SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Endedfiscal year ended June 27, 199925, 2000
CREE, RESEARCH, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-21154 56-1572719
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction Identification Number)
of incorporation)
4600 Silicon Drive, Durham, North Carolina 27703
(Address of principal executive offices)
(919) 313-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0025 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of August 2, 19994, 2000 was approximately $794,388,471$3,368,572,950 (based on the
closing sale price of $29.375$102 per share).
The number of shares of the registrant's Common Stock, $0.0025 par value per
share, outstanding as of August 2, 19994, 2000 was 29,258,464.35,351,133.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held November 2, 1999October 31, 2000
are incorporated by reference into Part III.
CREE, RESEARCH, INCINC.
FORM 10-K
For the Fiscal Year Ended June 27, 199925, 2000
INDEX
Part I Page
Item 1. Business........................................................3Business............................................................3
Item 2. Properties.....................................................19Properties.........................................................20
Item 3. Legal Proceedings..............................................19Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders............19Holders................20
Part II
Item 55. Market for Registrant's Common Equity and Related
Stockholder Matters............................................19Matters................................................21
Item 6. Selected Financial Data........................................20Data............................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................21Operations................................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........30
Item 8. Financial Statements and Supplementary Data....................30Data........................31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...........................50Disclosures...............................53
Part III
Item 10. Directors and Executive Officers of the Registrant.............50Registrant.................54
Item 11. Executive Compensation.........................................50Compensation.............................................54
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................50Management.........................................................54
Item 13. Certain Relationships and Related Transactions.................50Transactions.....................54
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................51
SIGNATURES ...............................................................53
-2-8-K....55
SIGNATURES...................................................................57
PART I
Item 1. Business
INTRODUCTION
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Cree, Research, Inc., a North Carolina corporation, was established in 1987 to
commercialize silicon carbide, or SiC, semiconductor wafers and devices. Today,
Cree iswe are the world leader in developing and manufacturing compound semiconductor
materials and electronic devices made from SiCSiC. SiC-based devices offer
significant advantages over competing products made from silicon, gallium
arsenide, sapphire and other wide bandgap compound
semiconductor products. Using its proprietarymaterials for certain electronic applications. We
use our compound semiconductor technology the Company producesto make enabling products such as blue
and green light emitting diodes, or LEDs. We sell our LEDs to customers who
package them for use in applications such as backlighting for automotive
dashboards and liquid crystal display, or LCD, backlighting, indicator lamps,automotive interior lighting, wireless handsets and other
consumer products. Other applications for our LEDs include indoor and outdoor
full color displays, such as video boards in indoor arenas and outdoor stadiums
or billboards and message signs. Our LEDs are also used in traffic signals,
indicator lights for consumer or industrial equipment and miniature white
lights. We have developed several generations of LED displaysproducts, including high
performance LEDs with increased brightness over our previous diodes and other lighting applications. The Companysmall
chip products, which consume less power. Our SiC-based blue and green LEDs offer
benefits to our customers over competing products, including an industry
standard chip structure, improved resistance to electrostatic discharge, small
size and low unit price. We also manufacturesmanufacture SiC materials products, including
SiC wafers, that we sell for use in manufacturing and for research directed to
optoelectronics, microwave and power applications, and SiC crystals used in the
production of unique gemstone products and SiC wafers soldgemstones.
We have new product initiatives for research directed to optoelectronics, microwave and power applications. Cree
has recently introduced the first of a family of radio frequency, or RF and microwave devicestransistors and recently
began shipping limited quantities of these devices. We believe that these
products may prove useful in a variety of applications, including power
amplifiers for use in wireless base stations, radar systemsinfrastructure, home-based multi-channel multi-point
subscriber units, digital broadcast applications and other
commercial and military applications. These products are expected to be
available on a sample basis during fiscal 2000. SiC-based compound semiconductor
devices offer significant advantages over competing products based on silicon,
gallium arsenide, or GaAs, and other materials for certain electronic
applications. The Company hassolid state radar. We also
have new product initiatives based on SiC, including
additional RF and microwave devices, larger and clearer crystals for moissanite
gemstones, blue laser diodes for optical storage applications andaimed at developing high power devices for power
conversion and switching uses and blue laser diodes for use in high-density
digital versatile disk, or switching uses.DVD, players and other optical storage applications.
We are also developing LEDs with a higher luminous efficiency to expand our
existing family of devices. We believe if certain significant milestones are
achieved these LED chip products currently in development may enable our
customers to produce white lamps that could compete in the conventional lighting
market.
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 numerousmany
electronic devices. Alternative materials, such as gallium arsenide, or 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 widely usedcommercially
available semiconductor materials have certain physical and electronic
characteristics that limit their usefulness in manycertain applications. For
example, silicon and GaAs-based semiconductors arehave not suitable fordemonstrated the fabrication ofability
to fabricate 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
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commercial and military aerospace
applications. SiC can deliver five times the power per
single device than silicon or GaAs based devices, therefore, SiC based wireless
systems may use fewer transistors per base station with less complex circuitry,
which may result in a lower system cost. Furthermore, few silicon or GaAs
devices can operate effectively at temperatures above 400 degrees F.Fahrenheit.
This is a majorsignificant limitation infor applications such as advanced electronic
systems for high power 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) whichsemiconductors. SiC
also possesspossesses physical and electronic properties that meaningfully increase
device performance over products fabricated from semiconductor 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.
