industry, SiC is known as moissanite. Its
high refractive index and dispersion give it "diamond-like" sparkle or fire.
In addition, its hardness allows superior faceting and wear resistance
compared to many gemstone materials.
THE CREE29
31
OUR SOLUTION
Through itsour proprietary technology and over 1012 years of development and
manufacturing experience, Cree haswe have succeeded in overcoming the difficulties
involved in processing SiC for commercial use. The CompanyWe introduced itsour first product
in October 1989 and currently isare the leading manufacturer of SiC wafers and
SiC-based blue and green LED products in the world. The Company believesWe believe that itsour
proprietary process techniques and the inherent attributes of SiC give Cree'sour
products significant advantages over competing products for certain electronic
and gemological applications. These advantages include:
o BLUE AND GREEN LIGHT EMISSION. Cree produces- - Blue and Green Light Emission. We produce high efficiency blue and green LEDs
using gallium nitride, ("GaN"),or GaN, a wide bandgap material, and other nitrides
grown on SiC substrates. Other manufacturers of nitride-based LEDs use
sapphire substrates. The conductive properties of SiC enable Creeus to fabricate a
simpler, smaller LED chip as compared to competing blue
and green LEDs grown using GaN and related materials on sapphire
substrates. Cree hasWe have also demonstrated and isare continuing development of
GaN-based blue laser diodes grown on SiC. The principal advantages of SiC over
other substrate materials for blue laser diodes are its high electrical and
thermal conductivity and its ability to be cleaved, providing an excellent
surface for laser light emission.
o ENABLING SUBSTRATE PROPERTIES.- - 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. The Company manufacturesWe
manufacture SiC wafers for both internal use and for sale to external
development programs to further new product development. The
Company continuesWe recently
introduced a larger three-inch wafer to developproduction for research purposes and
demonstrated a four-inch prototype wafer. These larger substrates with lower
defect 26
densities which should drive further device development and strengthen SiC's
economic advantages in certain applications.
o GEMSTONE MATERIAL PROPERTIES. Cree manufactures- - Gemstone Material Properties. We manufacture SiC crystals whichthat are used to
produce moissanite gemstones. The combination of SiC's optical properties
(high refractive index and dispersion) and robust material properties give
these gemstones both diamond-like sparkle or fire and hardness
characteristics. Cree continuesWe continue to develop larger and higher quality SiC crystals
for this application.
o HIGH POWER MICROWAVE OPERATION. The Company has- - High Power RF and Microwave Operations. 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. Higher power SiC devices can allowenable the
fabrication of SiC-based RF and microwave transmitters with less circuit
complexity and higher total output power. These same advantages exist for
microwave devices made using GaN on SiC substrates, which can also operate at
much higher frequencies than SiC-only devices. The Company believes that
initial applications for itsWe recently introduced on a
sample basis the first in a planned line of RF and microwave devices now underdesigned
for use in wireless infrastructure and broadcast applications, and we expect
to begin shipping evaluation units in the third quarter of fiscal 2000. We are
continuing development will
beof additional RF and microwave devices for use in
wireless base stationsinfrastructure, radar systems and radar systems. The high temperature
capabilities of SiC should also enable future aerospaceother commercial and
defensedefense-related applications.
o HIGH POWER, HIGH VOLTAGE OPERATION. Cree is- - High Power, High Voltage Operation. We are developing SiC power diodes and
switches that are able to operate at higher power densities than currently
availableused semiconductor materials because of the much higher breakdown electric
field of SiC. In addition, Cree believeswe believe that itsour SiC power devices will be able
to operate with lower resistive losses and lower switching losses than those
made with silicon or GaAs.
30
32
STRATEGY
The Company'sOur strategy is to continue to develop SiC materials and device technology for
use in enabling products and systems. The Company believesWe believe that by supplying itsour customers
with enabling component technology, it allows themthey are able to develop and deliver new
systems that provide enhanced performance capabilities. The Company'sOur strategy
incorporates the following key elements:
o GROW REVENUES THROUGH MULTIPLE PRODUCT LINES. The Company has focused its- - Grow Revenues Through Multiple Product Lines. We focus our technology on six
primary product lines -- LEDs, SiC wafers, gemstone crystals, RF and microwave
devices, power devices and laser diodes. The Company
generates itsWe generate our current product
revenues primarily through the sale of blue and green LEDs, SiC wafers and
gemstone crystals. The Company planscrystals and have recently released test samples of our first RF
product. We plan to leverage itscontinue leveraging our enabling materials technology to
develop products in the area
of microwave, power and laserslaser products while continuing to develop new
and improved products to enhance growth in the markets for LEDs, SiC wafers,
gemstone crystals and gemstone crystals.
o EXPAND CAPACITY AND INFRASTRUCTURE.RF products.
- - Expand Capacity and Infrastructure. In order to meet anticipated demand for
itsour existing products and to develop and fabricate new products, the
Company haswe have more
than doubled itsour manufacturing capacity over the last year and isare preparing
to support additional growth over the next several years as needed. In
November 1997, the Companywe acquired itsour present manufacturing facility in Durham, North
Carolina, a 30-acre site with 172,000 square feet of manufacturing, warehouse
and office space. The Company is currentlyWe recently completed a 42,000 square foot expansion of this
facility and intend to further expand this facility by an additional 125,000
square feet to increase capacity. We also intend to purchase new equipment. In
addition we are in the process of completing the build-outpurchasing a 120,000 square foot facility
under construction on a 17.5-acre site near our current facility.
- - Enhance Competitive Value of this facility to increase
capacity, which it expects to finish in July 1999. The Company also intends
to expand its existing facility, construct new facilities and purchase
equipment.
o ENHANCE COMPETITIVE VALUE OF ITS SIC PRODUCTS THROUGH TECHNOLOGICAL
ADVANCES. The Company believesSiC Products Through Technological Advances. We
believe that itwe can make existing and future products more competitive than
alternative non-SiC products through continued technological advances. In
pursuing this strategy, the Company
haswe have increased the performance and reduced the cost
of itsour LED chips over the last several years by using different materials to
increase brightness, decreasing die size, increasing wafer diameter and
developing a conductive buffer epitaxial and fabrication process. These
improvements have resulted in LED chip products which provide a low cost
solution for numerous high volume applications. The Company isWe are continuing SiC
development activities to provide improvements in die cost, crystal quality
and device performance. 27In the second half of calendar 2000, we plan to begin
the integration of three-inch wafers into our LED production process. We
believe this larger wafer size will enable further reductions in LED costs as
we begin to achieve higher yields than are possible with two-inch wafers.
31
33
PRODUCTS
All of Cree'sour products are an outgrowth of itsour core SiC technology. CreeWe continually
pursuespursue technical improvements to itsour existing products in order to lower cost
and improve quality. The following chart illustrates the Company'sour existing products and
user applications:
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PRODUCT USER APPLICATIONS
- --------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Blue and green LEDs o- Backlighting in applications such as
automotive dashboards and LCD
displays,LCDs, including
wireless handsets oand other lighting
applications
- Large area indoor full color displays, such as
arena video screens
o- Large outdoor full color displays
o- White light products to replace miniature
incandescent bulbs, such as those used in
automobile map lights oand other lighting
applications
- Traffic signals
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Wafer products o- Manufacture of LEDs
- Research and development for new
semiconductor applications
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SiC crystals o- Gemstones
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RF transistors (first product available on a - Communications and other wireless
test sample basis) applications
- ---------------------------------------------------------------------------------------------------------
BLUE AND GREEN LEDSBlue and Green LEDs
LEDs are solid-state chips used in miniature lamps in everyday applications such
as indicator lights on printers, computers and other equipment. LEDs generally
offer substantial advantages over small incandescent bulbs, including longer
life, lower maintenance cost and energy consumption, and smaller space
requirements. Groups of LEDs can make up single or multicolor electronic
displays. Prior to the introduction of Cree'sour blue LED product in 1989, blue LEDs
could not be produced in volumes necessary for commercialization. Since then, Cree haswe
have developed several generations of blue LED products, including a more robust
conductive buffer chip that is easier to build into lamps and has a lower unit
price than competing products. The commercial availability of the
blue LED,LEDs,
together with red and green, has enabled the development of full color LED lamps
and video displays.
Strategies Unlimited,We believe that LEDs made from SiC substrates offer important benefits over
those made from competing substrates, including:
- - an industry research
firm, has estimatedstandard vertical chip structure requiring a single wire bond that
permits faster LED assembly and reduced cost;
- - a small chip size compatible with industry trends towards package
miniaturization;
- - high resistance to electrostatic discharge, or ESD, which reduces the market size forcost,
engineering effort and time to qualify LEDs (all colors) was
approximately $1.8 billion in 1997at customer production sites; and
has forecast that the blue and green LED
portion of the market will increase from approximately $204 million in 1998 to
approximately $430 million in 2001.- - a lower-priced outdoor-capable product.
Presently, the Company'sour blue LED chips are used for backlighting purposes in applications
such as automotive dashboards and LCD displays, including wireless handsets.handsets and
other consumer products. In addition, they are used in office equipment
indicator lighting, full color video display technology, such as arena
32
34
video replay boards, moving message advertising and informational signs. The Company'sOur
standard brightness blue LED products are primarily used in indoor applications.
In September 1998, the Companywe introduced brighter blue and green LEDs that offer a lower
cost highly
efficientalternative to competing sapphire products. These products, which increase
brightness up to 300% over our standard LED solutionproducts, are used in backlighting
applications requiring low power consumption, such as LCDs for existing applications that require a higher
brightness. For example, many municipalities throughout the U.S. have already
implemented red LEDs into theirwireless handsets
and consumer products, and in traffic signals but have not previously used
green LEDs due to high cost or unavailability. In addition, the Company
believes that there areand outdoor full-color display
applications where brightness is critical.
We also offer a large number of existing applications for green LEDs
using lower efficiency materials technology which could be replaced with Cree's
new higher efficiency green LED products.
In November 1998, Cree announced a new product line built on its existingwithin our blue LED products for use in solid-state
white light applications. By passing blue or near ultraviolet LED output through
certain conversion materials such as phosphors or polymers, blue light is
converted into white light. Cree is
developing newWe currently sell blue LEDs to customers who produce
the white light conversion LED. Commercial products incorporating our chips for
white light conversion include backlighting applications for automobile
dashboards and ultraviolet LEDs designed to maximize conversion
efficiency. The Company anticipates thatinstrumentation and LCD backlighting for wireless handsets. Other
applications for white light LEDs initially will have
the greatest impact on the market forinclude miniature incandescent lighting, such
as map lights, automobile trunk lights and small flashlights.
WAFER PRODUCTS
Cree manufacturesWe are focusing current development efforts on further improving the brightness
of our high brightness LEDs. We believe that increased brightness will further
enhance our ability to compete against LEDs fabricated from sapphire substrates,
which are presently brighter than our high brightness products.
Wafer Products
We manufacture SiC wafers for sale to corporate, government and university
programs that use SiC for developing electronic components. These customers
utilize the material as the basis for research in optoelectronic, microwave and
high power devices. Each order may be sold as a bare wafer or customized 28
by
adding epitaxial films, depending upon the nature of the customer's development
program. For the past several years, the Company haswe have worked to improve the quality of
itsour wafers while increasing their size. During fiscal
1998,In October 1999, we released a low-cost
two-inch wafer targeted as an alternative to sapphire substrates used by many
researchers in the Company expanded its capabilitiesoptoelectronics field. In the same month, we introduced our
first three-inch wafer for sale to supply two-inchthe research community. We also sell our
wafers while
achievingto Osram OS for the manufacture of standard brightness LED products under
a significant improvement in wafer quality.
SIC CRYSTALS FOR GEMSTONE APPLICATIONSlicense from us.
SiC Crystals for Gemstone Applications
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to hardness and brilliance. Through a proprietary
process, Cree manufactureswe manufacture SiC crystals in near colorless form for use in gemstones. The Company sellsgemstone
applications. We sell SiC crystals to C3, a company which was founded to develop
gemstone products from SiC crystals. C3 cuts and polishes the productSiC crystals to
fabricate diamond-like gemstones targeted at customers who desire affordable
high quality jewelry. DuringOver the first half of fiscal 1999, Creepast 18 months, we significantly expanded crystal
growth capacity for C3, funded by C3, to meet increased volume requirements.
The potential for increasing demand depends on Cree's ability to meet C3's
requirements
for color, clarityanticipated by C3. More recently, however, C3 announced lower sales revenue and
yield. Consequently, Cree has agreed to
focus development efforts on improving its manufacturing processes to increase
crystal size and volume,higher inventory levels than anticipated as well as the initiation of a new
marketing campaign for its gemstone products. We anticipate that sales to develop crystals with higher quality.C3
will decrease in calendar 2000. Consequently, we may use manufacturing capacity
that becomes available due to a reduction in sales to C3 for other product
applications. Future demand also is dependent on C3's ability to cut, facet and
effectively market its gemstone products.
33
35
RF and Microwave Transistors
In June 1999, we announced the first of a planned line of SiC-based RF and
microwave transistor products. Initial samples of this product were shipped
during the first quarter of fiscal 2000. Evaluation kits are expected to be
available for shipment on a test sample basis in the third quarter of fiscal
2000. A second phase of transistor products is scheduled for release to
production in calendar 2000, although it is possible that we could experience
delays in development or production that would prevent us from meeting this
schedule. We believe that these products can be used in a variety of power
amplifier applications, including wireless infrastructure and digital broadcast
applications. We believe that future SiC transistors in development, with higher
output power per transistor than current silicon and GaAs-based devices, will
allow wireless systems to use fewer transistors per base station, resulting in
less complex circuitry, higher linearity and lower cost. While distribution of
initial samples for the first product has begun, we believe that sales will be
limited to samples and evaluation kits during fiscal 2000, as we continue to
refine the product and respond to our customers' design requests. We anticipate
that each transistor product subsequently released will go through a similar
process. There can be no assurance that our customers will be able to develop
applications in the near future that will require commercial production of our
RF products or that such products will be successful in the market.
PRODUCTS UNDER DEVELOPMENT
The Company believesWe believe that the inherent physical characteristics of SiC make it an
excellent material for many new semiconductor applications. The Company isWe are dedicated to
creating new applications using SiC and hashave products currently under
development in each of the areas described below. The following chart
illustrates the potential user applications for each area of product
development:
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
- --------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
High power radio frequencyRF and o Communicationmicrowave devices - Power amplifier systems for wireless
applications, such as microwave devices PCSpersonal communications
service base stations
o Radar- Power amplifier systems for third generation,
or 3G, wireless local loop and multi-channel,
multi-point distribution service transmitter
sites
- Digital broadcast systems
- --------------------------------------------------------------------------------------Solid-state radar systems
- ---------------------------------------------------------------------------------------------------------
Power devices o- Industrial motor controls
o- Electric vehicles
o- High voltage power supplies
- Lighting ballasts
o- Factory robotics
o- Locomotive applications
o- Solid-state power transmission
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Blue and ultraviolet lasers o- High density optical storage, such as CD-ROMsCDs and
DVDs
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
High temperature devices o- Automotive and aerospace electronics
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
HIGH POWER RADIO FREQUENCY AND MICROWAVE DEVICES
The Company isHigh Power RF and Microwave Devices
We are currently developing SiC-based high power transistors that operate at
radio and microwave frequencies. The Company believesWe believe these devices will have applications
in wireless phone base stations, high power solid-state broadcast systems for
television and radio and radar search and detection equipment.
Cree is continuing34
36
In June 1999, we introduced our first RF transistor product on a test sample
basis. We continue to develop aother SiC-based deviceRF and microwave transistor
devices expected for useprototype distribution during fiscal 2000. All of these
products are designed to amplify power in base stations for
wireless systems. This device canseveral applications. These SiC
devices are expected to be used for frequency band applications
beginning at 1.8frequencies from 400 megahertz to 10
gigahertz, such as personal communications system ("PCS") base
stationincluding 3G transmitter site networks.
The Company believes that SiC transistors will be superior to
current silicon and GaAs-based devices due to greater output power per
transistor. The higher output power available from SiC devices is expected to
allow wireless systems to use fewer transistors per base station resulting in
less complex circuitry and lower cost. In addition, SiC's ability to dissipate
heat more rapidly than other materials reduces the need for costly cooling
equipment. The Company currently anticipates releasing its first product
designed for use in microwave applications during fiscal 1999 for shipment in
the first half of fiscal 2000.
Cree isWe are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). During
fiscal 1998, the Company1999, we reported the demonstration of GaN on SiC transistors that
although low in totaloperated with an output power operatedof 10.0 watts at 9.0 gigahertz. We also previously
reported a record high power density of 6.86.9 watts per
29
millimeter at 10 gigahertz. The Company believes thisgigahertz
on smaller GaN devices. This power density is the
highest publicly reported for a solid-state field-effect transistor operating
at radio or microwave frequency and is substantially higher than that achieved with
equivalent silicon or GaAs-based devices. The Company doesWe do not anticipate that a commercial
device capable of emitting power at this level will be available in the near
term.
POWER DEVICES
The Company isPower Devices
We are developing prototype high power devices that have many potential uses.
Such devices could be employed in applications involving power conditioning as
well as power switching. SiC-based power devices have the potential to handle
significantly higher power densities than existing silicon-based devices. In
addition, SiC devices are expected to operate at significantly higher
temperatures and voltages with superior switching capabilities. These devices
are expected to yield substantial power savings due to reductions in energy
losses made possible by the devices' high efficiency. Potential applications
include power drive components for electric vehicles, lighting ballast
components, industrial motor controls and power conditioning for high voltage
power transmission. The Company recentlyIn early fiscal 1999, we entered into a three-year project
with Kansai Electric Power Company, one of the largest power companies in the
world, for development of SiC-based devices for use in power transmission
networks.
BLUE AND ULTRAVIOLET LASER DIODES
The Company continuesBlue and Ultraviolet Laser Diodes
We continue to focus on the development of blue and ultraviolet laser diodes.
SiC's inherent attributes, including its natural cleavability and high thermal
conductivity, make it an excellent substrate material for blue laser
applications. The storage capacity of optical disk drives can be increased
significantly by utilizing a laser diode capable of emitting short wavelength
light. The Company hasWe have demonstrated a blue laser diode, fabricated from GaN and related
materials deposited on SiC substrates, that emits blue light, which has a shorter wavelength than that
of the red or infrared lasers used today. The
Company believesWe believe that the shorter wavelength
of blue light could potentially result in storage capacity for optical disk
drives that is significantly greater than the capacity permitted by red light.
This increased storage capacity could lead to advances in CD-ROM data storage
and audio and video compact disc applications. Currently,We believe that we were the Company is the onlyfirst
U.S.-based company to have demonstrateddemonstrate the continuous wave operation of a blue laser
diode at room temperature;temperature on SiC; however, there is still substantial work
needed to produce a blue laser suitable for commercial applications. HIGH TEMPERATURE DEVICESIn the
second half of fiscal 1999, we entered into a one-year development agreement
with Microvision by which Microvision provides $2.6 million in funding for us to
conduct research in edge-emitting LEDs and laser diodes. Microvision has the
right to extend the agreement for a second year by making an additional payment
of $2.5 million.