-3-
SiC OVERVIEW
- ------------
SiC has many physical characteristics that make the material veryit 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 degrees F,Fahrenheit, it is 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, slicingSlicing and polishing SiC wafers is also hindered by the intrinsic
hardness of the material. Similarly, its inherent chemical resistance makes SiC
a difficult material to etch. Many of the same physicalThe characteristics that make SiC difficult to produce
also make it an excellent material for certain semiconductor applications. The
following characteristicsdiscussed below distinguish
SiC from conventional silicon and GaAs-based semiconductor materials, resulting
in significant advantages for many
applications in which theif production hurdles can be overcome:
WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to moveionize 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.
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 and GaAs-based devices.
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.
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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 and GaAs-based devices.
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 hostile environments. As a result, SiC can withstand much higher
electrical pulses and is much more radiation-resistant than silicon or GaAs. -4-
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 CREE SOLUTION
- -----------------
Some of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material very difficult to
produce. Through its proprietary technology and over 10our 13 years of development and manufacturing experience, Cree haswe
have succeeded in overcoming many of the difficulties involved in processing SiC
for commercial use. The CompanyWe introduced itsour first product in October 1989 and believe
we are currently is the leading manufacturervolume producer 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 Creeour products significant
advantages over competing products for certain electronic and gemological
applications. These advantages include:
BLUE AND GREEN LIGHT EMISSION. Cree producesWe produce high efficiency blue and green LEDs
using gallium nitride, or GaN, a wide bandgap material, and other nitrides grown
on SiC substrates. Most otherOther manufacturers of nitride-based LEDs currently use
sapphire substrates. The conductive properties of SiC enable Creeus to fabricate a
simpler, smallerindustry standard sized LED chip as compared to competingthat is smaller than LEDs grown on
competing sapphire substrates. Cree hasWe believe the industry standard size of our chip
affords our customers more flexibility in gaining design wins and our smaller
chip size enables our product to be offered for a lower cost per chip in
comparison to sapphire-based products currently available. We are also
developing LEDs with higher luminous efficiency that may allow our products to
better compete with the brightness offered from sapphire-based products.
Sapphire-based products currently offer a higher brightness than our existing
LED products. We are also working to develop highly efficient near-ultraviolet
LED chips that may eventually be used by our customers to produce white lamps
that can compete with conventional lighting products for certain applications.
We have also demonstrated in the laboratory and isare continuing development of
GaN-basednitride-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.
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 also sell some
wafers to developOsram OS for the production of LED products. In October 1999, we
introduced a larger substrates with lower defect densities, which should drive further device
developmentthree-inch wafer to production for research purposes and
strengthen SiC's economic advantages in certain applications.demonstrated a four-inch prototype wafer.
-5-
GEMSTONE MATERIAL PROPERTIES. Cree manufacturesWe manufacture SiC crystals that 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.
HIGH POWER RF AND MICROWAVE OPERATIONS. The Company hasWe 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. HigherWe believe our higher power SiC devices can allowwill
enable the fabricationdesign and manufacture 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. InWe recently
began shipping limited quantities of SiC RF devices that can be used in wireless
infrastructure applications such as cellular base station transmission systems.
We believe that SiC devices offer certain advantages for RF and microwave
applications in comparison to silicon and GaAs devices, including using fewer
devices for a similar range of frequency, superior linearity for digitally
modulated carrier applications which results in less distortion to the fourth quarter of fiscal 1999,signal,
superior efficiency, and the Company introduced
its first RF power transistor product, a SiC metal semiconductor field effect
transistor or MESFET device, which is the first in a planned family of RF power
transistor products designed for wireless and broadcast applications. The
Company isability to operate at higher temperatures. We are
continuing development of additional RF and microwave devices for use in
wireless base stations, radar systemsinfrastructure and other commercial and defense-related applications.
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HIGH POWER, HIGH VOLTAGE OPERATION. Cree isWe are developing SiC power diodes and
switches that are able to operate at higher power densities than currently used
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.
PRODUCTS
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All of Cree'sour current products are an outgrowth of itsbased on our SiC technology. The following chart
illustrates the Company'sour existing products and userexisting and potential applications for
whichof
these products are being used or marketed:by our customers and their end users:
PRODUCT EXISTING AND POTENTIAL USER APPLICATIONS
------- ----------------------------------------
Blue and green LEDs o Backlighting in applications such as automotive
dashboards and LCDs, includinginterior lighting, wireless handsetshand-
sets and other lighting applications
o Large indoor full color displays, such as arena
video screens
o Large outdoor full color displays
o White light products to replace miniature incandescentincan-
descent bulbs, such as those used in automobile
map lights and other lighting applications
o Traffic signals
SiC waferso Indicator lights used for consumer, office and
crystalsother equipment
Wafer Products o Manufacture of LEDs
o Research and development for new semiconductor
applications (wafers)devices
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SiC crystals o Gemstones (crystals)
SiC
RF transistors and o CommunicationPower amplifier systems for wireless infra-
amplifiers structure, such as base stations, wireless local
loop and other power
wirelessmulti-channel, multi-point distribution
system base station applications
amplifiers
The Company's products are manufactured in a six-part process which includes:
SiC crystal growth, wafer slicing, polishing, epitaxial deposition, fabrication
and testing. 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's proprietary epitaxial deposition technology,
which essentially consists of growing thin layers of SiC, GaN or other material
on the polished wafer, depending on the nature of the device under production.