High Temperature Devices
In certain applications for microwave and power devices, the ability of SiC to
operate at higher temperatures than comparable silicon devices can be a major
advantage. Thus, Cree iswe are currently
35
37
developing high temperature versions of these devices. These devices would be
used for applications in high temperature environments or environments with
limited cooling or heat sinking, including potential applications in the
automotive, energy and aerospace industries. Cree
isWe are also working on high
temperature sensors, as well as analog and digital circuits that could be used
to amplify low level sensor signals directly in a jet engine or other high
ambient temperature environment. Such devices could also find use in
applications such as down hole drilling equipment. Although Cree haswe have developed prototype devices,
additional development work is needed to achieve commercial viability.
RESEARCH AND DEVELOPMENT
The Company believesWe believe that itsour ability to maintain itsour position as athe world's leading
supplier of SiC material and SiC-based semiconductor products, and to expand the
markets for such products, will depend in large part on itsour ability to enhance
existing products and to continue developing new products incorporating the
latest improvements in SiC technology. Accordingly, the Company iswe are committed to
investing significant resources in research and development.
The CompanyWe continually conductsconduct research aimed at improving the quality of itsour crystals
and wafers and enhancing itsour epitaxial film deposition (wafer coating) process.
Cree believesWe believe that these research and development efforts will benefit all of the Company'sour
products. The Company believes itWe believe we can increase the 30
diameter of itsour wafers while lowering
manufacturing costs and permitting the development of more complex devices. The
key determinants that will enable the manufacture of more complex devices, such
as power semiconductors, are the substrate quality and wafer size. Epitaxial
thickness, lower defect density and the elimination of variation are important
factors to yield improvement, marketability and lower cost. In moving to larger
wafer sizes, the Company iswe are focusing on how to stabilize the process to repeatedly grow
larger diameter crystals with minimal defects. The two-inch wafer size, which Creewe
introduced in fiscal 1998, is considered a minimum standard for many niche
fabrication facilities. Cree also has begun development ofWe recently introduced a three-inch wafer for sale to
the research community and largerdemonstrated a four-inch wafer, sizes.
Duringwhich we believe is
the largest single crystal SiC wafer ever exhibited.
We spent $9.7 million in fiscal years 1998, 1997, and 1996, the Company spent $8.6 million $9.7in fiscal 1998 and $9.4
million and $6.3 million, respectively,in fiscal 1999 for direct expenditures relating to research and
development activities. Offsetting these expenditures were $8.7 million in
fiscal 1997, $8.2 million $8.7in fiscal 1998 and $6.6 million and $5.9 million, respectively,in fiscal 1999, 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. DuringCustomers contributed $66,000 in
fiscal years1997, $3.5 million in fiscal 1998 and 1997, customers spent
$3.5$4.5 million and $66,000, respectively, forin fiscal 1999 towards
our product research and development activities.
In fiscal 1996, customers did not provide significant funding for
research activities.
SALES AND MARKETING
The CompanyWe actively markets itsmarket our products through targeted mailings, telemarketing, select
advertising and attendance at trade shows. The CompanyWe generally usesuse an executive sales
approach, relying predominantly on the efforts of senior management and a small
direct sales staff for worldwide product sales. The Company believesWe believe that this approach is
preferable in view of itsour current customer base and product mix, particularly
since the production of lamp and display products incorporating LED chips is
concentrated among a relatively small number of manufacturers. However, the Company departswe
depart from this approach for sales to certain Asian countries. In Japan, the Company
markets itswe
market our LED products and SiC wafers through itsour distributors Sumitomo
Corporation ("Sumitomo") and Shin-Etsu. The CompanyWe also usesuse sales representatives to market itsour LED
products in Hong Kong, China, Taiwan and Korea. The
Company sellsWe sell SiC crystal materials
for use in gemstone applications directly to C3 under an exclusive supply
agreement. We plan to use both direct sales and sales representatives to market
any new RF products.
36
38
MANUFACTURING AND FACILITIES
The Company operates itsWe operate our own facilities in Durham, North Carolina. Direct control over SiC
crystal growth, wafering, epitaxial deposition, device fabrication and test
operations allows the Companyus to shorten itsour product design and production cycles and to
protect itsour proprietary technology and processes. In November 1997, the Companywe acquired
itsour present manufacturing facility, a 30-acre industrial site in Durham, North
Carolina, consisting of a 139,000 square foot production facility and 33,000
square feet of service and warehouse buildings. The Company is currentlyWe recently completed a facility
expansion of 42,000 square feet and in the processDecember 1999 began construction of completing the
build-out of this facilityan
additional 125,000 square feet expected to increase capacity. The Company isbe completed in calendar 2000. In
1999, we also in the
process of purchasingpurchased a 79-acre site closeand have contracted to its presentpurchase a 120,000
square foot facility for $1.5
million. The Company anticipates that any additional expansionunder construction on a 17.5-acre site. Both of capacitythese sites
are near our current manufacturing facility.
We currently lease approximately 21,900 square feet in the near future will occur on these two sites.
The Company currently leases spaceDurham, North Carolina
for some of itsour manufacturing and research and development facilities which occupy 21,900 square feet and 3,800 square
feet, respectively, in the same building in Durham, North Carolina. These
leases expireactivities. This
lease expires in December 2001 and May 1999, respectively. In addition, the
Company2001. We also leaseslease approximately 13,200 square feet
in a separate building in Durham, North Carolina which is used for its device fabricationRF production
and test
processes.microwave research and development. This lease expires in August 2000.
The Company's2002.
Our products are manufactured in a six-part process which includes: SiC crystal
growth, wafer slicing, polishing, epitaxial deposition, fabrication, and testing
and packaging. SiC crystals are grown using a proprietary high temperature
process designed to produce uniform crystals in a single crystalline form.
Crystals used for moissanite 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 the
Company'sour proprietary epitaxial deposition
technology, which essentially consists of growing a thin layerlayers of SiC, GaN or
other material on the polished wafer, depending on the nature of the device
under production. SiC wafer 31
products may leave the manufacturing process either
after polishing or epitaxy. Following epitaxy, LED and RF chips are fabricated
in a clean room environment. The final steps include testing and packaging for
shipment to the customer. In manufacturing itsour products the Company dependswe depend substantially
on itsour custom-manufactured equipment and systems, some of which isare manufactured
internally and some of which the Company acquireswe acquire from third parties and customizes itself.
The Company dependscustomize
ourselves.
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in itsour SiC products and LEDs, including certain key materials
and equipment used in itsour crystal growth, wafering, polishing, epitaxial
deposition, device fabrication and device test processes. The CompanyWe generally purchasespurchase
these limited source items pursuant to purchase orders and hashave no guaranteed
supply arrangements with itsour suppliers. In addition, the availability of these
materials, components and equipment to the Companyus is dependent in part on the Company'sour ability to
provide itsour suppliers with accurate forecasts of itsour future requirements. The Company endeavorsWe
endeavor to maintain ongoing communication with itsour suppliers to guard against
interruptions in supply and, to date, generally hashave been able to obtain
adequate supplies in a timely manner from itsour existing sources. However, any
interruption in the supply of these key materials, components or equipment could
have a significant adverse effect on the Company's operation.our operations.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. The
Company believesWe
believe that itwe currently enjoysenjoy a favorable position in the existing markets for
SiC-based products and materials primarily as a result of itsour proprietary
SiC-based technology. However, the Company faceswe face actual and potential competition from a
number of established domestic and international compound semiconductor
companies. Many of these companies have greater engineering, manufacturing,
marketing and financial resources than the Company.
The Company'swe have.
37
39
Our primary competition for the blue and green LED products comes from Nichia
Chemical Industries, Ltd., Toyoda Gosei Co. Ltd. and the
Hewlett-Packard CompanyLumiLeds Lighting, a joint
venture between Agilent Technologies and Philips Lighting, which currently
market blue and green LED products that are brighter than the Company'sour high brightness
blue and green LED devices. These companiesIn addition, Uniroyal Technologies, Inc. has
announced its intention to begin production of blue and green LEDs in January
2000. Existing competitors historically have historically been successful in the market for
outdoor display applications because of the brightness demands of outdoor
displays, as well as the decreased price sensitivity of the outdoor display
market. Cree
believes itsWe believe our brighter blue and green LEDs will enable ithave enabled us to compete
successfully in this market because theyour LEDs can be used in the same
applications at a lower cost than competing products. The Company believesAt the same time, we
continue development to improve the brightness of our LEDs to enhance our
ability to compete in this market.
We believe that it is positioned to take advantage of the larger
indoor display market because of its lower cost and the advantages of its
design. The Company believes that itsour approach to manufacturing blue and green LEDs from SiC
substrates offers a more cost-effective design and process than itsour competitors,
who use a sapphire substrate. Cree'sOur smaller chip design, which is compatible with
industry trends toward package miniaturization, enables the diode to use less
material and permits more devices to be fabricated on each wafer processed,
lowering the cost per unit. In addition, the Company's device enablesour industry standard vertical chip
structure allows manufacturers to package the LED on the same production line as
other green, amber and red LEDs, eliminating the need for special equipment
necessary for chips made from sapphire substrates. Furthermore, Cree'sour SiC-based
devices can withstand a much higher level of electrostatic
discharge ("ESD")ESD than existing sapphire-based
products and therefore are more suitable for applications that require high ESD
emission ratings, such as automotive applications.
We believe that other companies, including certain of our customers, may seek to
enter the blue and green LED market in the future. For example, Osram OS and
Shin-Etsu have licensed some of our LED technology, which may facilitate their
entry into our LED markets. We believe that Osram OS is currently producing LEDs
using technology licensed from us. The market for SiC wafers also is becoming
competitive, as other companies in recent years have begun to offer SiC wafer
products or announced plans to do so.
PATENTS AND PROPRIETARY RIGHTS
We are a leader in the development of SiC materials and devices made using SiC.
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 December 30, 1999, we owned or exclusively licensed, subject in some cases to
previous licenses held by third parties, a total of 59 issued U.S. patents.
These patents expire between 2007 and 2017. We also own two U.S. patents jointly
with a third party. We also own or hold exclusive licenses to corresponding
patents and patent applications in certain foreign countries we consider
significant or potentially significant markets.
The Company haslicense rights above include an exclusive license from N.C. State to 10 U.S.
patents, fromand to corresponding foreign patents and applications, that relate to
SiC materials and device technology, including a process to grow single crystal
SiC. The license was granted pursuant to an agreement executed by us and N.C.
State and
holds 43 additional domestic patents of its own or owned jointly. In key
foreign markets, Cree holds exclusive licenses to patents issued on the N.C.
State technology and owns patents issued on Cree applications which are
counterparts to the U.S. patents. The Company also holds licenses or rights to
acquire exclusive licenses to inventions owned by N.C. State, the University of
California and Purdue Research Foundation which are subject to pending patent
applications. Cree has 25 patent applications of its own pending in the U.S.
and also has 85 foreign patent applications pending. In addition to its patent
rights, the Company relies upon proprietary know-how and
32
trade secrets relating to its manufacturing processes and devices and has
entered into non-disclosure agreements to protect its proprietary technology
with both employees and parties outside of the Company.
The Company earns a material amount of its revenues in overseas markets. While
the Company holds and has applied for patent protection for certain of its
technologies and products in some of these markets, there can be no assurance
that the Company's intellectual property rights will provide adequate
protection in all commercially significant markets.
THE N.C. STATE LICENSE. In 1987, the Company entered into a1987. This license agreement
with N.C. State pursuant to which the Company was grantedgave us a worldwide, fully paid, exclusive license
to manufacture, use and sell products and processes covered by the claims of
10 U.S. patent applications filed by N.C. State relating to SiC materials and SiC-based semiconductor devices, some of which
also have been filed in foreign countries.the licensed inventions. Ten
U.S. patents were subsequently issued with respect to eight of thosethe applications, with
expiration dates between 2007 and 2009. Twelve of the foreign filingsapplications have
been issued with expiration dates from 2006 throughto 2013. Included inThe U.S. government holds a
38
40
non-exclusive license to practice the licensed patents are patents practicedinventions covered by the CompanyN.C. State
license for government purposes. We have also entered into other license
agreements with N.C. State, and with the licensing agencies of other
universities, under which we have obtained rights to grow single crystal SiC. The U.S. patent for this process
expirespractice inventions claimed
in 2007 and in other markets the comparable patents expire between 2006
and 2012. Under the terms of the license, the U.S. Office of Naval Research has
retained an interest in the licensed technology for certain military
applications.
CREE'S PATENTS. Since its inception, the Company has been granted 43 U.S.
patents of its own or jointly owned. These patents expire between 2008 and
2016. The Company has filed a number of thesevarious patent applications in foreign
countries, many of which have been issued. In addition, the Company has, in the
past, entered into joint research and development programs to develop new
SiC-based devices. These efforts have resulted in four jointly-owned patents,
one with Purdue University, two with General Electric Company and one with N.C.
State.
The Company intends to continue to file patent applications in the future, where
appropriate, and to pursue such applications with U.S. and foreign patent
authorities, but the Company cannot be sure that any patents will be issued on
such applications or that the Company patents will not be contested. In the
past, one of the important patents the Company licenses from N.C. State relating
to crystal growth was subject to re-examinationpending in the U.S. butand other foreign countries.
For proprietary technology which is not patented or otherwise published, we seek
to protect the Company
prevailedtechnology 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 proceeding. Currently, the corresponding European patentinformation is being challenged, which means that the Company could lose patent protection in
certain European countries for this particular method. Also, because issuance of
a valid patent does not prevent other companies from using alternative,
non-infringing technology, theredisclosed. There can be no
assurance that any of the Company's
patents (or patents issued to N.C. State or other parties and licensed to the
Company)these agreements will provide significant commercial protection.
Although the Company believesmeaningful protection against
unauthorized disclosure or use of our confidential information or that its products do not infringe on theour
proprietary rights of third parties, there can be no assurance that third
partiestechnology and know-how will not assert infringement claims against the Company in the future
with respect to currentotherwise become known or
future products or thatindependently discovered by others. We also rely upon other intellectual
property rights such assertion may not
require the Company to enter into royalty arrangements, prevent the Company
from selling products, or result in protracted or costly litigation.as copyright where appropriate.
Because of rapid technological developments in the semiconductor industry, the
patent position of any semiconductor materials or device manufacturer, including
that of the
Company,ours, is subject to uncertainties and may involve complex legal and factual
issues. Consequently, although the Company holds certain patents, is licensed
under other patents, and is currently pursuing additional patent applications,
there can be no assurance that patents will be issued fromon
any of the pending applications owned or licensed to us or that claims allowed
byin any existing or future patents issued or licensed to the Companyus will not be challenged, invalidated,contested or circumvented,invalidated. In
the past, the U.S. patent that we license from N.C. State relating to growth of
SiC was subject to a reissue proceeding; however, that patent was successfully
reissued. Currently, a corresponding European patent is being opposed, which
means that we could lose patent protection in Europe for this particular method.
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 anyour
intellectual property rights granted under such patents will provide adequate protection in all such
markets.
In December 1999, one of our distributors in Japan, Sumitomo, was named in a
lawsuit filed by Nichia Corporation seeking an injunction that, if granted,
would preclude Sumitomo from selling our standard brightness blue LED product in
Japan. The suit, filed in Tokyo District Court, alleges infringement of a patent
issued to Nichia in Japan. We believe that the Company.infringement allegation is
without merit and that the lawsuit is motivated by competitive factors. We have
intervened in the action and are assisting Sumitomo in defending the suit.
Subject to contractual limitations, we have an obligation to indemnify Sumitomo
for certain patent infringement claims.
Frequent claims and litigation involving patents and intellectual property
rights are common in the semiconductor industry. Litigation may be necessary in
the future to enforce our intellectual property rights or to defend us against
claims of infringement, and 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, including core products. We have been
notified from time to time of assertions that our products or processes may be
infringing patents or other intellectual property rights of others. We cannot
predict the occurrence of future assertions of infringement or the extent to
which such assertions may require us to seek a license under the rights asserted
or whether a license would be granted. Likewise, we cannot predict the
occurrence of future assertions that may prevent us from selling products,
result in litigation or require us to pay damage awards.
39
41
EMPLOYEES
As of December 27, 1998, the Company26, 1999, we employed 297478 people, including 214363 in manufacturing
operations, 5177 in research and development, and 3238 in sales and general
administration. None of the Company'sour employees is represented by a labor union or subject
to collective bargaining agreements. The Company
believesWe believe relations with itsour employees are
strong.
3340
42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
TheOur executive officers and Directors of the Company are as follows:
NAME AGE POSITION
- --------------------------------------------- ----- --------------------------------------------------------------- --- --------
F. Neal Hunter (1) Hunter(1)....................... 3637 Chairman of the Board of Directors and
Chief Executive Officer
Charles M. Swoboda .......................Swoboda...................... 32 President and Chief Operating Officer
Calvin H. Carter, Jr., Ph.D.(2)......... 4344 Director, Executive Vice President, and
Director of Materials Technology
and Director
Cynthia B. Merrell ....................... 38Merrell...................... 39 Chief Financial Officer and Treasurer
John W. Palmour, Ph.D. ................... 38Ph.D................... 39 Director and Director of Advanced
Devices
James E. Dykes (1)Dykes(1)(2)(3) .................... 61................. 62 Director
Michael W. Haley (2)Haley(2)(3).................. 6061 Director
Walter L. Robb, Ph.D Ph.D.(3). ................ 7071 Director
Dolph W. von Arx (1)Arx(1)(2)(3)............... 6465 Director
- --------------------------------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
MR. HUNTER, a co-founderMr. Hunter, one of the Company,our co-founders, has served as our Chairman of the
Company's Board of
Directors since 1995, as the Company'sour Chief Executive Officer since 1994 and as a
Director since the Company'sour inception in 1987. Mr. Hunter also served as President from
1994 until January 14, 1999. Prior to his election as President and Chief Executive
Officer in 1994, Mr. Hunter served as Vice President of MarketingGeneral Manager with responsibility for
the management of the
Company'sour optoelectronic products and as the Company'sour Secretary and
Treasurer. He received ahis B.S. degree in mechanical engineering from N.C.
State.
MR. SWOBODAMr. Swoboda became President effectivein January 14, 1999 and has served as our Chief
Operating Officer of the Company since June 1997. Prior to becoming President, Mr. Swoboda also
held the title of Vice President since June 1997. Mr. Swoboda joined the Companyus in 1993
and served as the Company'sour Operations Manager from July 1996 to June 1997, as Wafer Fab
Manager from April 1996 to July 1996, as General Manager of the Company'sour subsidiary, Real
Color Displays, Inc., from August 1994 to April 1996 and as LED Product Manager
from July 1993 to August 1994. Prior to 1993, he was employed by Hewlett-Packard
Company, an electronics company. Mr. Swoboda received a B.S. degree in
electrical engineering from Marquette University.
DR. CARTER, a co-founderMarquette.