SiC wafer products may leave the manufacturing process either after polishing or
epitaxy. Following epitaxy, LED and microwave chips are fabricated in a clean
room environment. The final steps include testing and packaging for shipment to
the customer. In manufacturing its products the Company depends substantially on
its custom-manufactured equipment andsubscriber sites
o Digital broadcast systems
some of which is manufactured
internally and some of which the Company acquires from third parties and
customizes itself.o Solid-state radar systems
o Military communications systems
BLUE 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 toSince the introduction of Cree'sour first blue SiC-only LED product in 1989,
blue
LEDs could not be produced in volumes necessary
-6-
for commercialization. Since then, Cree haswe have developed several generations of blue LED products, including blue and green
LEDs using nitride materials on SiC substrates, a more robust conductive buffer
chip that is easier to build into lamps, higher brightness products and hasa small
size low power consumption diode. All of these products have a lower unit price
than competing products. The
commercial availability of the blue LED, together with red and green, has
enabled the development of full color LED lamps and video displays.
The Company believesWe believe that LEDs made from SiC substrates provide the followingoffer
important benefits over those made with competing substrates: 1)from the sapphire substrates presently used
by our competitors, including:
o an industry standard vertical chip structure requiring a single wire bond
that results inpermits faster LED assembly and reduced cost, 2)cost;
o a smallersmall chip size compatible with industry
trends toward package miniaturization, 3) the industry's highest specification
forsize;
o improved resistance to electrostatic discharge, resistance thator ESD, which reduces the
cost, engineering effort and time to qualify LEDs at customer production
sitessites; and
4)o a lower priced
outdoor capablelower-priced outdoor-capable product.
Presently, the Company'sour LED chips are used for backlighting purposes in applications such
as automotive dashboards, interior automotive lighting, and liquid crystal
display or 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 video replay boards, billboards and moving message
advertising and informational signs. The Company'sOur standard bluebrightness LED products,
offered in blue wavelengths only, are primarily used in indoor applications. In
September 1998, the Company first
began shippingwe introduced brighter, higher-priced blue and green LEDs that
offer a lower cost higher
efficiency LED solution for existing applications that require a higher
brightness.alternative to competing products made on sapphire
substrates. These products which were introduced generally in May 1999,increased brightness up to 300% over our standard LED
products. These higher brightness parts are used by our customers to produce
packaged components marketed for backlighting purposes, whereapplications requiring low power
consumption, is critical, such as LCD displaysLCDs for wireless handset applications,handsets and forconsumer products, and in
traffic signals and outdoor full color displays.
In November 1998, Cree announcedfull-color display applications where brightness is
critical.
We also offer a new product line built on itswithin our blue LED products forthat our customers use
in manufacturing solid-state LED components that emit white light applications.light. By passing
blue or near ultraviolet LED output through certain conversion materials such as
phosphors or polymers, blue light ismay be converted into white light. CreeWe
currently sellssell blue LEDsLED chips to a customercustomers who produces theproduce packaged components that
emit white light conversion LED.light. Commercial products incorporating Cree'sour chips for white light
conversion areinclude backlighting applications for automobile dashboards and
instrumentation and LCD backlighting for
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wireless handsets. Other applications for white light LEDs include miniature
incandescent lighting, such as map lights, automobile trunk lights and small
flashlights.
The Company suppliesIn June 2000, we announced the introduction of a new smaller chip that is
available at standard and high brightness levels in blue and green LED chipsin high brightness
levels for green. This product costs less and uses 50% less power than our
larger sized chips. We are targeting this product to LED component manufacturers who
assemble the chip into a lamplow cost handset
market.
We are focusing current development efforts on further improving the brightness
of our high brightness LEDs. We believe that increased brightness is necessary
to effectively compete against LEDs fabricated on sapphire substrates, which are
presently brighter than our high brightness products, and then manufacture solid-statemay eventually lead to
products marketed for commercial lighting components to supply OEMs.applications. LED products represented
51%63%, 48%49%, and 53%43% of our revenue for the fiscal years ended June 25, 2000, June
27, 1999, and June 28, 1998, and June 30,
1997, respectively.
MATERIALS PRODUCTS
Cree manufacturesWe manufacture SiC wafers for sale to corporate, government and university
programs that use SiC for developing electronic components. SiC wafers are
distributed directly to these parties. 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 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 fiscalIn October 1999, we released a low-cost
two-inch wafer targeted as an alternative to sapphire substrates used by many
researchers in the Company achieved significant
improvement inoptoelectronics field. In the same month, we introduced our
first three-inch wafer quality for its two-inch sized wafers. Cree is currently
developing a three-inch sized wafer product.sale to the research community.
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 -7-
form for use in gemstones. The Company sellsgemstone
applications. We sell SiC crystals directly to C3 Inc.
("C3"),Charles & Colvard, or C&C, a
company which was founded to develop gemstone products from SiC crystals. C3C&C cuts and
polishesfacets the productSiC crystals to fabricate diamond-like gemstones targeted at
customers who desire affordable high quality jewelry. During the
first half of fiscalIn December 1999, Cree significantly expanded crystal growth capacity
for C3 to meet increased volume requirements. Cree has recently agreed to an
additional capacity expansion that is planned through the first half of fiscal
2000. The potential for increasing demand depends on Cree's ability to meet C3's
requirements for color, clarityC&C
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. As
a result, we anticipate that sales to develop crystals with higher quality.C&C will continue to decline as a
percentage of our business in fiscal 2001. Future demand also is dependent on
C3'sC&C's ability to cut, facet and effectively market its gemstone products. SiC produced for gemstone applications is
distributed directly to C3. Wafer
and other material products represented 38%26%, 34%37% and 24%31% of our revenue for the
fiscal years ended June 25, 2000, June 27, 1999, and June 28, 1998,
and June 30, 1997, respectively.