Dr. Carter, one of the Company,our co-founders, has served as a Director and Vice President
since Cree'sour inception. He currently holds the positions of Executive Vice
President and Director of Materials Technology. As Director of Materials
Technology, Dr. Carter is responsible for the Company'sour development of advanced materials
growth technology, including the growth of SiCsilicon carbide material for
semiconductor and other applications. He previously served as Vice President,
New Product Development from 1995 to 1997 and as Director of Technology from
1987 to 1995. Dr. Carter holds B.S., M.S. and Ph.D. degrees in materials science
and engineering from N.C. State.
MS. MERRELL41
43
Ms. Merrell was named Chief Financial Officer and Treasurer effective July 1998
after serving as the Company'sour Interim Chief Financial Officer and Assistant Treasurer
since January 1998. Ms. Merrell joined the Companyus in 1996, initially serving as itsour
Controller. From January 1992 to November 1996 she was employed as the
controller of Kaset International, a subsidiary of The Times Mirror Company
which is engaged in providing training, consulting and project management
services in the field of customer relations. Ms. Merrell's prior financial
experience includes service in various capacities with Tropicana Products, Inc.
and the accounting firm of Arthur Andersen & Co. She received a B.S. degree in
accounting from the University of Florida and is licensed as a Certified Public
Accountant in Florida.
34
DR. PALMOUR, a co-founderDr. Palmour, one of the Company,our co-founders, currently serves as Director of Advanced
Devices and, in that capacity, is responsible for the Company'sour development of advanced
SiCsilicon carbide devices such as microwave transistors and power devices. Dr.
Palmour has served as a Director of the Company since October 1995 and previously served on the Company's
Board of Directors from October 1992 to April 1993. During the period from 1993 to 1995 that Dr. Palmour was not a
Director, he continued to be employed by the Company.He has been an employee
since 1988. Dr. Palmour received his B.S. and Ph.D. degrees from N.C. State in
the fields of materials science and engineering.
MR. DYKESMr. Dykes became a Director of the Company in January 1992. He served as Executive Vice
President of Thomas Group, Inc., a publicly held management consulting group,
from July 1997 through June 1998 and from 1994 to 1997 served as President and
Chief Executive Officer of Intellon Corp., a privately held start-up company in
the home automation industry. From January 1989 until his retirement in December
1992, Mr. Dykes served as President and Chief Executive Officer of Signetics
Company, a subsidiary of North American Philips Corporation. Mr. Dykes received
a B.S. degree in electrical engineering from the University of Florida. He is
currently a director of EXAR Corporation, and
Thomas Group, Inc. MR. HALEYand Theseus Logic,
Inc.
Mr. Haley became a Director of the Company in April 1989. He serves as Chairman and Chief
Executive Officer of Triton Management Company based in Greensboro, North
Carolina, which previously owned and operated 60 restaurants and has been
engaged principally in investment and property management since the sale of the
restaurants in 1993 and 1996. Mr. Haley graduated from the University of North
Carolina-Chapel Hill, where he received a bachelor's degree in business
administration.
DR. ROBBDr. Robb became a Director of the Company in April 1993. He is currently the President of
Vantage Management, Inc., a consulting and investment firm in Schenectady, New
York. From 1986 through 1992, Dr. Robb served as a Senior Vice President for
Corporate Research and Development for General Electric Company, a diversified
technology company. From 1951 to 1986, he held various other positions with
General Electric Company. Dr. Robb received a B.S. degree from Pennsylvania
State University and M.S. and Ph.D. degrees from the University of Illinois. All
of Dr. Robb's degrees were awarded in chemical engineering. He is currently a
Director of Marquette Medical Systems, Inc., Celgene Corporation, Neopath, Inc. and Mechanical Technology
Incorporated.
MR. VON ARXMr. von Arx became a Director of the Company in October 1991. He served as the Non-Executive
Chairman of Morrison Restaurants Inc. from January 1996 to July 1998 and is the
former Chairman, President and Chief Executive Officer of Planters LifeSavers
Company, an affiliate of RJR Nabisco, Inc., where he served in such capacities
for four years prior to his retirement in 1991. Mr. von Arx is a graduate of
Washington University, where he received a bachelor's degree. He is currently a
Director of Ruby Tuesday, Inc., International Multifoods Corporation, and MacKenzie
Investment Management, Inc. 35and BMC Fund, Inc.
42
PRINCIPAL SHAREHOLDERS
The following table sets forth44
CERTAIN TRANSACTIONS
SUPPLY AND RELATED AGREEMENTS WITH C3, INC.
We are a party to certain information regarding beneficial
ownershipagreements with C3. Mr. Hunter, our Chairman and Chief
Executive Officer, is a brother of Jeff N. Hunter, who serves as Chairman of the
Company's Common Stock asBoard and Chief Executive Officer of December 27, 1998, except as
otherwise noted below,C3, and as adjustedof C. Eric Hunter, a founder of C3.
According to reflectC3's proxy statement dated April 7, 1999, at March 1, 1999 Jeff N.
Hunter beneficially owned 4.3% of the saleoutstanding shares of common stock of C3.
According to a Schedule 13G report filed with the Commission January 20, 1999,
at January 18, 1999 C. Eric Hunter beneficially owned 9.4% of the outstanding
shares of common stock of C3. General Electric Pension Trust, which beneficially
owns approximately 8.7% of our outstanding shares, at March 1, 1999 was the
beneficial owner of 8.3% of the outstanding shares of C3 common stock, according
to the C3 Proxy Statement. At August 13, 1999, five of our directors (Messrs.
Carter, Dykes, Palmour, Robb and von Arx) also held C3 shares, representing in
the aggregate approximately 1.5% of the shares offered hereby: (i) by each person known byoutstanding, with the Company to own beneficially
more than five percent of the Common Stock; (ii) by each Director; (iii) by
each executive officer; and (iv) by all Directors and executive officers of the
Company as a group. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all shares
of Common Stock owned by them, except to the extent such power may be shared
with a spouse.
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING(2) THE OFFERING(2)
------------------------ -----------------------
DIRECTORS AND EXECUTIVE OFFICERS(1) NUMBER PERCENT NUMBER PERCENT
- ----------------------------------- ------------ --------- ------------ --------
Michael W. Haley (3) ................................................ 475,914 3.7% 475,914 3.3%
Dolph W. von Arx (4) ................................................ 314,160 2.4% 314,160 2.2%
F. Neal Hunter (5) .................................................. 295,786 2.3% 295,786 2.1%
John W. Palmour, Ph.D. (6) .......................................... 289,500 2.2% 289,500 2.0%
Calvin H. Carter, Jr., Ph.D. (7) .................................... 256,030 2.0% 256,030 1.8%
Walter L. Robb, Ph.D. (8) ........................................... 170,000 1.3% 170,000 1.2%
Charles M. Swoboda (9) .............................................. 58,200 * 58,200 *
James E. Dykes (10) ................................................. 56,000 * 56,000 *
Cynthia B. Merrell (11) ............................................. 12,400 * 12,400 *
All Directors and executive officers as a group (9 persons) ......... 1,927,990 14.3% 1,927,990 13.0%
5% SHAREHOLDERS
---------------
Trustees of General Electric Pension Trust (12) ..................... 1,279,967 9.9% 1,279,967 9.0%
Freiss Associates, Inc. (13) ........................................ 750,000 5.8% 750,000 5.3%
D.L. Carlson Investment Group, Inc. (14) ............................ 683,995 5.3% 683,995 4.8%
- -------------------
* Representslargest
individual holding representing less than one percent. (1) Unless otherwise indicated, the address of the Directors andNeither we nor any other
directors or executive officers namedbesides the five listed above is the same as the Company's address at 4600 Silicon
Drive, Durham, North Carolina 27703.
(2) Based on 12,919,818presently hold
shares of common stock outstanding on December 27, 1998
and 14,219,818 shares of common stock outstanding immediately after the
offering. PursuantC3 stock.
We supply SiC to the rules of the Commission, certain shares of Cree's
common stock which a person has the right to acquire within 60 daysC3 pursuant to the exercise of stock options and warrants are deemed to be
outstanding for the purpose of computing beneficial ownership and the
percentage ownership of that person but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. All
Directors and executive officers as a group hold options to purchase an
aggregate of 587,966 shares of common stock. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of common stock that are
beneficially owned by them.
(3) Includes options to purchase 68,000 shares of common stock. Also includes
20,000 shares held by a charitable foundation of which Mr. Haley is a
director. Mr. Haley holds shared voting and investment power over these
shares but disclaims beneficial ownership.
(4) Includes options to purchase 94,000 shares of common stock. Mr. von Arx
disclaims voting and investment power over these shares.
(5) Includes options to purchase 115,786 shares of common stock.
(6) Includes options to purchase 66,000 shares of common stock. Also includes
10,000 shares held by Dr. Palmour's spouse. Dr. Palmour disclaims voting
and investment power over these shares.
(7) Includes options to purchase 54,780 shares of common stock. Also includes
51,030 shares held by members of Dr. Carter's immediate family. Dr. Carter
disclaims voting and investment power over these shares.
(8) Includes options to purchase 77,000 shares of common stock. Also includes
43,000 shares held by a trust of which Dr. Robb is a trustee. Dr. Robb
holds shared voting and investment power over these shares but disclaims
beneficial ownership.
(9) Includes options to purchase 58,000 shares of common stock.
36
(10) Includes options to purchase 42,000 shares of common stock.
(11) Includes options to purchase 12,400 shares of common stock.
(12) Based upon a Form 13G filed with the Securities and Exchange Commission
filed February 19,1997. Includes warrants to purchase 12,500 shares of
common stock. Trustees of General Electric Pension Trust's address is 3003
Summer Street, Stamford, Connecticut 06904.
(13) Based on a Form 13F filed with the Securities and Exchange Commission for
the period ended September 30, 1998. Freiss Associates, Inc.'s address is
3908 Kennett Pike, P.O. Box 4166, Greenville, Delaware 19807.
(14) Based on a Form 13F filed with the Securities and Exchange Commission for
the period ended September 30, 1998. D.L. Carlson Investment Group, Inc.'s
address is 101 N. State Street, Concord, New Hampshire 03301.
37
CERTAIN TRANSACTIONS
Pursuant to a supply agreement originally entered into in
1995 and subsequently
amended and restated the Company has agreedin June 1997. The agreement, with an initial term
extending to 2005, provides that we will supply SiC to C3 on an exclusive basis
for use in the fabrication of gemstones and that C3 has agreed towill purchase certainfrom us each
quarter at least 50% (by dollar volume) of its requirements for such materialSiC material.
Recently, we agreed that C3 could reschedule approximately one-half of its
purchase commitments from the Company.first half of calendar 2000 to the second half of
the year. In related development agreements executed in July 1997 and January 1998, and
subsequently
amended and restated the Company has agreedin July 1998, we have undertaken to develop improved
processes for manufacturing large volume, colorless SiC material for sale to C3.
In addition, the Companywe and C3 are parties to an agreement executed in February 1996
under which the Company supplieswe supply certain electronic devices to C3 for use in gemstone
testing equipment. During the fiscal year ended June 28,
1998,27, 1999, C3 purchased
approximately $4.5$11.4 million in products and services from the
Companyus under these
agreements. The CompanyUnder an agreement entered in December 1999, C3 has committed to
purchase a minimum fixed quantity of SiC materials from us until December 2000.
We and C3 are also parties to an agreement executed agreements in May 1998 and May 1999 under which C3
purchased certainagreed to purchase equipment to be constructed by the Company which the
Company retainsus and retained by us for use
in manufacturing SiC crystalsmaterial for sale to C3. The purchase price of the equipment was based on the Company'sis
equal to our labor and material costs incurred in construction, plus a
reasonable allocation of overhead, subject to an agreeda maximum price of $3.4 million.million
and $2.8 million under the 1998 and 1999 agreements, respectively. Construction
under the 1998 agreement was begun during fiscal 1998 and completed in fiscal
1999. C3 paid us $3.4 million during fiscal 1999 as the purchase price of this
equipment, which was equal to our construction costs plus an overhead allocation
of $603,000 (determined using the same methods as followed by us in our cost
accounting for government contracts). Construction under the 1999 agreement was
begun during the 1999 fiscal year and was completed in fiscal 2000. We charged
C3 approximately $1.3 million (which included an overhead allocation of
$202,000) for costs incurred under this agreement during fiscal 1999 and $1.4
million through the first quarter of fiscal 2000. Under the terms applicable to
the purchase,these purchases, C3 is obligated to transfer title to the equipment to the Companyus once
it is fully depreciated.
Certain of the Company's Directors and executive officers own approximately
169,000 shares of C3 common stock, representing less than 2.3% of C3's
outstanding common stock.EMPLOYMENT AGREEMENT WITH C. ERIC HUNTER
In addition,May 1999, we entered into an employment agreement with C. Eric Hunter, and Jeff N. Hunter,
brothersa
brother of Cree'sour Chairman and Chief Executive Officer, F. NealOfficer. Mr. Hunter beneficially own approximately 18% of the outstanding common stock of C3. Jeff
Hunter is the Chairmanserved as our
President and Chief Executive Officer from 1987 until 1994 and served as
Chairman of C3. The Company also owns
less than 1%our Board of Directors from 1987 until 1995.
43
45
He was engaged as a consultant to us from 1995 until expiration of the
outstandingconsulting agreement in June 1998. Mr. Hunter has developed and filed patent
applications on several inventions relating to wide bandgap materials that are
of interest to us. In view of our interest in these inventions and Mr. Hunter's
knowledge and expertise in wide bandgap materials generally, we entered into
negotiations to acquire his rights in the inventions and to obtain his
assistance on technical matters on a part-time basis.
Pursuant to the May 1999 agreement, we employed Mr. Hunter at a salary of
$15,000 per year as Senior Technology Advisor with responsibilities that include
conceiving and evaluating ideas and inventions relating to wide bandgap
materials. In the agreement, Mr. Hunter assigned to us rights to seven pending
U.S. patent applications and one issued U.S. patent on inventions relating to
wide bandgap materials, subject to previously granted license rights. Two
additional U.S. patents have subsequently issued on the acquired applications.
In consideration of the assignment and other benefits under the agreement, we
granted Mr. Hunter, on May 11, 1999, an option to purchase 134,400 shares of
common stock at an exercise price equal to the closing market price on the grant
date (adjusted for stock splits). The option vests over seven years in equal
annual increments, subject to continued employment at the applicable vesting
date. The employment agreement obligates Mr. Hunter not to engage in certain
competitive activities during the ten-year term of C3.
38the agreement and for three
years thereafter. Neither party may terminate the agreement except for cause (as
defined in the agreement) and except that Mr. Hunter may resign after seven
years.
44
46
UNDERWRITING
The Company hasWe have entered into an underwriting agreement with the underwriters named
below. CIBC OppenheimerWorld Markets Corp., Prudential Securities Incorporated, Banc of
America Securities LLC, SoundView Technology Group, Inc. and Morgan Keegan &
Company, Inc. are acting as representatives of the underwriters. The
underwriting agreement provides for the purchase of a specific number of shares
of common stock by each of the underwriters. The underwriters' obligations are
several, which means that each underwriter is required to purchase a specified
number of shares, but is not responsible for the commitment of any other
underwriter to purchase shares. Subject to the terms and conditions of the
underwriting agreement, each underwriter has severally agreed to purchase the
number of shares of common stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
CIBC Oppenheimer Corp. .....................World Markets Corp.....................................
Prudential Securities Incorporated .........Incorporated..........................
Banc of America Securities LLC..............................
SoundView Technology Group, Inc.............................
Morgan Keegan & Company, Inc. ..............
Total ..................................
-----------------
=================Inc................................
---------
Total............................................. 2,600,000
=========
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised Creeus that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to certain securities dealers at such price less a concession of
$ per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
The Company hasWe have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 195,000390,000 additional shares from the Companyus to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the public offering price that
appears on the cover page of this prospectus, less the underwriting discount. If
this option is exercised in full, the total price to public will be $ ,$253.8
million, and the total proceeds to the Companyus will be $ .$241.7 million. The underwriters
have severally agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares proportionate
to the underwriter's initial amount reflected in the foregoing table.
3945
47
The following table provides information regarding the amount of the discount to
be paid to the underwriters by the Company:
TOTAL
-------------------------------------
EXERCISE OF
WITHOUT EXERCISE WITH FULL
PER SHARE OF OVER-ALLOTMENT OVER-ALLOTMENT
- ----------- ------------------- ---------------
The Company estimatesus:
TOTAL
--------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- ------------------- ---------------------
$ $ $
We estimate that itsour total expenses of the offering, excluding the underwriting
discount, will be approximately $650,000.
The Company has$550,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
The Company and itsWe, as well as our executive officers and directorsDirectors, have agreed to a 90-day
"lock up" with respect to approximately 3,290,142 shares of common stock and
certain other Companyof our securities that they beneficially own, including securities
that are convertible into shares of common stock and securities that are
exchangeable or exercisable for shares of common stock. This means that, subject
to certain exceptions, for a period of 90 days following the date of this
prospectus, the
Companywe and such persons may not offer, sell, pledge or otherwise dispose
of these securities without the prior written consent of CIBC OppenheimerWorld Markets
Corp.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
o- - Stabilizing transactions -- The representatives may make bids or purchases for
the purposepurposes of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
o- - Over-allotments and syndicate covering transactions -- The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created in
connection with the offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option.
o- - Penalty bids -- If the representatives purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim a
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
o- - Passive market making -- Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject to
certain limitations, until the time, if ever, at which a stabilizing bid is
made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither the Companywe nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
4046
48
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon for
the Companyus by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., 2500 First
Union Capitol Center, Raleigh, North Carolina 27601. Certain legal matters in
connection with this offering will be passed upon for the Underwritersunderwriters by Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts 02109.
EXPERTS
The consolidated balance sheetssheet as of June 30, 199727, 1999 and the consolidated
statements of income, cash flow and shareholders' equity for the year ended June
27, 1999 included in this prospectus have been included herein and incorporated
by reference to the Annual Report on Form 10-K for the year ended June 27, 1999
in reliance on the report of Ernst & Young LLP, independent auditors, given on
the authority of that firm as experts in accounting and auditing.
The consolidated balance sheet as of June 28, 1998 and the consolidated
statements of operations,income, cash flow and shareholdersshareholders' equity for the two years in the period ended
June 30, 1997 and for the year ended June 28, 1998 included in this prospectus have been included
herein and incorporated by reference to the Annual Report on Form 10-K for the
year ended June 27, 1999 in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of that firm as experts in
accounting and auditing.
OTHER MATTERS
In September 1998, the Company retained Ernst & Young LLP as its independent
public accountants and dismissed the Company's former auditors. In connection
with its audits for the two most recent fiscal years prior to dismissal and
through the date of its dismissal, there were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if
not resolved to the satisfaction of the former auditors, would have caused it
to make reference to the subject matter of the disagreement in connection with
its report on the financial statements of the Company for such periods. The
former auditors' reports on the Company's financial statements contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. Prior to retaining Ernst
& Young LLP, the Company had not consulted with Ernst & Young LLP on any
accounting, auditing or reporting matter.