RF AND MICROWAVE TRANSISTORS
In June 1999, Creewe announced the first of a familyplanned line of SiC-based RF and
microwave transistor products designed to be a partproducts. Samples of this product were shipped throughout
fiscal 2000. In June 2000, the power amplification process. A
second phase offirst 10-watt transistor products is scheduled for releasewere released
to production and became available to customers in fiscal 2000. The Company expectslimited quantities. These
products include a complete, self-biased broadband power amplifier covering 100
megahertz to 1 gigahertz as well as pre-matched transistors for broadband
wireless access bands up to 3.7 gigahertz. We believe that these products willcan be
sold toused in a variety of power amplifier producers,applications, including wireless
base stationsinfrastructure, home-based subscriber units, cable TV and digital broadcast
applications. While distribution of samples will commence in early fiscal 2000,
the Company believes that these products will be sold inAt this time we are shipping only limited quantities during fiscal 2000, as design cycles forof these
products. Revenue growth from sales of these devices is dependent on the target applications are generally
several months. There can be no assurance that such producers or other customers
will be able to develop applications in the near future that will require
commercial productionresults
of customer evaluations of the Company'sfirst SiC RF products or that suchand whether the products
will be
successful in the market.are designed into customer applications.
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PRODUCTS UNDER DEVELOPMENT
- --------------------------
The Company believes that the inherent physical characteristics of SiC make it
an excellent material for many new semiconductor applications. The Company is
dedicated to creating new applications using SiC and has products currently
under development in each of the areas described below.
The following chart illustrates the potential user applications for each area of
current product development:
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
High power---------------- ---------------------------
RF and microwave devices o AmplifierPower amplifier systems for wireless
applications, microwave devices such as personal communication systems, or
PCS base stations,
wireless local loop and digitalmulti-channel,
multi-point distribution system base
station and subscriber sites
o Amplifiers for CATV
o Digital broadcast systems
o RadarSolid-state radar systems
Power devices o Industrial motor controls
o Electric vehicles
o High voltage power supplies
o Lighting ballasts
o Factory robotics
o Locomotive applications
o Solid-state power transmission
Blue and ultraviolet lasers o High density optical storage, such as
CDs and
lasers DVDs
High temperature devicesLEDs with higher lumenous o Automotive and aerospace electronics
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HIGH POWERPremium outdoor display signs
efficiency o Products for the conventional lighting
market
RF AND MICROWAVE DEVICES
The Company isWe 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. In June 1999, Cree introduced the first of a family of RF and microwave
transistor products. As discussed above, the Company continues to develop otherThese SiC-based transistor devices that are expected for prototype distribution during
fiscal 2000. All of these products are designed to amplify power in several
applications. These
devices are expected to be usedtargeted for frequency band
applicationsfrequencies from 40030 megahertz to 2.54 gigahertz, including
PCS base stationthird generation, or 3G transmitter site networks. The Company believesWe believe that future SiC
transistors offer advantages overin development, with higher output power per transistor than current
silicon and GaAs-based devices, for certain applications due to greater
output power per transistor. The higher output power available from SiC devices
is expected towill allow wireless systems to use fewer
transistors per base station, resulting in less complex circuitry, higher
linearity and lower cost. Cree isNew higher power devices are targeted for introduction
in fiscal 2001 on a sample basis. We have also demonstrated 50 watts of
continuous wave power at 2 gigahertz in a complete amplifier from a single SiC
transistor.
We are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). During
fiscal 1999, the CompanyWe
previously reported the demonstration of GaN on SiC transistors that operated
with an output power of 9.040 watts at 7.4 gigahertz. The Company10 gigahertz which we believe to be the
highest publicly reported pulsed power output for a single device at this
frequency. We also reported a record high power density of 6.99.8 watts per
millimeter, continuous wave, at 108.2 gigahertz on smaller GaN devices. The Company believes thisThis power
density is the
highest publicly reported for a solid-state field-effect transistor operating in
this frequency range 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.
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POWER DEVICES
The Company isWe 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 toand
operate at significantly higher temperatures and voltages with superior
switching capabilities. These devices are expected to yield substantialcapabilities, yielding power savings due to reductions in energy losses made possible by the devices' highhigher efficiency.
Potential applications include power drive components for electric vehicles,
lighting ballast components, industrial motor controls and power conditioning
for high voltage power transmission. In early fiscal 1999, the Companywe 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. Under this program, we recently demonstrated a 12 kV high
efficiency SiC rectifier for use in electric power switching. We believe this
voltage level was higher than any previously reported for a single rectifier
device. We do not anticipate that a commercial device capable of switching power
at this voltage level will be available in the near term.
BLUE AND NEAR ULTRAVIOLET LASER DIODES
The Company continuesWe continue to focus on the development of blue and near ultraviolet laser
diodes. SiC's inherent attributes, including its natural cleavability and high
thermal conductivity, make it an excellent substrate material for bluedevelopment of
such short wavelength laser applications.diodes. The storage capacity of optical disk drives
can be increased significantly by utilizing a laser diode capable of emitting
shortshorter wavelength light. The Company
hasWe have demonstrated in the laboratory a short-lived
blue laser diode, fabricated from GaN and relatednitride materials deposited on SiC substrates,
which has a shorter wavelength than that of the red or infrared lasers used in
applications 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 -9-
than the capacity permitted by red light. This increased storage capacity could
lead to advances in CD-ROM data storageSubstantial
research and audio and video compact disc
applications. Currently, the Companydevelopment work is the only U.S.-based firm to have
demonstrated the continuous wave operation of a blue laser diode at room
temperature on SiC; however, there is still substantial work needed for us to produce a blueshort wavelength
laser suitable for commercialconsumer applications. During fiscalIn May 1999 Creewe entered into a one-year
development agreement with Microvision, Inc. ("MVIS").
This agreement provides, or Microvision, under which
Microvision provided $2.6 million ofin funding for us to conduct research in edge-emittingedge
emitting LEDs and laser diodes. At MVIS' option, thisIn April 2000, the agreement may bewas extended for an
additional year for $2.5 million.
HIGH TEMPERATURE DEVICES
In certain applications for microwavetwo years with Microvision providing funding of $4.5 million and power devices, the ability of SiC to
operate at higher temperatures than comparable silicon devices can be a major
advantage. Thus, Cree is currently 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$5.5
million in the automotive, energyfirst and aerospace industries.second years of the program, respectively.
LEDs WITH HIGHER LUMINOUS EFFICIENCY
In May 2000, we acquired Nitres, Inc., (now a wholly owned subsidiary known as
Cree Lighting Company, or Cree Lighting) with operations based in Goleta,
California. Cree Lighting is also workingengaged in the development of new LED device and
manufacturing technology, with the goal of developing higher efficiency LED
technology necessary for LEDs to compete with incandescent and fluorescent
lighting technology for conventional lighting markets. In July 2000, Cree
Lighting demonstrated a near ultraviolet LED made using nitride materials on high temperature sensors, as well as analoga
sapphire substrate with a power output of 17 mW and digital
circuits that could be used28% external quantum
efficiency. This is the highest known external quantum efficiency publicly
reported for an LED in the UV-to-blue portion of the wavelength spectrum. Our
goal is to amplify low level sensor signals directlybegin production of products using this new development 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 has developed prototype devices, additional development work is needed to
achieve commercial viability.fiscal
2001.
GOVERNMENT CONTRACT FUNDING
- ---------------------------
Cree derivesWe derive a portion of itsour revenue fromwith funding from research contracts with the
U.S. government.Government. For the fiscal years ended June 25, 2000, June 27, 1999 and
June 28, 1998, and
June 30, 1997, government funding represented
-10-
11%, 18%14% and 23%21% of total revenue, respectively. These contracts typically cover
work performed over several months up to three years. While the U.S. government is interested in Cree's development
of SiC materials and SiC-based devices, there can be no assurance that the
Company will enter into any additional government contracts, or that they will
be profitable or produce contract revenue. In addition, there can be no
assurance that after any such contracts are entered into, changing government
regulations will not significantly alter the benefits of such contracts. These contracts may be
modified or terminated at the convenience of the government. The contracts
generally provide that Creewe may elect to obtain title to inventions made in the
course of research, with the government retaining a nonexclusive license to
practice such inventions for government purposes.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company believes that its ability to maintain its position as a leading
supplier of SiC material and SiC-based semiconductor products, will depend on
its ability to enhance existing products and to continue developing new products
incorporating the latest improvements in SiC technology. Accordingly, the
Company is committed to investingWe invest significant resources in research and development.
The Company continually conducts researchdevelopment aimed at improving
our semiconductor materials and developing new device and production technology.
Our core SiC materials research is directed to improving the quality and
diameter of our SiC substrates. We are also working to improve the quality of
its
crystalsthe SiC and wafers and enhancing itsnitride epitaxial film deposition (wafer coating)
process. Cree believes that these research and development efforts will benefit
all of the Company's products. The Company believes it can increase the diameter
of its wafers while lowering manufacturing costs and permitting the development
of more complex devices. 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
-10-
cost. In moving to larger wafer sizes, the Company is focusing on how to
stabilize the process to repeatedlymaterials we grow larger diameter crystals with minimal
defects. The two-inch wafer size, which Cree introduced in fiscal 1998, is
considered a minimum standard for certain fabrication and development
facilities. Cree is expected to produce three-inch wafersdevices and to
improve device yields by reducing variability in our processes.
We spent $20.0 million in fiscal 2000, $12.1 million in fiscal 1999 and has
begun development of larger wafer sizes.
During$9.9
million in fiscal years 1999, 1998 and 1997, the Company spent $9.4 million, $8.6
million and $9.7 million, respectively, for direct expenditures relating to research and
development activities. OffsettingOff-setting these expenditures were $6.6$12.7 million $8.2in
fiscal 2000, $9.0 million in fiscal 1999 and $8.7$9.7 million respectively,in fiscal 1998 of U.S.
governmentGovernment 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 $5.5 million in fiscal
years 1999, 1998 and 1997, customers spent2000, $4.5 million $3.5in fiscal 1999 and $ 3.5 million and $66,000, respectively, forin fiscal 1998 towards our
product research and development activities.
SALES AND MARKETING
- -------------------
We actively market our wafer and optoelectronic products through targeted
mailings, telemarketing, select advertising and attendance at trade shows. We
generally use an executive sales approach, relying predominantly on the efforts
of senior management and a small direct sales staff for worldwide product sales.
We believe that this approach is preferable in view of our 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, we depart from this approach for sales to certain Asian
countries. In Japan, we market our LED products and SiC wafers through our
distributors Sumitomo Corporation, or Sumitomo, and Shin-Etsu Handotai Co. Ltd.,
or Shin-Etsu. We also use sales representatives to market our LED products in
Hong Kong, China, Taiwan and South Korea. We sell SiC crystal materials for use
in gemstone applications directly to C&C under an exclusive supply agreement. We
are using both direct sales and sales representative arrangements to market RF
products. We have engaged nine representatives for our RF products in the United
States. We have not yet engaged sales representatives or made other distribution
arrangements for our RF products outside the United States.