WHERE YOU CAN FIND MORE INFORMATION
The Company hasWe have filed a registration statement on Form S-3 with the Securities and
Exchange Commission in connection with this offering. In addition, the
Company fileswe file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy the
registration statement and any other documents filed by the Companyus at the Securities and
Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Room. The Company'sOur
Securities and Exchange Commission filings are also available to the public at
the Securities and Exchange Commission's Internet site at "http://www.sec.gov".
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contractof our contracts or other document of the Company,documents, the
reference may not be complete and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
The Securities and Exchange Commission allows the Companyus to "incorporate by reference"
into this prospectus the information the Company fileswe file with it, which means that the Companywe can
disclose important information to you by referring you to those documents.
Information incorporated by reference is part of this prospectus. Later
information filed with the Securities and Exchange Commission will update and
supersede this information.
41
The Company incorporatesWe incorporate by reference the documents listed below (File No. 34-21154) and
any future filings made with the Securities and Exchange Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
this offering is completed:
o- - Annual Report on Form 10-K for the fiscal year ended June 28, 1998, as amended
by Form 10-K/A.
o27, 1999.
- - Quarterly Report on Form 10-Q for the quarter ended September 27, 1998.
o26, 1999.
47
49
- - Current Report on Form 8-K dated September 21, 1998, as amended by Form
8-K/A on September 30, 1998.
oJuly 13, 1999.
- - The description of the Company'sour common stock contained in itsour registration statement on
Form 8-A filed with the Commission under Section 12 of the Securities Exchange
Act of 1934.
You may request a copy of these filings, at no cost, by contacting the Companyus at:
Cree, Research, Inc.
4600 Silicon Drive
Durham, North Carolina 27703
Attention: Investor Relations Manager
Telephone: (919) 313-5300
4248
50
CREE, RESEARCH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
INTERIM FINANCIAL STATEMENTSInterim Financial Statements -- UNAUDITEDUnaudited
Consolidated Balance Sheets as of June 28, 199827, 1999 (audited)
and December 27, 1998 ......September 26, 1999................................. F-2
Consolidated Statements of Income for the sixthree months
ended December 28, 1997 and
DecemberSeptember 27, 1998 ...................................................................and September 26, 1999........ F-3
Consolidated Statements of Cash Flow for the sixthree months
ended December 28, 1997 and
DecemberSeptember 27, 1998 ..................................................................and September 26, 1999........ F-4
Consolidated Statements of Shareholders' Equity for the
year ended June 28, 199827, 1999 (audited) and for the sixthree
months ended December 27, 1998 ............................September 26, 1999........................ F-5
Notes to Consolidated Financial Statements ...........................................Statements................ F-6
ANNUAL FINANCIAL STATEMENTSAnnual Financial Statements
Report of Independent Accountants ....................................................Auditors............................ F-11
Report of Independent Accountants......................... F-12
Consolidated Balance Sheets as of June 30, 199728, 1998 and June
28, 1998 ....................27, 1999............................................... F-13
Consolidated Statements of OperationsIncome for the years ended June
30, 1996 and 1997, and June 28, 1998 ......................................................................and June 27, 1999.............. F-14
Consolidated Statements of Cash Flow for the years ended
June 30, 1996 and 1997, and June 28, 1998 ......................................................................and June 27, 1999......... F-15
Consolidated StatementsStatement of Shareholders' Equity for the
years ended June 30, 1996 and
1997, and June 28, 1998 ...........................................................and June 27,
1999................................................... F-16
Notes to Consolidated Financial Statements ...........................................Statements................ F-17
F-1
51
CREE, RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 28, DECEMBER 27, 1998 1998
---------SEPTEMBER 26,
1999 1999
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $17,680 $12,769equivalents................................. $ 42,506 $ 41,226
Marketable securities .................................................... 657 905securities..................................... 6,145 3,727
Accounts receivable, net ................................................. 10,479 12,110
Inventories .............................................................. 2,543 3,402net.................................. 16,285 16,900
Inventories............................................... 3,977 4,060
Deferred income tax ...................................................... 1,952 264tax....................................... 296 296
Prepaid expenses and other current assets ................................ 1,347 691
------- -------assets................. 558 571
-------- --------
Total current assets ................................................... 34,658 30,141assets................................... 69,767 66,780
Property and equipment, net .............................................. 36,476 44,972net............................... 69,884 77,575
Patent and license rights, net ........................................... 1,525 1,641net............................ 1,731 1,798
Deferred income tax....................................... 2,827 2,827
Other assets ............................................................. 65 1,349
------- -------assets.............................................. 8 125
-------- --------
Total assets ........................................................... $72,724 $78,103
======= =======assets........................................... $144,217 $149,105
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ..................................................trade................................... $ 5,5957,487 $ 4,097
Current maturities of long term debt ..................................... 17 1215,406
Accrued salaries and wages ............................................... 391 550wages................................ 819 2,043
Other accrued expenses ................................................... 1,052 990
------- -------expenses.................................... 1,239 3,691
-------- --------
Total current liabilities .............................................. 7,055 5,758liabilities.............................. 9,545 11,140
Long term liabilities:
Long term debt ........................................................... 8,650 9,879liability....................................... -- 30
Deferred income tax ...................................................... 2,154 2,477
------- -------tax....................................... 4,650 4,650
-------- --------
Total long term liabilities ............................................ 10,804 12,356liabilities............................ 4,650 4,680
Shareholders' equity:
Preferred stock, par value $0.01; 2,7503,000 shares authorized
at June 28, 199827, 1999 and 3,000 shares authorized at December 27, 1998;September 26, 1999; none issued
and outstanding ............................................................outstanding........................................ -- --
Common stock, $0.005 par value; 14,500value $0.0025; 60,000 shares authorized
at June 28,
199827, 1999 and 30,000 shares authorized at December 27, 1998;September 26, 1999; shares issued
and outstanding 12,98929,258 and 12,92029,500 at June 28, 199827, 1999 and
December 27,
1998, respectively ..................................................... 65 65September 26, 1999, respectively....................... 73 74
Additional paid-in-capital ............................................... 49,676 49,583paid-in-capital................................ 111,136 112,180
Retained earnings ........................................................ 5,124 10,341
------- -------earnings......................................... 18,813 21,031
-------- --------
Total shareholders' equity ............................................. 54,865 59,989
------- -------equity............................. 130,022 133,285
-------- --------
Total liabilities and shareholders' equity ............................ $72,724 $78,103equity........ $144,217 $149,105
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
52
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1998 1999
------------- -------------
(UNAUDITED)
Revenue:
Product revenue, net...................................... $10,720 $18,257
Contract revenue, net..................................... 1,559 1,791
------- -------
Total revenue.......................................... 12,279 20,048
Cost of revenue:
Product revenue, net...................................... 5,415 9,498
Contract revenue, net..................................... 1,207 1,136
------- -------
Total cost of revenue.................................. 6,622 10,634
Gross profit................................................ 5,657 9,414
Operating expenses:
Research and development.................................. 806 931
Sales, general and administrative......................... 1,218 1,927
Other expense............................................. 269 101
------- -------
Income from operations................................. 3,364 6,455
Interest income, net........................................ 115 569
------- -------
Income before income taxes............................. 3,479 7,024
Income tax expense.......................................... 1,113 2,388
------- -------
Net income............................................. $ 2,366 $ 4,636
======= =======
Other comprehensive income, net of tax:
Unrealized holding loss................................ -- (2,418)
------- -------
Comprehensive income........................................ $ 2,366 $ 2,218
======= =======
Earnings per share:
Basic..................................................... $ 0.09 $ 0.16
======= =======
Diluted................................................... $ 0.09 $ 0.15
======= =======
Shares used in per share calculation:
Basic..................................................... 25,840 29,337
======= =======
Diluted................................................... 26,498 31,214
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
-----------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
------------- -------------
(UNAUDITED)
Revenue:
Product revenue, net ...................... $ 16,369 $ 23,525
Contract revenue, net ..................... 3,944 2,792
-------- --------
Total revenue ........................... 20,313 26,317
Cost of revenue:
Product revenue ........................... 10,365 11,792
Contract revenue .......................... 3,252 2,252
-------- --------
Total cost of revenue ................... 13,617 14,044
-------- --------
Gross profit ............................... 6,696 12,273
Operating expenses:
Research and development .................. 920 1,927
Sales, general and administrative ......... 1,985 2,668
Other expense ............................. 390 567
-------- --------
Income from operations .................. 3,401 7,111
Interest income, net ....................... 332 135
-------- --------
Income before income taxes .............. 3,733 7,246
Income tax expense ......................... 1,093 2,029
-------- --------
Net income .............................. $ 2,640 $ 5,217
======== ========
Earnings per share:
Basic ................................... $ 0.21 $ 0.41
======== ========
Diluted ................................. $ 0.20 $ 0.39
======== ========
Shares used in per share calculation:
Basic ................................... 12,699 12,876
======== ========
Diluted ................................. 13,522 13,541
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
53
CREE, RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
SIXTHREE MONTHS ENDED
-----------------------------
DECEMBER 28, DECEMBERSEPTEMBER 27, 1997SEPTEMBER 26,
1998 1999
------------- -------------
(UNAUDITED)
(UNAUDITED)
Operating activities:
Net income ..........................................................income................................................ $ 2,6402,366 $ 5,2174,636
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................................... 2,067 2,341amortization.......................... 1,140 2,009
Loss on disposal of property equipment and patents ............... 320 951equipment............. 511 43
Amortization of patent rights ..................................... 50 56
Amortization and write off of goodwill ............................ 86 --
Proceeds from sale of marketable trading securities ............... -- 489rights.......................... 28 32
Purchase of marketable trading securities ......................... (1,500) (232)
Gainsecurities.............. (234) --
Loss on marketable trading securities .............................securities.................. 67 -- (116)
Changes in operating assets and liabilities:
Accounts receivable ............................................... (2,258) (1,964)
Inventories ....................................................... 1,161 (859)receivable.................................. (1,217) (615)
Inventories.......................................... (706) (83)
Prepaid expenses and other assets ................................. 148 1,004assets.................... 595 (130)
Accounts payable, trade ........................................... (783) (3,073)trade.............................. (2,452) (2,081)
Accrued expenses .................................................. 889 420
---------- ---------expenses..................................... 1,119 3,707
------- -------
Net cash provided by operating activities ......................... 2,820 4,234
---------- ---------activities......... 1,217 7,518
------- -------
Investing activities:
Purchase of property and equipment .................................. (5,704) (10,380)equipment........................ (4,006) (9,744)
Proceeds from sale of property and equipment ........................ 340 189equipment.............. 10 --
Purchase of patent rights ........................................... (200) (194)
---------- ---------rights................................. (91) (99)
------- -------
Net cash used in investing activities ............................ (5,564) (10,385)
---------- ---------activities............. (4,087) (9,843)
------- -------
Financing activities:
ProceedsNet proceeds from issuance of long-term debt ............................ 3,259 1,333debt.............. 1,281 --
Net proceeds from issuance of common stock .......................... 2,139 2,527
Receipt of Section 16(b) common stock profits ....................... -- 594stock................ 159 1,045
Repurchase of common stock ..........................................stock................................ (3,214) --
(3,214)
---------- ---------------- -------
Net cash (used in) provided by financing
activities ........................ 5,398 1,240
---------- ---------activities.................................... (1,774) 1,045
------- -------
Net increase (decrease)decrease in cash and cash equivalents ................. 2,654 (4,911)equivalents................... (4,644) (1,280)
Cash and cash equivalents:
Beginning of period ................................................. 10,448period....................................... 17,680 ---------- ---------42,506
------- -------
End of period ....................................................... $ 13,102 $ 12,769
========== =========period............................................. $13,036 $41,226
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized ..................capitalized........ $ 112 $ --
$ 275
========== ================ =======
Cash paid for income taxes ..........................................taxes................................ $ 219164 $ 1,396
========== =========63
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
54
CREE, RESEARCH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 28, 199827, 1999 AND THE SIXTHREE MONTHS ENDED DECEMBER 27, 1998SEPTEMBER 26, 1999
(IN THOUSANDS)
COMMON
STOCK ADDITIONAL TOTAL
STOCKPAR PAID-IN RETAINED TREASURY SHAREHOLDERS'
PAR
VALUE CAPITAL EARNINGS STOCK EQUITY
----------- ----------- ------------ ----------- -------------------- ---------- -------- -------- -------------
Balance at June 30, 1997 -- (audited) ................... $6228, 1998................ $65 $ 46,21449,676 $ (1,151)5,124 $ -- $ 45,125
Common stock options exercised for cash, 217
shares ................................................. 1 1,693 -- -- 1,694
Common stock warrants exercised for cash, 331
shares ................................................. 2 1,240 -- -- 1,242
Purchase of common stock for the treasury, 82
shares ................................................. -- -- -- (1,262) (1,262)
Retirement of 82 treasury shares ........................ -- (1,262) -- 1,262
Income tax benefits from stock option exercises ......... -- 1,791 -- -- 1,791
Net income .............................................. -- -- 6,275 -- 6,275
----- -------- -------- -------- --------
Balance at June 28, 1998 -- (audited) ................... 65 49,676 5,124 -- 54,865
Common stock options exercised for cash,
100
shares .................................................418 shares............................ 1 7451,511 -- -- 7461,512
Common stock warrants exercised for
cash, 72
shares .................................................342 shares...................... -- 1,7814,656 -- -- 1,7814,656
Issuance of common stock for cash, 2,990
shares................................ 7 55,240 -- -- 55,247
Purchase of common stock for treasury,
470 shares............................ -- -- -- (3,213) (3,213)
Retirement of 470 treasury shares....... -- (3,213) -- 3,213 --
Receipt of Section 16(b) common stock
profits ...........from a director............... -- 594 -- -- 594
Purchase and retirement of 235 treasury shares .......... (1) (3,213)Income tax benefits from stock option
exercises............................. -- 2,672 -- -- (3,214)
Net2,672
Other comprehensive income, ..............................................net of
tax................................... -- -- 5,217987 -- 5,217
-----987
Net income.............................. -- -- 12,702 -- 12,702
--- -------- -------- --------------- ------- --------
Balance at DecemberJune 27, 19981999 (audited)...... 73 111,136 18,813 -- 130,022
Common stock options exercised for cash,
242 shares............................ 1 1,044 -- -- 1,045
Other comprehensive loss, net of tax.... -- -- (2,418) -- (2,418)
Net income.............................. -- -- 4,636 -- 4,636
--- -------- ------- ------- --------
Balance at September 26, 1999
(unaudited) ............. $65 $ 49,583 $ 10,341........................... $74 $112,180 $21,031 $ -- $ 59,989
=====$133,285
=== ======== ======== =============== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
55
CREE, RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The consolidated balance sheet as of DecemberSeptember 26, 1999, the statements of operations for the
three month periods ended September 27, 1998 the consolidated
statements of income for the six months ended December 28, 1997 and December
27, 1998,September 26, 1999, and the consolidated
statements of cash flowflows for the sixthree months ended December 28, 1997 and DecemberSeptember 27, 1998 and
the consolidated statement of
shareholders' equity for the six months ended December 27, 1998September 26, 1999 have been prepared by the Company and have not been audited.
In the opinion of management, all normal and recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows at December 27,
1998,September 26, 1999,
and all periods presented, have been made. The balance sheet at June 27, 1999
has been derived from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included elsewhere herein.in the Company's fiscal 1999 Form 10-K. The results of
operations for the period ended December 27, 1998September 26, 1999 are not necessarily
indicative of the operating results that may be attained for the entire fiscal
year.
ACCOUNTING POLICIES
FISCAL YEARFiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. Accordingly, all quarterly reporting reflects a 13 week
period in fiscal 1999. In2000 and fiscal 1998, the Company changed its fiscal year from
the twelve months ending June 30, to the 52 week period ending on the last
Sunday in the month of June.1999. The Company's current fiscal year will extendextends
from June 29, 1998 to28, 1999 through June 27, 1999.
INVESTMENTS25, 2000.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This statement requires certain securities
to be classified into three categories:
(1)(a) Securities Held-to-Maturity -- DebtHeld-to-Maturity-Debt securities that the entity has
the positive intent and ability to hold to maturity are reported at
amortized cost.
(2)(b) Trading Securities -- DebtSecurities-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.
(3)(c) Securities Available-for-Sale -- DebtAvailable-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 and losses excluded from
earnings and reported as a separate componentin retained earnings.
As of stockholders' equity.
TheSeptember 26, 1999, the Company's short-term investments consisted of
common stock holdings of Microvision, Inc. ("MVIS"). The Company purchased
268,600 common shares in a private equity transaction in May 1999 at a price of
$16.75 per share. In August 1999, MVIS filed a registration statement for the
Company's sale of these shares; however, Cree has agreed not to sell the shares
until at least January 6, 2000. Since the Company is currently restricted from
trading these shares and management views this transaction as an investment, the
shares are comprisedaccounted for as
F-6
56
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
"available for sale" securities under SFAS 115. Therefore unrealized gains or
losses are excluded from earnings and are recorded directly in retained
earnings.
As of equity securities that
are classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at DecemberSeptember 27, 1998, the Company's short-term investments consisted of
common stock holdings in C3, Inc ("C3"), the majority of which were bought in
November 1997. The Company also acquired additional shares of C3 in September
1998 and acquired 24,601 shares directly from C3 pursuant to the exercise of an
option in January 1997. This investment was treated for accounting purposes as a
trading security, with net realized and unrealized gains and losses included in
net earnings. As of December 27, 1998, short-term investments consist ofAll common stock
holdings in C3, the majority of which were purchased in November 1997 and
September 1998. The Company's CEO has, through a binding agreement, promised to
indemnify the Company for losses of up to $450,000 for the net difference
between the aggregate cash consideration paid by Cree for the shares of C3 common stock and the cash proceeds receivedheld by Cree upon the sale of C3 common
shares. This indemnity covers losses that may result from the sale of shares
purchased in November 1997 and September 1998 below the purchase price paid,
offset bywere subsequently sold during
fiscal 1999. Recognized gains realized on shares acquired directly from C3 in January 1997
(see below). Payment of this obligation is due within ten days after receipt by
the CEO of the Company's written demand made pursuant to a vote of the majority
of the members of the Board of Directors other than the CEO. Realized losses on shares of C3 F-6
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
stock soldrecorded to the statement of
income during fiscal 1999 by the Company were $254,000 and $46,000, for fiscal 1998 and 1999,
respectively. At December 27, 1998, a net unrealized gain, including shares
acquired directly from C3 (see below), of $383,000$140,000. This amount was recognized to bring the
valuation of shares held to market. Therefore,recorded
as other income.
Long Term Debt
In November 1997, the Company recorded
approximately $116,000 of other income in the six months ended December 27,
1998. Approximately $32,000 of net losses were recorded to other income
(expense) in fiscal 1998. Since the net unrealized gain on shares held exceeded
realized losses on shares sold, there was no receivable recorded from the CEO
as of December 27, 1998.