CUSTOMERS
- ---------
During fiscal 2000, revenues from three customers- Siemens AG, or Siemens,
Sumitomo and C&C each accounted for more than 10% of total revenue. For the year
ended June 27, 1999, and June 28, 1998, revenue from Siemens, C&C and the
Department of Defense each accounted for more than 10% of total revenue. For
financial information about foreign and domestic sales, please see Note 2,
"Summary of Significant Accounting Policies" to our consolidated financial
statements included in Item 8 of this report.
-11-
BACKLOG
- -------
As of June 25, 2000, we had a firm backlog of approximately $76.5 million
consisting of approximately $55.1 million of product orders and $21.4 million
under research contracts signed with the U.S. Government, a portion which have
not yet been appropriated. This compares to a firm backlog level of $42.3
million as of June 27, 1999, which consisted of approximately $25.6 million of
product orders and approximately $16.7 million of research contracts signed with
the U.S. Government. We believe the entire backlog could be filled during fiscal
2001, with the exception of approximately $9.3 million in U.S. government funded
contracts.
MANUFACTURING
- -------------
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 our epitaxial deposition processes, which
require that we grow thin layers of SiC, GaN or other material on the polished
wafer, depending on the nature of the device under production. SiC wafer
products may leave the manufacturing process either after polishing or epitaxy.
Following epitaxy, LED and RF chips are fabricated in a clean room environment.
The final steps include testing and packaging for shipment to the customer. In
manufacturing our products we depend substantially on our custom-manufactured
equipment and systems, some of which are manufactured internally and some of
which we acquire from third parties and customize ourselves.
SOURCES OF RAW MATERIALS
- ------------------------
The Company dependsWe 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 our operations.
COMPETITION
- -----------
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. We
believe that we currently enjoy a favorable position in the Company's operation.existing markets for
SiC-based products and materials. However, we 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 we have.
-12-
Our primary competition for blue and green LED products comes from Nichia
Chemical Industries, Ltd., or Nichia, Toyoda Gosei Co. Ltd. and Lumi Leds
Lighting, a joint venture between Agilent Technologies and Philips Lighting.
These companies currently market blue and green LED products that are brighter
than our high brightness blue and green LED devices. In addition, Uniroyal
Technologies, Inc., American Xtal Technology, Lucky Goldstar and other Asian
based companies have announced intentions to begin production of blue and green
LEDs, all on sapphire substrates. Some of our existing competitors have been
more successful than us 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. We believe our brighter blue and
green LEDs have enabled us to compete successfully in this market because our
LEDs often can be used in the same applications at a lower cost than competing
products. We are working on plans to improve the brightness of our LEDs to
enhance our ability to compete in this market. We believe that our approach to
manufacturing blue and green LEDs from SiC substrates offers a more
cost-effective design and process than competitors, who use a sapphire
substrate. Our smaller chip design, which is possible because we use a
conductive substrate, permits more devices to be fabricated on each wafer
processed, which lowers our cost per unit. In addition, our 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, our SiC-based devices can withstand a higher level of ESD than
existing sapphire-based products and therefore are more suitable for
applications that require high ESD emission ratings, such as automotive
applications.
In addition to competitor using alternative LED technology, Osram OS is
currently producing LEDs using technology licensed from us in 1995. Shin-Etsu
has also licensed certain of our LED technology in 1996 but has not begun
production under this license. 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
- ------------------------------
The Company since its inception has been a leader in the development of SiC
materials and devices made using SiC. It seeksWe seek to protect itsour 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. The Company hasWe have also from time to time acquired,
through license grants or assignments, rights to patents on inventions
originally developed by others.
At August 2, 1999, the CompanyJune 25, 2000 we owned 46or held exclusive rights licensed under a total of 70
issued U.S. patents.patents, subject in some cases to nonexclusive license rights held
by third parties. These patents expire between 20082007 and 2017. Forty-two2018. Two of thethese
patents are jointly owned by the Company
alone and the remainder, which resulted from research and development agreements
with other firms, are owned jointly with the other parties to such agreements.
The Company also ownsa third party. In addition, we own or hold
exclusive license rights under corresponding patents and patent applications in
certain foreign countries it considers significant or potentially significant markets.
In addition,countries.
Included in the Company owns pending U.S. and foreign patent applications
relating to inventions developed by the Company or acquired from third parties.
The Company holdslicenses we hold is an exclusive license fromgranted by North
Carolina State University, ("or N.C. State")State, to 10 U.S. patents, and 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 the Company andwith N.C. State in 1987. This license gave the
Company1987, is a
worldwide, fully paid, exclusive license to manufacture, use and sell products
and processes covered by
-11-
the claims of patent applications filed by N.C. State
relating to the licensed inventions. Ten U.S. patents were subsequently issued
with respect to the applications, with expiration dates between 2007 and 2009.
Twelve of the foreign applications have been issued with expiration dates from
2006 to 2013. The U.S. government holds a non-exclusive license to practice the
inventions covered by the N.C. State license for government purposes. The Company hasWe have
also entered into other license agreements with N.C. State, and with the
licensing
-13-
agencies of other universities, under which the Company haswe have obtained rights to practice
inventions claimed in various patentpatents and applications issued or pending in the
U.S. and other foreign countries.