In addition to the shares of C3 purchased in November 1997 and September 1998,
the Company acquired 24,601 shares of C3 common stock in January 1997. These
shares were issued pursuant to an option C3 granted to the Company in 1995. The
option gave the Company the right to acquire, for an aggregate consideration of
$500, one percent of the outstanding common stock of C3. C3 retained the right
to waive the consideration and issue the stock at any time, which it elected to
do in January 1997. The shares issued pursuant to the option are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933,
which permits the sale of such securities without registration if certain
conditions are met. The shares first became eligible for sale under Rule 144 in
the third quarter of fiscal 1998.
LONG TERM DEBT
The Company obtainedentered into a term loan fromwith a commercial bank
offor up to $10,000,000$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 production facility and service and
warehouse buildings in November 1997. As of December 27, 1998 the entire
$10,000,000 loan was outstanding, including a current portion of $121,000 and a
long term amount of $9,879,000.monthly basis based on actual expenditures
incurred. The loan, which iswas collateralized by the purchased property accruesand
subsequent upfits, accrued interest at a fixed rate of 8% and carriescarried customary
covenants, including the maintenance of a minimum tangible net worth and other
requirements. Accrued interest is due monthly until MayAs of September 27, 1998 the entire $10.0 million loan was
outstanding, including a current portion of $69,000 and a long term amount of
$9.9 million. On February 17, 1999, at
which time the outstanding principal balance will be amortized over twenty
years until 2011, when the loan balance becomes due.entire $10.0 million indebtedness was
repaid with proceeds received from a public stock offering.
During the sixthree months ended DecemberSeptember 27, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with the facility. Interest capitalized for the sixthree months ended DecemberSeptember 27,
1998, was $118,000.
INVENTORIES$84,000.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
usingunder the first-in, first-out (FIFO)("FIFO") method. Inventories consist of the
following:
JUNE 28, DECEMBER 27, 1998 1998
---------SEPTEMBER 26,
1999 1999
-------- -------------
(IN THOUSANDS)
Raw materials ............ $ 999 $1,338
Work-in-progress ......... 752 1,220materials.............................................. $1,290 $1,352
Work-in-progress........................................... 1,675 1,193
Finished goods ........... 792 844goods............................................. 1,012 1,515
------ ------
Total Inventory ......... $2,543 $3,402inventory.......................................... $3,977 $4,060
====== ======
RESEARCH AND DEVELOPMENT ACCOUNTING POLICYResearch and Development Accounting Policy
The U.S. Government provides funding for several of the Company'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
F-7
57
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 F-7
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
divided between the U.S. Governmentgovernment and the Company based on the terms
of the contract. The government's cost share is then paid to the Company.
Activities performed under these arrangements include research regarding silicon
carbide and gallium nitride materials. The contracts typically require the
submission of a written report to documentthat documents the results of such research.
The revenue and expense classification for contract activityactivities is determined 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 exceed funding by period as included in research and development
expenses:
SIXTHREE MONTHS ENDED
-----------------------------
DECEMBER 28, DECEMBERSEPTEMBER 27, 1997SEPTEMBER 26,
1998 1999
------------- -------------
(IN THOUSANDS)
Net R&D costs ......................... $281 $0research and development costs..................... $-- $ 40
Government funding .................... 598 0funding..................................... -- 67
-- ---- --
Total direct costs incurred ......... $879 $0incurred.......................... $-- $107
=== ==== ==
As of December 27, 1998, all funding under contracts where the Company
anticipates that direct costs will exceed amounts to be funded has been
exhausted. Therefore, the Company anticipates that all future funding under
existing contracts will be reflected as contract revenue while direct costs
will be reported as contract cost of revenue.
SIGNIFICANT SALES CONTRACTSignificant Sales Contract
In September 1996, the Company entered into a Purchase Agreement with Siemens AG
("Siemens"), pursuant to which Siemens agreed to purchase LED chips made with
the Company's gallium nitride-on-silicon carbide technology. In April 1997,
and December 1997 and September 1998, contract amendments were executed that
provided for enhanced product specifications requested by Siemens and larger
volume requirements, respectively. In SeptemberDecember 1998, the Company and Siemens further amended the contract to
extend the Purchase Agreement with respectwas
amended to provide for additional shipments of LED products through September
1999. The Purchase Agreement was subsequently assigned to be made on or after
June 29, 1998. The third amendment obligatesan indirect subsidiary
of Siemens, OSRAM Opto Semiconductors GMBH & Co. OHG ("Osram"), effective as of
January 1, 1999.
In August 1999, the Company entered into a new Purchase Agreement with Osram,
pursuant to which Osram agreed to purchase and the Company is obligated to ship and Siemens
to purchase,
stipulated quantities of both conductive bufferthe standard brightness and newthe high brightness
LED chips and silicon carbide wafers through fiscal 1999.September 2000.
The agreement calls for certain quantities of standard brightness and high
brightness LED chips to be delivered by month. In the event the Company
materially defaults in delivering shipments, Osram may recover liquidated
damages of one percent per week of the purchase price of the delayed product,
subject to a maximum of ten percent of the purchase price. If product shipments
are delayed six weeks or more due to circumstances within the Company's control,
then in lieu of liquidated damages, Osram may claim damages actually resulting
from the delay up to forty percent of the purchase price of delayed products.
F-8
58
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The contract also limits Siemen's rightgives Osram limited rights to defer shipments to 30% of scheduled
quantities for itemsshipments. For products to
be shipped in more than 24 weeks after initial notice, Osram can defer 30% and
10%20% of scheduled quantities for itemsstandard brightness and high brightness LEDs, respectively. For products
to be shipped in more than 12 weeks.weeks, but less than 24 weeks, Osram may defer 10%
of scheduled quantities for both standard brightness and high brightness LEDs.
Also, additional quantities of high brightness LEDs stipulated in the contract
may be deferred to the next quarter with 60 days notice at the election of
Osram. In bothall cases, SiemensOsram would be required to accept all productproducts within 90
days of the original shipment date. Additionally, the amendmentPurchase Agreement
provides for higher per unit prices early in the contract with reductions in
unit prices being available as the cumulative volume shipped increases. In December 1998, the Company and Siemens further amended the contract to
include greater quantities of conductive buffer LED chips to be shipped during
fiscal 1999 and extend the contract for these shipments through September 1999.
This amendment also provides for higher per unit prices early in the contract
with reductions in unit prices being available as the cumulative volume shipped
increases. As was the case with the third amendment, theseThe
higher prices were negotiated by the Company to offset higher per unit costs
expected earlier in the contract.
F-8
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
INCOME TAXESDepreciation
The Company has changed its depreciation policy to reflect lower useful lives on
new manufacturing equipment. The useful life has 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. Based
on information available at this time, management estimates that the change in
policy may reduce the Company's fiscal 2000 net income by approximately $660,000
or $0.02 per share, but actual results may vary.
Income Taxes
The Company has established an estimated tax provision based upon an effective
rate of 28%34%. The estimated tax rate was based on tax reduction strategies being
implemented by the Company. The estimated effective rate was based upon projections of income
for the fiscal year and the Company's ability to utilize remaining net operating
loss carryforwards and other tax credits. However, the actual effective rate may
vary depending upon actual pre-tax book income for the year or other factors.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between 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.
The actual income tax expense attributable to earnings for the six months ended
December 27, 1998 differed from the amounts computed by applying the statutory
U.S. Federal tax rate of 35% to pretax earnings as a result of the following:
AMOUNT PERCENT
---------- ----------
(IN THOUSANDS)
Federal income tax provision at statutory rate ......... $2,536 35.0%
State tax provision .................................... 174 2.4
Decrease in income tax expense resulting from:
Foreign sales corporation ........................... (306) (4.2)
State tax incentives ................................ (167) (2.3)
Research and development credits .................... (85) (1.2)
Change in valuation allowance ....................... (123) (1.7)
------ ----
Income tax expense ..................................... $2,029 28.0%
====== ====
The following are the components of the provision for income taxes for the six
months ended December 27, 1998 (in thousands):
Current:
Federal ....................... $1,182
State ......................... 175
------
Total current portion .......... 1,357
Deferred:
Federal ....................... 782
State ......................... (110)
------
Total deferred portion ......... 672
------
Net provision .................. $2,029
======
F-9
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
JUNE 28, DECEMBER 27,
1998 1998
---------- -------------
(IN THOUSANDS)
--------------
Deferred tax assets:
Net operating loss carryforwards .................... $1,304 $ 948
Research tax credits ................................ 169 92
Compensation accruals ............................... 62 70
Inventory capitalization ............................ 120 130
Bad debt allowance .................................. 56 64
Alternative minimum tax ............................. 261 158
Foreign tax credit .................................. 270 153
State incentive credits ............................. -- 165
------ ------
Total gross deferred tax assets ..................... 2,242 1,780
Less valuation allowance ............................ (290) (167)
------ ------
Net deferred tax asset .............................. 1,952 1,613
Deferred tax liabilities:
Property and equipment, due to depreciation ......... 2,154 2,477
------ ------
Gross deferred tax liabilities ...................... 2,154 2,477
------ ------
Net deferred tax asset (liability) .................. $ (202) $ (864)
====== ======
The net change in the total valuation allowance for the six months ended
December 27, 1998 was $123,000. The primary reason for the reduction in the
valuation allowance for the six months ended December 27, 1998 was the
implementation of tax strategies to utilize these assets. Realization of
deferred tax assets associated with the NOL carryforwards is dependent upon the
Company generating sufficient taxable income prior to their expiration.
Although realization is not assured for the remaining deferred tax assets,
management believes it is more likely than not that they will be realized
through future taxable earnings. However, the net deferred tax assets could be
reduced in the future if management's estimates of taxable income during the
carryforward period are significantly reduced.
As of December 27, 1998, the Company has net operating loss carryforwards for
federal purposes of $3,493,000 and $2,346,000 for state purposes. The
carryforward expiration period is 2011 to 2013 for Federal tax purposes and
from 2000 to 2003 for state purposes. The Company anticipates that each of
these carryforwards will be utilized by the end of the current fiscal year.
EARNINGS PER SHARE
The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards, "Earnings Per Share,"Share" ("SFAS 128"). SFAS No. 128
required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128.
F-10F-9
59
CREE, RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following computation reconciles the differencesdifference between the basic and
diluted presentations:
SIXTHREE MONTHS ENDED
-----------------------------
DECEMBER 28, DECEMBER--------------------------------------
SEPTEMBER 27, 1997 1998
------------- -------------SEPTEMBER 26,
1998* 1999
--------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income ............................................income....................................... $ 2,6402,366 $ 5,2174,636
Weighted average common shares ........................ 12,699 12,876
-------- --------shares................... 25,840 29,337
------- -------
Basic earnings per common share .......................share.................. $ 0.210.09 $ 0.41
======== ========0.16
======= =======
Net income ............................................income....................................... $ 2,6402,366 $ 5,2174,636
Diluted weighted average common shares:
Common shares outstanding ............................. 12,699 12,876outstanding........................ 25,840 29,337
Dilutive effect of stock options and warrants ......... 823 665
-------- --------warrants.... 658 1,877
------- -------
Total diluted weighted average common shares .......... 13,522 13,541
-------- --------shares..... 26,498 31,214
------- -------
Diluted earnings per common share .....................share................ $ 0.200.09 $ 0.39
======== ========0.15
======= =======
- -------------------------
* Weighted average shares and per share amounts have been adjusted for the
two-for-one stock split effective July 26, 1999.
Potential common shares that would have the effect of increasing diluted
incomeearnings per share are considered to be antidilutive. In accordance with SFAS
No. 128, these shares were not included in calculating diluted incomeearnings per
share. As of
DecemberAccordingly, 476,000 and 1.0 million shares for the three months ended
September 26, 1999 and September 27, 1998, there were no potential shares considered to be
antidilutive. For the six months ended December 28, 1997, there were 300,000
shares thatrespectively, were not included in
calculating diluted incomeearnings per share because their effect was antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscalOn July 13, 1999 the Company adopted Statementfiled a Form 8-K announcing a two-for-one split of
Financial Accounting Standards
No.130, "Reporting Comprehensive Income," ("SFAS 130"), which establishes
standards for reportingits common stock. The stock split was effected by an amendment to the Company's
Articles of Incorporation that became effective at the close of business on July
26, 1999. With the effectiveness of the amendment, each issued and displayunissued
authorized share of Comprehensive income and its components
in a full setcommon stock, $0.005 par value per share, was automatically
split into two whole shares of general-purpose financial statements. SFAS 130 only impacts
financial statement presentation as opposed to actual amounts recorded. Other
comprehensive income includes all nonowner changes in equity that are excluded
from net income. This Statement has no financial statement impact for an
enterprise that has no items of other comprehensive income in any period
presented. During the six months ended December 28, 1997 and December 27, 1998,
the Company had no items of other comprehensive income.
In fiscalcommon stock, $0.0025 par value per share. On
July 30, 1999, the Company adopted Statementissued to each holder of Financial Accounting Standards
No. 131, "Disclosures about Segmentsrecord of an Enterprisecommon stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and Related Information,"
("SFAS 131"). SFAS 131 changesper common
share data have been adjusted to reflect the way public companies report segment
information in annualcommon stock split.
F-10
60
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Cree Research, Inc.
We have audited the accompanying consolidated balance sheet of Cree Research,
Inc. and subsidiaries as of June 27, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements and also requires those companies to
report selected segment information in interim financial statements to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The application
ofare the new rules does not have a significant impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133")
which is required to be adopted in years beginning after June 15, 1999. Becauseresponsibility of the Company's
minimal usemanagement. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of derivatives, management does not anticipate
that the adoptionCree
Research, Inc. and subsidiaries as of and for each of the new Statement will havetwo years in the
period ended June 28, 1998 were audited by other auditors whose report dated
July 22, 1998 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
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 effect on
earnings orestimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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
Research, Inc. and subsidiaries as of June 27, 1999, and the Company.consolidated
results of their operations and their cash flows for the fiscal year then ended,
in accordance with generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
July 23, 1999
F-11
61
REPORT OF INDEPENDENT ACCOUNTANTS
July 22, 1998
BOARD OF DIRECTORS AND SHAREHOLDERS
CREE RESEARCH, INC.Board of Directors and Shareholders Cree Research, Inc.
In our opinion, the accompanying consolidated balance sheetssheet and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows and shareholders' equity, present fairly, in all material respects, the financial position of Cree
Research, Inc. and subsidiaries at June 30, 1997 and June 28, 1998, and the results of their
operations and their cash flows for the two years in the period
ended June 30, 1997, and for the year ended June 28, 1998 and June 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. PRICEWATERHOUSECOOPERSWe have not audited the consolidated financial statements of Cree
Research, Inc. for any period subsequent to June 28, 1998.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 22, 1998, except as to Note 13 to the consolidated financial statements
for which the date is July 13, 1999
F-12
62
CREE, RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30,28, JUNE 28,
199727,
1998 ----------- ---------1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .....................................................equivalents................................. $ 10,448 $17,68017,680 $ 42,506
Marketable securities ......................................................... --securities..................................... 657 6,145
Accounts receivable, net ...................................................... 7,694net.................................. 10,479 Inventories ................................................................... 3,94916,285
Inventories............................................... 2,543 3,977
Deferred income tax ........................................................... 1,830tax....................................... 1,952 296
Prepaid expenses and other current assets ..................................... 466assets................. 1,347 558
-------- ---------------
Total current assets ........................................................ 24,387assets................................... 34,658 69,767
Property and equipment, net ................................................... 24,333net............................... 36,476 69,884
Patent and license rights, net ................................................ 1,267net............................ 1,525 1,731
Deferred income tax....................................... -- 2,827
Other assets .................................................................. 150assets.............................................. 65 8
-------- ---------------
Total assets ................................................................assets........................................... $ 50,137 $72,72472,724 $144,217
======== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade .......................................................trade................................... $ 2,2485,595 $ 5,5957,487
Current maturities of long term debt ..........................................debt...................... 17 -- 17
Accrued salaries and wages .................................................... 292wages................................ 391 819
Other accrued expenses ........................................................ 834expenses.................................... 1,052 1,239
-------- ---------------
Total current liabilities ................................................... 3,374liabilities.............................. 7,055 9,545
Long term liabilities:
Long term debt ................................................................debt............................................ 8,650 -- 8,650
Deferred income tax ........................................................... 1,638tax....................................... 2,154 4,650
-------- ---------------
Total long term liabilities ................................................. 1,638liabilities............................ 10,804 4,650
Shareholders' equity:
Preferred stock, par value $0.01; 2,750 shares authorized;authorized
at June 28, 1998 and 3,000 shares authorized at June
27, 1999; none issued and outstanding .................................................................outstanding.................. -- --
Common stock, $0.005 par value; 14,500value $0.0025; 29,000 shares authorized;authorized
at June 28, 1998 and 60,000 shares authorized at June
27, 1999; shares issued and outstanding 12,523 at June 30, 199725,978 and
12,98929,258 at June 28, 1998 ............. 62and June 27, 1999,
respectively........................................... 65 73
Additional paid-in-capital .................................................... 46,214paid-in-capital................................ 49,676 111,136
Retained earnings (deficit) ................................................... (1,151)earnings......................................... 5,124 18,813
-------- ---------------
Total shareholders' equity .................................................. 45,125equity............................. 54,865 130,022
-------- ---------------
Total liabilities and shareholders' equity .................................equity............. $ 50,137 $72,72472,724 $144,217
======== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
63
CREE, RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30,YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, 1996JUNE 27,
1997 1998 --------- ------------ ------------1999
-------- -------- --------
Revenue:
Product revenue, net ...................... $ 9,689 $ 19,823 $ 34,891net.................................... $19,823 $34,891 $53,464
Contract revenue, net ..................... 3,945net................................... 6,535 7,640 6,586
License fee income ........................ 1,423income...................................... 2,615 -- --
------- -------- --------------- -------
Total revenue ............................ 15,057revenue........................................ 28,973 42,531 60,050
Cost of revenue:
Product revenue, net ...................... 8,411net.................................... 13,388 21,727 26,977
Contract revenue, net ..................... 3,078net................................... 5,707 6,252 4,943
------- -------- --------------- -------
Total cost of revenue .................... 11,489revenue................................ 19,095 27,979 ------- -------- --------31,920
Gross profit ................................ 3,568profit.............................................. 9,878 14,552 28,130
Operating expenses:
Research and development .................. 1,286development................................ 1,826 1,774 4,443
Sales, general and administrative ......... 2,917administrative....................... 4,301 4,131 6,064
Other (income) expense .................... (11)expense........................................... 639 502 1,041
------- -------- --------------- -------
Income (loss) from operations ............ (624)operations............................... 3,112 8,145 16,582
Interest income, net ........................ 867net...................................... 607 730 1,060
------- -------- --------------- -------
Income before income taxes ............... 243taxes........................... 3,719 8,875 17,642
Income tax expense .......................... --expense........................................ 177 2,600 4,940
------- -------- --------------- -------
Net income ............................... $ 243income........................................... $ 3,542 $ 6,275 $12,702
======= ======== =============== =======
Other comprehensive income, net of tax;
Unrealized holding gains............................. -- -- 987
------- ------- -------
Comprehensive income...................................... $ 3,542 $ 6,275 $13,689
======= ======= =======
Earnings per share:
Basic ..................................Basic................................................... $ 0.020.14 $ 0.28 $ 0.49
======= ======== ========
Diluted ................................ $ 0.02 $ 0.270.24 $ 0.47
======= ======== =============== =======
Diluted................................................. $ 0.13 $ 0.23 $ 0.45
======= ======= =======
Shares used in per share calculation:
Basic .................................. 11,826 12,455 12,863Basic................................................... 24,911 25,726 27,015
======= ======= =======
Diluted................................................. 26,251 26,987 28,432
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
64
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
Operating activities:
Net income................................................ $ 3,542 $ 6,275 $ 12,702
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,356 4,217 5,382
Loss on disposal of property and equipment............. 631 719 1,602
Loss on write off of patents........................... 141 17 51
Amortization of patent rights.......................... 108 102 117
Amortization and write off of goodwill................. 41 86 --
Purchase of marketable trading securities.............. -- (1,500) (233)
Proceeds from sale of marketable trading securities.... -- 421 1,421
Loss (gain) on marketable trading securities........... -- 32 (141)
Deferred income taxes.................................. (192) 394 3,494
Income tax benefits from stock option exercises........ 96 1,791 2,672
Changes in operating assets and liabilities:
Accounts receivable.................................. (891) (2,398) (6,196)
Inventories.......................................... (723) 1,406 (1,434)
Prepaid expenses and other assets.................... (262) (882) (1,981)
Accounts payable, trade.............................. (226) 1,092 1,892
Accrued expenses..................................... 476 320 598
------- -------- --------
Net cash provided by operating activities......... 6,097 12,092 19,946
------- -------- --------
Investing activities:
Maturity of investment securities......................... 1,787 -- --
Purchase of available for sale security................... -- -- (4,500)
Purchase of property and equipment........................ (8,115) (15,287) (40,578)
Proceeds from sale of property and equipment.............. 13 463 186
Purchase of patent rights................................. (310) (377) (374)
------- -------- --------
Net cash used in investing activities............. (6,625) (15,201) (45,266)
------- -------- --------
Financing activities:
Net proceeds from issuance of long-term debt.............. -- 8,667 1,350
Net repayment of long-term debt........................... -- -- (10,000)
Net proceeds from issuance of common stock................ 926 2,936 61,415
Receipt of Section 16(b) common stock profits............. -- -- 594
Repurchase of common stock................................ (112) (1,262) (3,213)
------- -------- --------
Net cash provided by financing activities......... 814 10,341 50,146
------- -------- --------
Net increase in cash and cash equivalents................... 286 7,232 24,826
Cash and cash equivalents:
Beginning of year......................................... 10,162 10,448 17,680
------- -------- --------
End of year............................................... $10,448 $ 17,680 $ 42,506
======= ======== ========
Diluted ................................ 12,615 13,126 13,493Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized........ $ -- $ 74 $ 257
======= ======== ========
Cash paid for income taxes................................ $ 300 $ 336 $ 2,175
======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-14F-15
65
CREE, RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
------------- ----------- -----------
Operating activities:
Net income .......................................................... $ 243 $ 3,542 $ 6,275
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 1,765 3,356 4,217
Loss (gain) on disposal of property and equipment .................. (8) 631 719
Loss on write off of patents ....................................... -- 141 17
Amortization of patent rights ...................................... 126 108 102
Amortization and write off of goodwill ............................. 41 41 86
Purchase of marketable trading securities .......................... -- -- (1,500)
Proceeds from sale of marketable trading securities ................ -- -- 421
Loss on marketable trading securities .............................. -- -- 32
Deferred income taxes .............................................. -- (192) 394
Tax benefits associated with stock options ......................... -- 96 1,791
Changes in assets and liabilities:
Accounts receivable .............................................. (3,258) (891) (2,398)
Inventories ...................................................... (1,549) (723) 1,406
Deferred cost on research contracts .............................. 81 -- --
Prepaid expenses and other assets ................................ 49 (262) (882)
Accounts payable, trade .......................................... 714 (226) 1,092
Accrued expenses ................................................. 160 476 320
---------- -------- ---------
Net cash provided by (used in) operating activities .............. (1,636) 6,097 12,092
---------- -------- ---------
Investing activities:
Maturity of investment securities ................................... 2,124 1,787 --
Purchase of property and equipment .................................. (14,740) (8,115) (15,287)
Proceeds from sale of assets ........................................ 52 13 463
Purchase of patent rights ........................................... (310) (310) (377)
---------- -------- ---------
Net cash used in investing activities ............................ (12,874) (6,625) (15,201)
---------- -------- ---------
Financing activities:
Proceeds from issuance of long-term debt ............................ -- -- 8,667
Net proceeds from issuance of common stock .......................... 20,924 926 2,936
Repurchase of common stock .......................................... -- (112) (1,262)
---------- -------- ---------
Net cash provided by financing activities ........................ 20,924 814 10,341
---------- -------- ---------
Net increase in cash and cash equivalents ............................. 6,414 286 7,232
Cash and cash equivalents:
Beginning of year ................................................... 3,748 10,162 10,448
---------- -------- ---------
End of year ......................................................... $ 10,162 $ 10,448 $ 17,680
========== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized .................. $ 5 $ -- $ 74
========== ======== =========
Cash paid for income taxes .......................................... $ -- $ 300 $ 336
========== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTSSTATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDING JUNE 30, 1996 AND 1997, JUNE 28, 1998 AND JUNE 28, 199827, 1999
(IN THOUSANDS)
COMMON
STOCK ADDITIONAL TOTAL
STOCKPAR PAID-IN RETAINED UNEARNED TREASURY SHAREHOLDERS'
PAR
VALUE CAPITAL EARNINGS COMPENSATION STOCK EQUITY
----------- ----------- ------------ -------------- ----------- -------------------- ---------- -------- -------- -------------
Balance at June 30, 1995 ................. $521996................ $61 $ 24,427 $ (4,936) $ (2)45,342 $(4,693) $ (38) $ 19,503
Common stock options
exercised for cash, 122 shares ......... 1 412 -- -- -- 413
Common stock warrants
exercised for cash, 665 shares ......... 3 2,916 -- -- -- 2,919
Compensation expense
for common stock options ............... -- -- -- 2 -- 2
Proceeds from sale of 1,079 shares
of common stock and 300
common stock warrants,
net of issuance costs of $625 .......... 5 17,587 -- -- -- 17,592
Net income ............................... -- -- 243 -- -- 243
--- -------- -------- ---- -------- --------
Balance at June 30, 1996 ................. 61 45,342 (4,693) -- (38) 40,672
Common stock options exercised for cash,
52 shares ....................104 shares............................ -- 160 -- -- -- 160
Common stock warrants exercised for
cash, 203 shares ...................406 shares...................... 1 766 -- -- -- 767
Purchase of common stock for the
treasury, 10 shares ................ --20 shares................... -- -- -- (112) (112)
Retirement of 2040 treasury shares .........shares........ -- (150) -- -- 150 --
Income tax benefits from stock option
exercises .......................exercises............................. -- 96 -- -- -- 96
Net income ...............................income.............................. -- -- 3,542 -- -- 3,542
--- -------- -------- ---- --------------- ------- --------
Balance at June 30, 1997 .................1997................ 62 46,214 (1,151) -- -- 45,125
Common stock options exercised for cash,
217 shares ...................434 shares............................ 1 1,693 -- -- -- 1,694
Common stock warrants exercised for
cash, 331 shares ...................662 shares...................... 2 1,240 -- -- -- 1,242
Purchase of common stock for the
treasury, 82 shares ................ --164 shares.................. -- -- -- (1,262) (1,262)
Retirement of 82164 treasury shares .........shares....... -- (1,262) -- -- 1,262 --
Income tax benefits from stock option
exercises .......................exercises............................. -- 1,791 -- -- -- 1,791
Net income ...............................income.............................. -- -- 6,275 -- -- 6,275
--- -------- -------- ---- --------------- ------- --------
Balance at June 28, 1998 ................. $65 $1998................ 65 49,676 $ 5,124 -- 54,865
Common stock options exercised for cash,
418 shares............................ 1 1,511 -- -- 1,512
Common stock warrants exercised for
cash, 342 shares...................... -- 4,656 -- -- 4,656
Issuance of common stock for cash, 2,990
shares................................ 7 55,240 -- -- 55,247
Purchase of common stock for the
treasury, 470 shares.................. -- -- -- (3,213) (3,213)
Retirement of 470 treasury shares....... -- (3,213) -- 3,213 --
Receipt of Section 16(b) common stock
profits from a director............... -- 594 -- -- 594
Income tax benefits from stock option
exercises............................. -- 2,672 -- -- 2,672
Other comprehensive income, net of
tax................................... -- -- 987 -- 987
Net income.............................. -- -- 12,702 -- 12,702
--- -------- ------- ------- --------
Balance at June 27, 1999................ $73 $111,136 $18,813 $ -- $ -- $ 54,865$130,022
=== ======== ======== ==== =============== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
66
CREE, RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree, Research, Inc. (", the Company""Company," or "Cree"),"Cree," a North Carolina corporation, develops,
manufactures and markets silicon carbide-based semiconductor devices. Revenues
are primarily derived from the sale of blue and green light emitting diodes ("LEDs"),and
silicon carbide ("SiC") based materials and full-color LED based
electronic displays and modules.carbide-based materials. The Company markets its blue 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
to corporate, government and university research laboratories. In addition, the
Company is engaged in a variety of research programs related to the advancement
of SiC process technology and the development of electronic devices that take
advantage of SiC's unique physical and electronic properties. These research
projects are primarily funded by Federal governmentU.S. Government agencies and departments. The
Company recovers the costs of a majority of its research and development efforts
from revenues on these contracts with agencies of the Federal
government.U.S. Government.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATIONPrinciples of Consolidation
The consolidated financial statements include the accounts of Cree, Research, Inc., and
its wholly-owned subsidiaries, Real Color Displays, Inc. ("RCD"), Cree Research
FSC, Inc. ("FSC") and Cree Technologies, Inc. ("Tech"). All material
intercompany accounts and transactions have been eliminated in consolidation.
CHANGE IN FISCAL YEAR
On September 24, 1997,Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the Boardlast Sunday in
the month of Directors of Cree Research, Inc.June. In fiscal 1998, the Company changed the Company'sits fiscal year from the
twelve months ending June 30, to a 52 or 53
week yearthe 52-week period ending on the last Sunday in
the month of June.
Accordingly, all
quarterly reporting reflected a 13 week period in fiscal 1998, except that the
period ended September 28, 1997, which commenced July 1, 1997, reflected the
results of twelve weeks and five days. The Company's 1998 fiscal year extended
for the period from July 1, 1997 to June 28, 1998.
ESTIMATESEstimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, at June 30, 199728, 1998 and June 28,
1998,27,
1999, and the reported amounts of revenues and expenses during the years ended
June 30, 1996 and 1997, June 28, 1998 and June 28, 1998.27, 1999. Actual amounts could differ from
those estimates.
REVENUE RECOGNITIONRevenue Recognition
The Company recognizes product revenue at the time of shipment or in accordance
with the terms of the relevant contract. Revenue from government contracts is
recorded on the percentage-of-completion method as expenses per contract are
incurred. License fee income is recognized when the transfer of licensed
technology is completed.
Contract revenue represents reimbursement by various U.S. Government entities to
aid in the furthering of the development of the Company's technology by
supplementing the Company's research and development efforts. Any resulting
technology obtainedThe applicable
contracts generally provide that the Company may elect to retain ownership of
inventions made in performing the work, subject to a non-transferable,
F-17
67
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-exclusive license retained by the Company through these efforts remaingovernment to practice the property of
the Company after the completion of the contract, subject to certain license
rights obtained by the government.inventions for
government purposes. Contract revenue includes funding of direct research and
development costs and a portion of the Company's 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's general and administrative expenses and other operating expenses that
are reimbursed, vary by contract. Such reimbursements are recorded as contract
revenue. For F-17
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In September 1996, the Company entered into a license and supply agreement with
Shin-Etsu Handotai Co. LTD.Ltd. ("Shin-Etsu") and other parties to use certain LED
fabrication technology and has agreed to supply silicon carbide wafers required
to manufacture the licensed product. The license agreement provides for payment
of a license fee and royalties based on a percentage of sales of products made
using the licensed technology. The license fee was payable in installments which
totaled $2,700,000.$2.7 million. As of June 28, 1998,27, 1999, all license fees have been received. The Company also has recorded a short-term accrued expense of
$186,000 payable in the first quarter of fiscal 1999 to the third party that
brokered the license agreement.
Substantially all of the Company's obligations to transfer the licensed
technology were performed during fiscal 1997 and the net present value of the
license fee payments and commission were recognized.
In October 1995, the Company also entered into an agreement to license its
technology for the joint developmentrecognized in that fiscal year.
Cash and manufacture of LEDs using Cree's
technology to Siemens AG License fees are payable in installments totaling
$1,500,000. As of June 28, 1998, all fees have been received. The Company's
obligation to transfer the licensed technology was substantially completed
during fiscal 1996, and the net present value of the license fee payments was
recorded as revenue at that time.
CASH AND CASH EQUIVALENTSCash 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.
MARKETABLE SECURITIESMarketable Securities
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, (SFAS No. 115) "Accounting for Certain Investments in Debt and
Equity Securities."Securities" ("SFAS No. 115"). This statement requires certain securities
to be classified into three categories:
(a) Securities Held-to-Maturity --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 --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 --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 stockholders' equity.in retained earnings.
The Company's short-term investments are comprised of equity securities that are
classified as trading securities available for sale, which are carriedreported at their fair value
based upon quoted market prices as of those investments atJune 27, 1999 with unrealized gains or
losses excluded from earnings and reported only in retained earnings.
As of June 28, 1998, short-term investments consisted of common stock holdings
in C3, Inc. ("C3"), a portion of which we purchased in November 1997. The
Company also acquired additional shares of
F-18
68
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C3 in September 1998 and acquired 24,601 shares directly from C3 pursuant to the
exercise of an option in January 1997. This investment was treated for
accounting purposes as a trading security, with net realized and unrealized
gains and losses included in net earnings. As of June 28, 1998, short-term investments consist ofAll common stock holdings in
C3 a portion of which were purchased in November 1997. The Company's CEO has,
through a binding agreement, promised to indemnify the Company for losses of up
to $300,000, plus the lesser of $100,000 or the net difference between the per
share selling price and $9.375 per share for all shares of C3 common stockheld by Cree
were sold by Cree. This indemnity covers losses that may result from the sale of shares
purchased in November 1997 below the purchase price paid, offset byduring fiscal 1999. Recognized gains
realized on shares acquired directly from C3 in January 1997 (see below).
Payment of this obligation is due within ten days after receipt by the CEO of
the Company's written
F-18
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
demand made pursuant to a vote of the majority of the members of the Board of
Directors. At June 28, 1998, the Company had recorded a $390,000 receivable
from the CEO (included in net accounts receivable) based upon this agreement
for the net realized and unrealized losses on this investment. Realized losses on shares of C3 stock soldrecorded to
the statement of income during fiscal 1999 by the Company during fiscal 1998 totaled $254,000,
and unrealized losses offset by the unrealized gain on shares acquired from C3
directly (see below) were $168,000 at June 28, 1998.$140,000. This
amount was recorded as other income. Approximately $32,000 of losses on the investment in C3 stock is included innet loss was
recorded to other income (expense) in fiscal 1998 related to this investment.
As of June 27, 1999, short-term investments consisted of common stock holdings
of Microvision, Inc. ("MVIS"). The Company purchased 268,600 common shares in a
private equity transaction in May 1999 at a price of $16.75 per share. In August
1999, MVIS filed a registration statement for fiscal 1998.
In additionthe Company's sale of these
shares; however, Cree has agreed not to sell the shares of C3 purchased in November 1997,until at least January
6, 2000. Since the Company acquired 24,601is currently restricted from trading these shares of C3 common stock in January 1997. Theseand
management views this transaction as an investment, the shares were
issued pursuantare accounted for
as "available for sale" securities under SFAS 115. Therefore unrealized gains or
losses are excluded from earnings and are recorded directly to an option C3 granted to the Company in 1995. The option gave
the Company the right to acquire, for an aggregate consideration of $500, one
percent of the outstanding common stock of C3. C3 retained
the right to waive
the consideration and issue the stock at any time, which it elected to do in
January 1997. The shares issued pursuant to the option are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933,
which permits the sale of such securities without registration if certain
conditions are met. The shares first became eligible for sale under Rule 144 in
the third quarter of fiscal 1998.
INVENTORIESearnings.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined underusing the first-in, first-out (FIFO)("FIFO") method. Inventories consistsconsist of
the following:
JUNE 30,28, JUNE 28,
199727,
1998 --------- ---------1999
-------- --------
(IN THOUSANDS)
Raw materials ............ $1,559materials............................................... $ 999 Work-in-progress ......... 1,374$1,290
Work-in-progress............................................ 752 1,675
Finished goods ........... 1,016goods.............................................. 792 1,012
------ ------
$3,949 $2,543 $3,977
====== ======
PROPERTY AND EQUIPMENTProperty 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
20 years. Leasehold improvements are amortized over the life of the related
lease. Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments 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 first quarter of fiscal 1996, the Company changed its previous
estimate on the useful lives of some of its manufacturing equipment from five
to nine years. The change in estimate was based on the Company's experience
with similar fixed assets. The net adjustment increased net income
approximately $280,000, or $0.02 per share, for fiscal 1996.
The Company has entered into an agreementtwo agreements with C3 to sell crystal growth
equipment manufactured by the Company to C3 at cost plus a reasonable overhead
allocation. As a result of this transaction,these transactions, the Company has recognized the
overhead allocation of $473,000 and $332,000, in fiscal 1999 and fiscal 1998
respectively, as "other"Other operating income."
In November 1997, the Company purchased real property consisting of
approximately 30 acres of land with a production facility of approximately
139,000 square feet and a total of approximately 33,000 square feet of service
and warehouse buildings. This property is located in Durham, North
F-19
69
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Carolina, in the vicinity of the Research Triangle Park. The purchase price offor
the land and buildings was $3,000,000.$3.0 million. The Company moved F-19
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mostthe majority of its
salesemployees and administrative personnelproduction to this facility in January
1998. The Company anticipates it will relocate several other operations to this
facility over the next few quarters. All areas, with the exception of certain
crystal growth and wafer fabrication assets, are expected to relocate during
fiscal 1999.facility.
The Company assesses the realizability of the carrying value of its investment
in property and equipment whenever events or changes in circumstance indicate
that an impairment may have occurred in accordance with the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for Impairment of Long Lived Assets and Assets to be Disposed of."
As ofFor the fiscal year ended June 28, 1998,27, 1999, the Company has not recorded any
impairment in the carrying value of its property and equipment.