For proprietary technology which is not patented or otherwise published, the
Company seekswe seek
to protect the technology and related know-how and information as trade secrets
and to maintain it in confidence through appropriate non-disclosure agreements
with employees and others to whom the information is disclosed. There can be no
assurance that these agreements will provide meaningful protection against
unauthorized disclosure or use of the Company'sour confidential information or that our
proprietary technology and know-how will not otherwise become known or
independently discovered by others. The CompanyWe also reliesrely upon other intellectual
property rights such 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 Companyours, is subject to uncertainties and may involve complex legal and factual
issues. Consequently, there can be no assurance that patents will be issued on
any of the pending applications owned or licensed to the Companyus or that claims allowed
byin any patents issued or licensed to the Companyus will not be contested or invalidated. In
the past, the U.S. patent that the Company licenseswe 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 the Companywe could lose patent protection in Europe for this particular method.method
or that the scope of our patent protection may be reduced. There is likewise no
assurance that patent rights owned or exclusively licensed to the Companyus will provide
significant commercial protection since issuance of a patent does not prevent
other companies from using alternative, non-infringing technology. Further, the Company earnswe
earn a material amount of itsour revenues in overseas markets. While the Company holdswe hold and
hashave applied for patent protection for certain of itsour technologies in these
markets, there can be no assurance that itwe will obtain protection in all
commercially significant foreign markets or that the Company'sour intellectual property
rights 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 in Tokyo District Court. As previously reported, the
complaint in this proceeding is directed to our standard brightness LED products
and alleges that these products infringe a Japanese patent owned by Nichia. The
suit seeks a permanent injunction against further distribution of the products
in Japan. We have intervened in the proceeding and filed a response denying the
allegations of infringement. In April 2000, Nichia commenced two additional
lawsuits against Sumitomo in Tokyo District Court in which it alleges that our
high brightness LED products infringe a second Japanese patent owned by Nichia.
The complaints in the new proceedings seek provisional and permanent injunctive
relief prohibiting Sumitomo from further sales of these products in Japan. We
have intervened in the new proceedings and have filed responses denying the
allegations of infringement. No monetary damages for infringement have been
sought in any of the lawsuits brought by Nichia against Sumitomo. Management
believes that the infringement claims are without merit and that the lawsuits
are motivated by competitive factors. We intend to vigorously defend our
products against these 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 the Company'sour intellectual property rights or to defend the Companyus 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 the Companyus with respect
to our current or future products. The Company
hasWe have been notified from time to time of
assertions that itsour products or processes may be infringing patents or other
intellectual property rights of others. We have investigated such claims and
determined the assertions were without merit or taken steps to obtain a license
or avoid the infringement. However, we cannot
-14-
predict whether past or future assertions of infringement may result in
litigation or the extent to which such assertions may require us to seek a
license under the rights asserted or whether a license would be available or
available on acceptable terms. Likewise, we cannot predict the occurrence of
future assertions of infringement or the extent
to which such assertions may require the Company to seek a license under the
rights asserted. Likewise, we cannot predict the occurrence of future assertions
that may prevent the Companyus from selling products,
or result in litigation.
-12-
SALES AND MARKETING
- -------------------
The Company actively markets its products through targeted mailings,
telemarketing, select advertising and attendance at trade shows. The Company
generally uses an executive sales approach, relying predominantly on the efforts
of senior management and a small direct sales staff for worldwide product sales.
The Company believes that this approach is preferable in view of its 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 departs from this approach
for saleslitigation or require us to certain Asian countries. In Japan, the Company markets its LED
products and SiC wafers through its distributors Sumitomo Corporation
("Sumitomo") and Shin-Etsu Handotai Co. Ltd. ("Shin-Etsu"). The Company also
uses sales representatives to market its LED products in Hong Kong, China and
Korea. The Company sells SiC crystal materials for use in gemstone applications
directly to C3 under an exclusive supply agreement.
CUSTOMERS
- ---------
During fiscal 1999, revenues from Siemens A.G., C3 and the Department of Defense
each accounted for more than 10% of total revenue. The loss of Siemens, C3, or
the Department of Defense's business would have a material adverse effect on the
results of operations if the Company were unable to replace the lost revenue.
For the year ended June 28, 1998, revenue from Siemens, C3 and the Department of
Defense each accounted for more than 10% of total revenue. For the year ended
June 30, 1997, Siemens and the Department of Defense revenues each accounted for
more than 10% of total revenue. For financial information about foreign and
domestic sales, please see Note #2, "Summary of Significant Accounting Policies"
to the Company's consolidated financial statements included in Item 8 of this
report.
BACKLOG
- -------
As of June 27, 1999, the Company had a firm backlog of approximately $37.1
million consisting of approximately $25.6 million of product orders and $11.5
million of executed research contracts with the U.S. Government. Some of the
funds for executed research contracts with the U.S. Government have been awarded
but may not be appropriated. This compares to a firm backlog level of $12.6
million as of June 28, 1998, which consisted of approximately $7.2 million of
product orders and approximately $5.4 million of executed research contracts
with the U.S. Government. We expect the entire backlog to be filled during
fiscal 2000, with the exception of approximately $5.6 million in U.S. government
funded contracts.
COMPETITION
- -----------
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. The
Company believes that it currently enjoys a favorable position in the existing
markets for SiC-based products and materials primarily as a result of its
proprietary SiC-based technology. However, the Company faces 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's primary competition for the blue and green LED products comes from
companies that market blue and green LEDs fabricated on sapphire substrates.
These competitors market blue and green
-13-
LED products that are as bright or brighter than the Company's high brightness
blue and green LED devices. These companies 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 its brighter blue and green LEDs will enable it to
compete successfully in this market because they can be used in the same
applications at a lower cost than competing products.
The Company believes that its approach to manufacturing blue and green LEDs from
SiC substrates offers a more cost-effective design and process than its
competitors. Cree's smaller chip design, which is compatible with industry
trends for 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 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's SiC-based devices
can withstand a much higher level of electrostatic discharge ("ESD") than
existing sapphire-based products and therefore are more suitable for
applications that require high ESD emission ratings, such as automotive
applications.