PATENT AND LICENSE RIGHTSPatent and License Rights
Patent rights reflect costs incurred to enhance and maintain the Company's
intellectual property position. License rights reflect costs incurred to use the
intellectual property of others. Both are amortized on a straight linestraight-line basis.
During fiscal 1997, the Company changed its previous estimate of the useful liveslife
of patents from 17 years, beginning at the date of patent issue, to 20 years
from the date of patent application to conform to a legislative amendment made
to the U.S. patent laws, which became effective in June 1995. This change in
estimate had no material impact to net income or earnings per share, since the
average period of time between patent application and issue is generally about
three years. Amortization expense was $126,000, $108,000, $102,000 and $102,000,$117,000 for the
years ended June 30, 1996 and 1997, June 28, 1998 and June 28, 1998,27, 1999, respectively. Total
accumulated amortization for patents was approximately $460,000$560,000 and $560,000$669,000 at June 30, 1997 and
June 28, 1998 and June 27, 1999, respectively.
GOODWILLGoodwill
Goodwill represented the amount by which the costs to acquire the net assets of
the Real Color Displays subsidiary exceeded their related fair value at
acquisition. Based on a review of undiscounted cash flows of the subsidiary
anticipated over the remaining amortization period, the Company determined that
goodwill had been impaired. As a result, the Company wrote off the remaining
$66,000 carrying value of such goodwill in the second quarter of fiscal 1998. As
required by generally accepted accounting principles, this charge was included
in the results of operations.
RESEARCH AND DEVELOPMENT POLICYResearch and Development Policy
The Company partnerscontracts with the Federal government inU.S. Government for many of its current research
and development efforts. By entering into these contracts, the Company has most
of its research and product development costs funded by the U.S. Government. The
contract funding may be based on either a cost-plus or a cost-share arrangement.
Pursuant to each contract, the amount of funding is determined based on cost
estimates that include direct costs, plus an allocation for research and
development, general and administrative and athe cost of capital expense.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's cost share is then funded to the Company. Activities performed
under both of these arrangements include research regarding silicon carbide and
gallium nitride materials. The contracts typically require the submission of a
written report that documents the results of such research.
F-20
70
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Funding on contracts under which the Company anticipates that funding will
exceed direct costs over the life of the contract is recorded as contract
revenue and related costs are reported as a cost 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, direct costs are shown 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 exceed funding by period as reflected in the statements of
operations:
F-20
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)income:
YEARS ENDED
---------------------------------
JUNE 30,--------------------------------
JUNE 30, JUNE 28, 1996JUNE 27,
1997 1998 --------- --------- ---------1999
-------- -------- --------
(IN THOUSANDS)
Net research and development costs ......... $ 368costs......................... $ 671 $276 $--
Government funding ......................... 1,918funding......................................... 2,186 601 --------
------ ---- ---
Total direct costs incurred ............. $2,286incurred................................ $2,857 $877 $--
====== ====== ==== ===
As ofInterest Capitalization
During the fiscal years ended June 28, 1998 all funding under contracts where the Company anticipates
that direct costs will exceed amounts to be funded has been exhausted.
Therefore, the Company anticipates that all future funding under existing
contracts will be reflected as contract revenue while direct costs will be
reported as contract cost of revenue.
INTEREST CAPITALIZATION
During the year endedand June 28, 1998,27, 1999, the Company
capitalized interest on funds used to construct property, plant and equipment in
connection with the newly acquired facility. Interest capitalized duringfor fiscal
1998 and 1999 was $128,000.
CREDIT RISK, MAJOR CUSTOMERS AND MAJOR SUPPLIERS$128,000 and $128,000, respectively.
Credit Risk, Major Customers and Major Suppliers
Financial instruments, which potentiallymay subject the Company to a concentration of
credit risk, consist principally of cash equivalents and accounts receivable.
The Company's cash equivalents consist of U.S. Treasury bills, government
agency bonds and commercial paper. Certain bank
deposits may at times be in excess of the FDIC insurance limit.
The Company sells its products to manufacturers and researchers worldwide and
generally requires no collateral. The Company maintains reserves for potential
credit losses, and such losses, in the aggregate, have generally been within
management's expectations. The Company presently derives primarily all of its
contract revenues from contracts with the U.S. Department of Defense.
Approximately 33%18% and 18%10%, respectively, of the Company's accounts receivable
balance at June 30, 199728, 1998 and June 28, 199827, 1999 was due from the Department of
Defense. In addition, the Company had amounts due from Siemens AG (or its
indirect subsidiary, Osram) totaling 19%37% and 37%35%, of accounts receivable
balances at June 30, 199728, 1998 and June 27, 1999, respectively. At June 28, 1998 respectively, and
June 27, 1999, the Company had amounts due from C3 totaling 1%23% and 23%17%,
of accounts
receivable balances at June 30, 1997 and June 28, 1998, respectively.
F-21
71
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has derived its product revenue from sales primarily in the United
States, the Far East, and Europe as follows:
YEARS ENDED
---------------------------------
JUNE 30,----------------------------------------
JUNE 30, JUNE 28, 1996JUNE 27,
1997 1998 --------- --------- ---------1999
-------- -------- --------
United States ......... 31%States...................................... 21% 26% 38%
Far East .............. 27%East........................................... 33% 15%
Europe ................ 38%49% 50%
Europe............................................. 44% 58%
Other ................. 4%24% 11%
Other.............................................. 2% 1% 1%
One customer accounted for 46%31%, 40% and 51%37% of product revenue for fiscal 1997, 1998 and
1998,1999, respectively. Another customer accounted for 2%, 11% and 13%19% of product revenue
for fiscal 1997, 1998 and 1998,1999, respectively. In addition, two customers
accounted for 32% of product revenue in fiscal 1996. The Department of Defense
accounted for 97%99%, 99%93% and 93%100% of contract revenues during fiscal 1996, 1997, 1998
and 1998,1999, respectively.
F-21
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company depends on single or limited source suppliers for a number of raw
materials and components used in its SiC wafer products and LEDs. Any
interruption in the supply of these key materials or components could have a
significant adverse effect on the Company's operations.
PER SHARE DATAEarnings Per Share
Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock.
Incremental shares of 789,000, 670,000 and 631,000 in 1996, 1997 and 1998,
respectively, were used in the calculation of diluted earnings per common
share.
ACCOUNTING FOR STOCK BASED COMPENSATIONAccounting for Stock Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, Accounting"Accounting for
Stock Issued to Employees," no compensation 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.
Compensation
related to performance share grants is recognized from the grant date until the
performance conditions are satisfied, based on the market price of the
Company's common stock.
In October, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123, ("FAS 123"), "Accounting for Stock Based Compensation."Compensation" ("FAS 123"). This
Statement 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. FAS 123 permits the Company to choose
between adoption of the fair value based method or disclosing pro forma net
income information. The Statement is effective for transactions entered into
after December 31, 1995. The Company will continue to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25, as
amended, and provide only the pro forma disclosures required by FAS 123.
F-22
72
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
The following is a summary of accounts receivable:
JUNE 30, 1997YEARS ENDED
------------------------
JUNE 28, JUNE 27,
1998 --------------- --------------1999
-------- --------
(IN THOUSANDS)
Trade receivables ....................... $5,210receivables......................................... $ 8,971 $14,685
Other short term receivables ............ 2,700short-term receivables.............................. 1,659 ------1,775
------- 7,910-------
10,630 16,460
Allowance for doubtful accounts ......... 216 151
------accounts........................... (151) (175)
-------
Current receivables ..................... 7,694 10,479
Long term receivables ................... 54 56
------ -------
Total accounts receivable ............ $7,748 $10,535
======receivable................................. $10,479 $16,285
======= =======
F-22
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 30, 1996 and 1997, June 28, 1998 and June 28,
1998:
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
(In thousands)27,
1999:
BALANCE AT CHARGES TO DEDUCTIONS BALANCE AT
YEARS BEGINNING COST AND (WRITE-OFFS END OF
ENDED
OF PERIOD EXPENSES CHARGED TO RESERVE) PERIOD
- ----- -----------------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- ------------------- -------------- --------
(IN THOUSANDS)
June 30, 1996 ......... $ 22 203 (175)Balance at beginning of year............................... $ 50 June 30, 1997 ......... $$216 $151
Charges to cost and expenses............................... 190 50 19024
Deductions (write-offs to reserve)......................... (24) (115) --
---- ---- ----
Balance at end of year..................................... $216 June 28, 1998 ......... $216 50 (115) $151 $175
==== ==== ====
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
JUNE 30, 1997YEARS ENDED
------------------------
JUNE 28, JUNE 27,
1998 --------------- --------------1999
-------- --------
(IN THOUSANDS)
Office equipment and furnishings .................. $ 909furnishings............................ $ 1,372 $ 1,948
Land and buildings ................................ --buildings.......................................... 3,501 21,031
Machinery and equipment ........................... 22,312equipment..................................... 28,136 46,199
Construction in progress .......................... 2,669progress.................................... 9,074 12,468
Leasehold improvements ............................ 5,420improvements...................................... 4,697 1,549
-------- ---------
31,310--------
46,780 83,195
Accumulated depreciation and amortization ......... (6,977)depreciation.................................... (10,304) (13,311)
-------- ---------
Total--------
Net property and equipment ................... $ 24,333equipment.................................. $ 36,476 $ 69,884
======== =================
Depreciation and amortization of property and equipment totaled $1,765, $3,356$3.4 million,
$4.2 million and $4,217$5.4 million for the yearyears ended June 30, 1996 and 1997, and June 28, 1998
and June 27, 1999, respectively.
F-23
73
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY
The BoardAt June 27, 1999, the Articles of Directors isIncorporation of the Company authorized the
Company to issue 1,250,000 and 1,500,000up to 30.0 million shares of Class A Votingcommon stock, with a par value of
$0.005 per share, and Class B Non-Voting3.0 million shares of preferred stock, respectively, each with a par value of
$0.01 per share, at its discretion. Thisshare. 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.
As a result, as of the effective date of the amendment, the Articles of
Incorporation authorize the Company to issue up to 60.0 million shares of common
stock, with a par value of $0.0025 per share. The amendment did not change the
number of authorized shares or other provisions relating to the preferred stock.
All share numbers have been restated to give effect to the stock split.
On February 17, 1999, the Company completed a public offering selling 3.0
million shares of its common stock at a price of $19.69 per share. The Company
received net aggregate proceeds of approximately $55.2 million after deducting
underwriting discounts and offering costs. A portion of the net proceeds, $10.0
million, was used to repay debt to a commercial bank. The majority of the funds
are being used for plant expansion and the balance for general corporate
purposes, including working capital and potential acquisition of or investments
in complementary businesses.
6. STOCK OPTIONS AND STOCK WARRANTS
As permitted by FAS 123, "Accounting For Stock-Based Compensation," the Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations and amendments in
accounting for its employee stock option plans.
The Company's Amended and Restated Equity Compensation Plan has authorized the
grant of options for up to 2,540,0005.4 million shares of the Company's common stock. All
options granted have ten year terms and vest and become fully exercisable within
five years. The Company had granted 96,000192,000 options with a ten year term for
shares of the Company's common stock under the Stock Option Plan for
Non-Employee Directors (Directors Formula Plan).Directors. This Planplan was terminated in November 1997 and all
96,000192,000 options granted under this plan are now fully vested. The Company's
current stock plans provide for grants of options with exercise prices equal to
or exceeding fair market value on the date of grant.
F-23
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the Statement. The fair
value of these options was estimated at the date of grant using a Black-
ScholesBlack-Scholes
option pricing model with weighted average risk free rates of interest of 6.7%5.6%
and 5.6%5.3%, for the years ended June 30, 199728, 1998 and June 28, 1998,27, 1999, respectively. The
volatility factor of the expected market price of the Company's common stock is
.7480.748 for fiscal 1997 and 1998 and 1.174 for fiscal 1999, and the
weighted-average expected life of the options was seven years for executives and
directors and five years for other employees.employees for fiscal 1997, 1998 and 1999.
F-24
74
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro-formapro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
YEARS ENDED
-------------------------------------
JUNE 30,----------------------------------------
JUNE 30, JUNE 28, 1996JUNE 27,
1997 1998 --------- ----------- -----------1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported ............................... $ 243 $ 3,542 $ 6,275reported............................ $3,542 $6,275 $12,702
====== ============= =======
Pro forma net income, as adjusted for FAS 123 .........123...... $1,418 $4,405 $ 243 $ 1,418 $ 4,4058,968
====== ============= =======
Pro forma earnings per share:
Basic ..............................................Basic............................................ $ 0.020.05 $ 0.11 $ 0.34
====== ======= =======
Diluted ............................................ $ 0.02 $ 0.110.17 $ 0.33
====== ====== =======
Diluted.......................................... $ 0.05 $ 0.16 $ 0.32
====== ====== =======
The following table details the number of stock options outstanding and their
related exercise prices as of June 28, 1998:27, 1999:
NUMBER OF OPTIONS OUTSTANDING AS OF JUNE 28,
199827, 1999
- -----------------------------------------------
EXERCISE-----------------------------------------------------
NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICE OPTIONS CONTRACTUAL LIFE
- ------------ -------------------------- ----------------- ----------------
$ 0.42 5,497 20.21 2,866 1 year
$ 1.56 16,000 5 years
$ 3.131.81 322,584 4 years
$ 1.88 10,668 1 year
$ 2.00 87,200 5 years
$ 2.19 12,000 5 years
$ 3.41 8,000 4 years
$ 3.69 12,000 5 years
$ 4.69 38,800 8 years
$ 5.13 21,400 8 years
$ 5.60 26,900 7 years
$ 6.49 752,200 8 years
$ 7.13 46,000 9 years
$ 7.19 330,950 6 years
$ 3.63 250,200 57.63 1,189,800 9 years
$ 3.75 13,317 37.88 96,000 7 years
$ 4.00 78,700 68.19 38,400 9 years
$ 4.38 6,000 68.38 10,000 9 years
$ 6.82 6,700 5 years
$ 7.38 6,000 68.88 33,600 9 years
$ 9.38 26,600 9 years
$ 10.25 14,500 9 years
$ 11.19 16,80071,800 8 years
$ 12.98 409,1009.69 20,000 9 years
$ 14.38 203,400 7$12.32 114,000 9 years
$ 15.75 48,000 8 years
$ 16.38 43,500$20.50 134,400 10 years
$ 17.75 19,000$22.60 139,600 10 years
$ 18.75 40,000 9 years
$ 19.38 10,000$22.63 78,000 10 years
-------
1,205,314---------
3,613,168
=========
F-24F-25
75
CREE, RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOTAL OPTION ACTIVITY
---------------------------------------------------------------------
JUNE 30, 1996------------------------------------------------------------
JUNE 30, 1997 JUNE 28, 1998 --------------------- --------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 27, 1999
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Outstanding --at beginning of
year ......... 769year............................ 1,264 $2.20 1,854 $2.38 2,410 $ 4.23 6325.10
Granted......................... 762 $6.78 1,084 $6.99 1,712 $10.85
Exercised....................... (104) $1.54 (434) $3.90 (418) $ 4.39 9273.63
Forfeited....................... (68) $4.03 (94) $4.34 (91) $ 4.76
Granted .................................. -- $ -- 381 $ 13.56 542 $ 13.98
Exercised ................................ 122 $ 3.39 52 $ 3.08 217 $ 7.80
Forfeited ................................ 15 $ 4.36 34 $ 8.05 47 $ 8.67
--- ---7.08
----- ----- -----
Outstanding -- end of year ............... 632 $ 4.39 927 $ 4.76 1,205 $ 10.19
Exercisable at end of year ............... 439year...... 1,854 $2.38 2,410 $5.10 3,613 $ 3.78 7028.14
Exerciseable at end of year..... 1,404 $3.72 1,198 $4.20 1,478 $ 7.44 599 $ 8.405.39
During fiscal year 1992, the Company issued stock warrants to purchasers of
Class B Non-Voting preferred stock, Series C. The warrants entitled the holders
to purchase 607,320 shares of common stock at $3.75 per share. In September
1992, the Company issued stock warrants to additional purchasers of Class B
Non-Voting preferred stock, Series C. The warrants entitled the holders to
purchase 363,644 shares of common stock at $4.13 per share. Warrants to
purchase 425,642, 202,996 and 331,326 shares of common stock were exercised
during the years ended June 30, 1996 and 1997, and June 28, 1998, respectively.
All remaining warrants expired effective February 8, 1998.
In connection with the Company's September 1995 private placement, the Company
issued an additional 300,000600,000 warrants, which have an exercise price of $27.23$13.62, which
represents fair value on the date of grant, and expire September 2000. AsWarrants
to purchase 342,000 shares of common stock were exercised during the fiscal year
ended June 27, 1999. Warrants to purchase 258,000 shares remain outstanding as
of June 28, 1998, all of these warrants remain
outstanding27, 1999 and represent the only warrants outstanding.
7. LEASE COMMITMENTS
The Company currently leases three facilities under four separate lease
agreements.facilities. These facilities are comprised of
both office and manufacturing space. The first facility has a remaining lease
period of approximately threetwo and one half years for a multi-suite block. Effective May 1, 1998, the Company
has notified the lessor of its intention to exercise a right to terminate for
all suites with the exception of the base suite. This right to terminate will
be effective May 1, 1999. Also associated with this facility is a sublease
agreement entered into in fiscal 1996 to lease an adjacent 1,900 square feet.
That sublease expires in October 1998 and will not be renewed.years. The lease term for the second
facility began in September 1995. This facility has a remaining lease period of
approximately two yearsone year with two options to renew for a total of four additional
years. The lease for the third facility expires in December 1999. All of these
agreements provide for rental adjustments for increases in property taxes, the
consumer price index and general property maintenance.
Rent expense associated with these and other expired leases totaled $338,000, $549,000,
$522,000 and $522,000$430,000 for the years ended June 30, 1996 and 1997, June 28, 1998, and June
28, 1998,27, 1999, respectively. Future minimum rentals as of June 28, 199827, 1999 under these
leases are as follows:
MINIMALMINIMUM RENTAL
FISCAL YEARS ENDED AMOUNT
- ------------------- --------------------------------- --------------
(IN THOUSANDS)
1999 ........... $ 389
2000 ........... 334
2001 ........... 284
2002 ........... 138
------
Total ........... $1,145
======June 25, 2000......................... $312
June 24, 2001......................... 247
June 30, 2002......................... 119
----
Total....................... $678
====
F-25
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
In November 1997, the Company entered into a term loan fromwith a commercial bank
for up to $10,000,000$10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $2,950,000$3.0 million was disbursed
under the loan to finance the initial purchase of the facility
F-26
76
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the remaining proceeds expected to be disbursed on a monthly basis based on actual
expenditures incurred. Draws under the loan agreement may be made during the
eighteen month period ending in May 1999. The loan, which iswas collateralized by the purchased
property and subsequent upfits, accruesaccrued interest at a fixed rate of 8% and
carriescarried customary covenants, including the maintenance of a minimum tangible net
worth and other requirements. Accrued interest is due monthly
through MayOn February 17, 1999, at which time the outstanding principal balance will be
amortized over twenty years until 2011, whenentire $10.0 million
indebtedness was repaid with proceeds received from the loan balance becomes due.public stock offering.
At June 28, 1998, short term and long term borrowings associated with this loan
were $17,000 and $8,650,000, respectively, leaving $1,333,000 unused and
available.
The aggregate maturities for long-term debt for the five years after June 28,
1998 are:
AMOUNT
YEARS ENDED DUE
- ----------------------- ---------------
(IN THOUSANDS)
1999 ............... $ 17
2000 ............... 213
2001 ............... 230
2002 ............... 250
2003 ............... 270
Thereafter ......... 7,687
------
Total ............. $8,667
======
$8.7 million, respectively.
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, ("FAS 109"), "Accounting for Income Taxes."Taxes" ("FAS
109"). Under the asset and liability method of FAS 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 FAS 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.
The actual income tax expense attributable to earnings for the years ended June 30, 1996 and 1997, June 28, 1998
and June 28, 199827, 1999 differed from the amounts computed by applying the U.S.
federal tax rate of 34 percent34% in fiscal 1997 and 1998 and 35% in fiscal 1999, to
pretax earnings as a result of the following:
F-26
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED
--------------------------------------
JUNE 30,--------------------------------
JUNE 30, JUNE 28, 1996JUNE 27,
1997 1998 ---------- ------------- ---------1999
-------- -------- --------
(IN THOUSANDS)
Federal income tax provision at statutory rate (34%) ......... $ 83rate............. $ 1,265 $3,018 $6,174
State tax provision .......................................... 36provision........................................ 193 166 211
Decrease in income tax expense resulting from:
Foreign sales corporation ...................................corporation................................ -- -- (214) (510)
Decrease in valuation allowance ............................. (106)allowance.......................... (1,279) (358) Other ....................................................... (13)(290)
Research and development................................. -- -- (251)
State tax credits........................................ -- -- (394)
Other.................................................... (2) (12) --
------- ------ ---------- ------
Income tax expense ........................................... $ --expense......................................... $ 177 $2,600 $4,940
======= ====== ========= ======
F-27
77
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the components of the provision for income taxes:taxes for the years
ended June 30, 1997, June 28, 1998 and June 27, 1999:
YEARS ENDED
-----------------------------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 --------- ---------1999
-------- -------- --------
(IN THOUSANDS)
Current:
Federal .......................................................................Federal.................................................. $ 54 $ 699 $2,553
Foreign tax withholding .......................................................withholding.................................. 220 50 State .........................................................................--
State.................................................... 95 269 300
----- ------ ------
369 1,018 2,853
Deferred:
Federal .......................................................................Federal.................................................. (442) 1,582 State .........................................................................2,347
State.................................................... 250 -- (260)
----- ------ ------
(192) 1,582 2,087
----- ------ ------
Net provision ..................................................................provision.............................................. $ 177 $2,600 $4,940
===== ====== ======
There is no tax provision for fiscal 1996.
F-27
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
JUNE 30,YEARS ENDED
------------------------
JUNE 28, 1997JUNE 27,
1998 ----------- ---------1999
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards ....................carryforwards.......................... $1,304 $ 2,413 $1,30497
Research tax credits ................................ 157credits...................................... 169 Compensation ........................................ 115420
Compensation.............................................. 62 Inventory ........................................... 199105
Inventory................................................. 120 126
Bad debt ............................................ 84debt.................................................. 56 Goodwill ............................................ 31 --65
Alternative minimum tax ............................. 64tax................................... 261 1,513
Foreign tax credit .................................. 220credit........................................ 270 Other ............................................... 10270
Other..................................................... -- --------527
------ ------
Total gross deferred tax assets ..................... 3,293assets............................. 2,242 3,123
Less valuation allowance ............................ (1,463)allowance.................................... (290) ----------
------ ------
Total net deferred tax assets............................... 1,952 3,123
Deferred tax liabilities:
Marketable equity securities.............................. -- 658
Property and equipment depreciation....................... 2,154 3,992
------ ------
Gross deferred tax liabilities.............................. 2,154 4,650
------ ------
Net deferred tax asset .............................. 1,830 1,952
Deferred tax liabilities:
Property and equipment, due to depreciation ......... 1,638 2,154
-------- ------
Gross deferred tax liabilities ...................... 1,638 2,154
-------- ------
Net deferred tax asset (liability) ..................liability.................................. $ 192 $ (202)
========202 $1,527
====== ======
F-28
78
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net change in the total valuation allowance for the years ended June 30,
199728,
1998 and June 28, 199827, 1999 was $1,201,000$358,000 and $1,173,000,$290,000, respectively. Included in
the valuation allowance is $815,000 and $0, respectively, for 1997 and 1998 to
offset net operating losses ("NOL") generated by the exercise of stock options.
The reduction in the valuation allowance does not impact the 1998 tax provision
as such taxes are reflected in additional paid in capital. The primary
reason for the reduction in the valuation allowance in 19971998 and 19981999 was the
greater likelihood of the utilization of future tax benefits from net operating
loss ("NOL") carryforwards. Realization of deferred tax assets associated with
the NOL carryforwards is dependent upon the Company generating sufficient
taxable income prior to their expiration. Management believes that there is a risk that
certain of the state NOL carryforwards may expire unused and, accordingly, has
established a valuation allowance against them. Although realization is not assured
for the remaining deferred tax assets, management believes it is more likely
than not that they will be realized through future taxable earnings. However,
the net deferred tax assets could be reduced in the future if management's
estimates of taxable income during the carryforward period are significantly
reduced.
As of June 28, 1998,27, 1999, the Company has net operating lossNOL carryforwards for Federalfederal purposes of
$3,493,000$75,000 and $2,346,000$1.4 million for state purposes. The carryforward expiration period
is 2011 to 20132019 for Federalfederal tax purposes and from 2000 to 20032004 for state
purposes.
10. ACQUISITION
In August 1994, the Company formed a North Carolina wholly-owned subsidiary,
RCD, to develop and market full color LED displays. Subsequently, RCD acquired
the net assets of Color Cells International, Ltd., a Hong-Kong based company in
this line of business, for cash consideration of $215,000 and assumption of
$152,000 of liabilities. The terms of the acquisition called for an "Earn-Out
Payment" based on calculated net profits, payable half in cash and half in Cree
common stock. Earn-Out Payments were subject to certain
F-28
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
limitations concerning the timing (calculation based on certain eligible
shipments through September 1997) and amount (maximum payments of $1.8 million)
of any such payments. As of the end of the earn-out period in September 1997,
no amounts had been earned or paid under this agreement.
11. RETIREMENT PLAN
The Company maintains an employee benefit plan (the "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'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 quarter after date of hire. The Plan is not insured by
the Pension Benefit Guaranty Corporation.
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
30, 1996, 1997, June 28, 1998 or June 28, 1998.
12. CONTINGENCIES
The consolidated securities class action lawsuits previously pending against
the Company and certain of its directors and officers in the U.S. District
Court for the Middle District of North Carolina were dismissed with prejudice
on November 28, 1997. The dismissal was pursuant to a stipulation of the named
parties entered after the court granted the defendant's motions to dismiss the
consolidated complaint for failure to state a claim. No payments were made to
the plaintiffs to obtain the dismissal. By stipulating to the dismissal with
prejudice, the plaintiffs waived any right to re-file the action or to appeal
the court's order of dismissal.
13.27, 1999.
11. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards, (SFAS) No.
128, "Earnings
Per Share,"Share" ("SFAS No. 128"), as of December 28, 1997. SFAS No. 128 required the
Company to change its method of computing, presenting and disclosing earnings
per share information. All prior period data presented has been restated to
conform to the provisions of SFAS No. 128.
F-29
79
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following computation reconciles the differences between the basic and
diluted presentations:
YEARS ENDED
---------------------------------------------------
JUNE 30,------------------------------------------
JUNE 30, JUNE 28, 1996JUNE 27,
1997 1998 --------------- --------------- ---------------1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic:
Net income ............................................ $ 243income...................................... $ 3,542 $ 6,275 ============ ============ ============$12,702
======= ======= =======
Weighted average common shares ........................ 11,826 12,455 12,863
============ ============ ============shares.................. 24,911 25,726 27,015
======= ======= =======
Basic income per common share .........................share................... $ 0.020.14 $ 0.280.24 $ 0.49
============ ============ ============0.47
======= ======= =======
Diluted:
Net income ............................................ $ 243income...................................... $ 3,542 $ 6,275 ============ ============ ============$12,702
======= ======= =======
Weighted average shares:
Common shares outstanding ............................. 11,826 12,455 12,863outstanding....................... 24,911 25,726 27,015
Dilutive effect of stock options and warrants ......... 789 670 631
------------ ------------ ------------warrants... 1,340 1,261 1,417
------- ------- -------
Total shares and common share equivalents ............. 12,615 13,126 13,493
============ ============ ============equivalents....... 26,251 26,987 28,432
======= ======= =======
Diluted income per common share .......................share................. $ 0.020.13 $ 0.270.23 $ 0.47
============ ============ ============0.45
======= ======= =======
F-29
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14.Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these shares were not included in calculating diluted income per share. For the
years ended June 30, 1997 and June 28, 1998, there were 574,000 and 225,000
shares, respectively, that were not included in calculating diluted income per
share because their effect was antidilutive. As of June 27, 1999, there were no
potential shares considered to be antidilutive.
12. NEW ACCOUNTING PRONOUNCEMENTS
TheIn fiscal 1999, the Company will adoptadopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 only impacts
financial statement presentation as opposed to actual amounts recorded. Other
comprehensive income includes all non-owner changes in equity that are excluded
from net income. For fiscal 1999, the yearCompany reports accumulated gains on
available-for-sale investment securities that are accumulated in shareholders'
equity as an item of other comprehensive income. At the time of the sale, any
previously recognized gains or losses that were accumulated in shareholders'
equity would be reversed in comprehensive income and then recognized as an
element of net income. For the years ended June 27,
1999. SFAS No. 130 requires30, 1997 and June 28, 1998, the
Company to display an amount representing totalhad no items of other comprehensive income forincome.
In fiscal 1999, the period in a financial statement which is displayed
with the same prominence as other financial statements. Upon adoption, all
prior period data presented will be restated to conform to the provisions of
SFAS No. 130. The application of the new pronouncement is not expected to have
a material impact on the Company's financial statements.
The Company will adoptadopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") for. SFAS 131 changes the year ended June 27, 1999. SFAS No. 131way public companies report segment information in
annual financial statements and also requires the Companythose companies to report selected
segment information about operating segments in itsinterim financial statements. Itstatements to shareholders. SFAS 131
also establishes standards for related disclosures about products and services,
geographic
F-30
80
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
areas, and major customers. The application of the new pronouncement isrules does not expected to have a
materialsignificant impact on the Company's disclosures.
F-30financial statements as the Company only
operates in a single segment.
In June 1998, The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
13. SUBSEQUENT EVENT
On July 13, 1999, the Company filed a Form 8-K announcing a two-for-one split of
its common stock. The stock split was effected by an amendment to the Company's
Articles of Incorporation that became effective at the close of business on July
26, 1999. With the effectiveness of the amendment, each issued and unissued
authorized share of common stock, $0.005 par value per share, was automatically
split into two whole shares of common stock, $0.0025 par value per share. On
July 30, 1999, 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 common stock split.
F-31
(CREE LOGO)81
- --------------------------------------------------------------------------------
[Cree, Inc. Logo]
CREE, RESEARCH, INC.
1,300,0002,600,000 SHARES
COMMON STOCK
--------------------------------------------
PROSPECTUS
--------------------------------------------
________ , 19992000
CIBC OPPENHEIMERWORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
INCORPORATEDBANC OF AMERICA
SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP
MORGAN KEEGAN &
COMPANY, INC.
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses of the Company payable in connection
with the issuance and distribution of the Common Stockcommon stock being registered hereby,
excluding underwriting discounts and commission.commissions. All expenses of the offering
will be borne by the Company. All amounts shown are estimates except the SEC
registration fee, the NASD filing fee, and the NasdaqNASDAQ fee:
SEC Registration Fee ...................................Fee........................................ $ 17,43160,953
NASD Filing Fee ........................................ 6,770
Nasdaq Fee .............................................Fee............................................. 23,588
NASDAQ Fee.................................................. 17,500
Printing and Engraving Expenses ........................ 125,000Expenses............................. 100,000
Legal Fees and Expenses ................................ 250,000Expenses..................................... 150,000
Accounting Fees ........................................ 175,000Fees............................................. 150,000
Blue Sky Expenses ...................................... 10,000Expenses........................................... 5,000
Transfer Agent and Registrar Fees and Expenses .........Expenses.............. 5,000
Miscellaneous Expenses ................................. 43,299Expenses...................................... 37,959
--------
Total ............................................... $650,000Total............................................. $550,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the North Carolina Business Corporation Act
permit a corporation to indemnify its directors, officers, employees or agents
under either or both a statutory or nonstatutory scheme of indemnification.
Under the statutory scheme, a corporation may, with certain exceptions,
indemnify a director, officer, employee or agent of the corporation who was, is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (1) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (2) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
II-1
83
In addition to, and separate and apart from the indemnification described above
under the statutory scheme, Section 55-8-57 of the North Carolina Business
Corporation Act permits a corporation to indemnify or agree to indemnify any of
its directors, officers, employees or agents against liability and expenses
(including attorney's fees) in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interestsinterest of the corporation. The
Company's bylaws provide for indemnification to the fullest extent permitted
under the North Carolina Business Corporation Act, provided, however, that the
Company will indemnify any person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Board of Directors of the Company. Accordingly,
II-1
the Company may indemnify
its directors, officers and employees in accordance with either the statutory or
the non-statutory standard.
Sections 55-8-52 and 55-8-56 of the North Carolina Business Corporation Act
require a corporation, unless its articles of incorporation provide otherwise,
to indemnify a director or officer who has been wholly successful, on the merits
or otherwise, in the defense of any proceeding to which such director or officer
was a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.
Finally, Section 55-8-57 of the North Carolina Business Corporation Act provides
that a corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain liabilities incurred by such persons, whether or not
the corporation is otherwise authorized by the North Carolina Business
Corporation Act to indemnify such party. The Company's directors and officers
are currently covered under directors' and officers' insurance policies
maintained by the Company.
As permitted by North Carolina law, Article VII of the Company's Articles of
Incorporation limits the personal liability of directors for monetary damages
for breaches of duty as a director provided that such limitation will not apply
to (i) acts or omissions not made in good faith that the director at the time of
the breach knew or believed were in conflict with the best interestsinterest of the
Company, (ii) any liability for unlawful distributions under N.C. Gen. Stat.
Section 55-8-33 of
the North Carolina Business Corporation Act, (iii) any transaction from which
the director derived an improper personal benefit, or (iv) acts or omissions
occurring prior to the date the provision became effective.
Section 7 of the Underwriting Agreement to be filed as Exhibit 1.01 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
ITEM 16. EXHIBITS
The following documents (unless indicated) are filed herewith and made a part of
this Registration Statement.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ----------------------
1.01* -- Form of Underwriting Agreement
4.01 (1)-- Specimen Common Stock Certificate
4.02 Amended and-- Restated Articles of Incorporation, as amended
II-2
84
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.03 Amended and Restated-- Bylaws, as amended
5.01 -- Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
23.01 -- Consent of PricewaterhouseCoopers LLP
23.02 -- Consent of Ernst & Young LLP
23.03 -- Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto)
24.01 -- Powers of Attorney (see page II-5)
27.01 Financial Data Schedule
- -------------------
(1) Exhibit 4.2 to the Company's Registration Statement on Form SB-2, File No.
33-55998, declared effective by the Securities and Exchange Commission on
Febuary 8, 1993, and incorporated herein by reference.-------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
1. The undersigned Registrantregistrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant'sregistrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's
II-2
annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrantregistrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrantregistrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrantregistrant of the expenses incurred or paid by a director, officer or
controlling person of the Registrantregistrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrantregistrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
3. The undersigned Registrant hereby undertakes that: (a) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration
Statementregistration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrantregistrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statementregistration statement as of the time it was
declared effective; and (b) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bonebona fide offering thereof.
II-3
85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrantregistrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statementregistration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Durham, State of North Carolina, on January 14,
1999.3, 2000.
CREE, RESEARCH, INC.
BY:By: /s/ F. NEAL HUNTER
---------------------------------------------------------------------------
F. NEAL HUNTER
CHAIRMAN AND CHIEF EXECUTIVE OFFICERNeal Hunter
Chairman and Chief Executive
Officer
II-4
86
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints F. Neal Hunter and Cynthia B. Merrell and each of them,
each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this registration statement, to
sign any related abbreviated registration statement filed pursuant to Rule
462(b) of the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statementregistration
statement has been signed by the following persons on January 14, 19993, 2000 in the
capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ F. NEAL HUNTER Chairman and Chief Executive Officer
--------------------------------------- ---------------------------------------------------
F. NEAL HUNTERNeal Hunter
/s/ CYNTHIA B. MERRELL Chief Financial Officer and Treasurer
--------------------------------------- --------------------------------------------------- (Chief Accounting and Financial
CYNTHIACynthia B. MERRELLMerrell Officer)
/s/ CALVIN H. CARTER, JR. Director
- ---------------------------------------------------
Calvin H. Carter, Jr., PH.D. Director
--------------------------------------
CALVIN H. CARTER, JR., PH.D.Ph.D.
/s/ JAMES E. DYKES Director
--------------------------------------
JAMES- ---------------------------------------------------
James E. DYKESDykes
/s/ MICHAEL W. HALEY Director
--------------------------------------
MICHAEL- ---------------------------------------------------
Michael W. HALEYHaley
/s/ JOHN W. PALMOUR Director
- ---------------------------------------------------
John W. Palmour, Ph.D.
/s/ WALTER L. ROBB PH.D. Director
--------------------------------------
WALTER- ---------------------------------------------------
Walter L. ROBB, PH.D.Robb, Ph.D.
/s/ DOLPH W. VON ARX Director
--------------------------------------
DOLPH- ---------------------------------------------------
Dolph W. VON ARX
/s/ JOHN W. PALMOUR, PH.D. Director
--------------------------------------
JOHN W. PALMOUR, PH.D.Von Arx
II-5
87
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ----------------------
1.01* -- Form of Underwriting Agreement
4.01 (1)-- Specimen Common Stock Certificate
4.02 Amended and-- Restated Articles of Incorporation, as amended
4.03 Amended and Restated-- Bylaws, as amended
5.01 -- Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
23.01 -- Consent of PricewaterhouseCoopers LLP
23.02 -- Consent of Ernst & Young LLP
23.03 -- Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto)
24.01 -- Powers of Attorney (see page II-5)
27.01 Financial Data Schedule
- -----------------
(1) Exhibit 4.2 to the Company's Registration Statement on Form SB-2, File No.
33-55998, as declared effective by the Securities and Exchange Commission
on Febuary 8, 1993, and incorporated herein by reference. .-------------------------
* To be filed by amendment
amendment.
II-6