The Company believes that other firms (including certain of our customers) may
seek to enter the blue and green LED market in the future. For example, Siemens
and Shin-Etsu have licensed certain of our LED technology, which may facilitate
their entrance into our LED markets. We believe that Siemens is currently
producing LEDs using Cree's licensed technology. 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.pay damage awards.
ENVIRONMENTAL REGULATION
- ------------------------
The Company is subject to a variety of governmental 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 dispose 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 regulations. We believe we are in full compliance
with such regulations, but any failure to comply, whether intentional or
inadvertent, could have an adverse effect on our business.
EMPLOYEES
- ---------
As of June 27, 1999,25, 2000, the Company (including its subsidiaries) employed 390680
people, all of which are locatedincluding 524 in the United States.manufacturing operations, 110 in research and
development, and 46 in sales and general administration. None of the Company'sour employees
areis represented by a labor union or subject to collective bargaining agreements.
The Company believesWe believe relations with itsour employees are strong.
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
- ----------------------------------------
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.
-14-
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 usable product produced during each
manufacturing step (our "yield");
o our ability to expand our production of SiC wafers and devices;
o our ability to produce higher brightness products;
o demand for our products or 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. If our future operating results are below the expectations of stock
market analysts or our investors, our stock price may decline.
IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR OPERATING RESULTS MAY SUFFER.
Our SiC material products and our LED and RF device products are manufactured
using technologies that are highly complex. Our customers incorporate our
products into high volume applications such as
-15-
automotive dashboards, wireless handsets, full color video displays and
gemstones, 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 but
not limited to 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;
o losses from broken wafers or other human error; and
o defects in packaging.
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 new products, which has adversely
affected our operating results. We may experience similar problems in the future
and we cannot predict when they may occur or their severity. These problems
could significantly affect our future operating results.
THERE ARE LIMITATIONS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY.
Our intellectual property position is based in part on patents owned by us and
patents exclusively licensed to us by N.C. State and others. The licensed
patents include patents relating to our SiC crystal growth process. We intend to
continue to file patent applications in the future, where appropriate, and to
pursue such applications with U.S. and foreign patent authorities, but we cannot
be sure that patents will be issued on such applications or that our existing or
future patents will not be successfully contested. Also, since issuance of a
valid patent does not prevent other companies from using alternative,
non-infringing technology, we cannot be sure that any of our patents (or patents
issued to others and licensed to us) will provide significant commercial
protection. In addition to patent protection, we also rely on trade secrets and
other non-patented proprietary information relating to our product development
and manufacturing activities. We try to protect this information with
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.
IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS LEDs, OUR
OPERATING RESULTS MAY SUFFER.
We believe that higher volume production of high brightness blue and green LEDs
will be important to our future operating results. Achieving greater volumes
requires improved production yields for these products. Successful production of
these products is subject to a number of risks, including the following:
o our ability to consistently manufacture these products in volumes large
enough to cover our fixed costs and satisfy our customers' requirements;
and
o our ability to improve our yields and reduce the costs associated with
the manufacture of these products.
Our inability to produce adequate quantities of our high brightness blue and
green products would have a material adverse effect on our business, results of
operations and financial condition.
-15--16-
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
Our future success will depend on our ability to develop new SiC solutions for
existing and new markets. We must introduce new products in a timely and
cost-effective manner, and we must secure production orders from our customers.
The development of new SiC products is a highly complex process, and we have
historically experienced delays in completing the development and introduction
of new products. Products currently under development include high power radio
frequencyRF and
microwave devices, power devices, blue laser diodes, and high temperature devices.devices
and higher brightness LED products. The successful development and 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 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;
o our customers' ability to develop applications incorporating our
products; 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-efficient 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 that trend to continue. For example,
for fiscal 19992000 our top five customers accounted for 81%82% of our total revenue.
Accordingly, our future operating results depend on the success of our largest
customers and on our success in selling large quantities of our products to
them. The concentration of our revenues with a few large customers makes us
particularly dependent on factors affecting those customers. For example, if
demand for their products decreases, they may stop purchasing our products and
our operating results will suffer. If we lose a large customer and fail to add
new customers to replace lost revenue, our operating results may not recover.
WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
FACILITY.
In order to increase production at our new facility, we must add critical new
equipment, move existing equipment and complete the construction and upfit of
buildings. Expansion activities such as these are subject to a number of risks,
including unforeseen environmental or engineering problems relating to existing
or new facilities or unavailability or late delivery of the advanced, and often
customized, equipment used in the production of our products, and delays in
bringing production equipment on-line. These and other risks may affect the
construction of new facilities, which could adversely affect our business,
results of operations and financial condition.
-17-
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The market for our products is highly competitive. Although we believe our
SiC-based LEDs offer substantial advantages,Our competitors currently
sell blue and green LEDs made from sapphire wafers that -16-
are brighter than the
high brightness LEDs we currently produce. In addition, we
believe that othernew firms (including certain of our customers) may seekhave begun
offering or announced plans to enter
theoffer blue and green LED market in the future. For example, Siemens and Shin-Etsu
license certain of our LED technology, which may facilitate their entrance into
our LED markets.LEDs. 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 those of the Company. 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 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 developments could have an adverse effect on our business, results of
operations and financial condition.
WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH.
We have experienced a period of significant growth that has strained our
management and other resources. We have grown from 188 employees on December 31,
1996 to 680 employees on June 25, 2000 and from revenues of $44.0 million for
the fiscal year ended June 28, 1998 to $108.6 million for the fiscal year ended
June 25, 2000. To manage our growth effectively, we must continue to:
o implement and improve operation systems;
o maintain adequate 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 support.
We will spend substantial amounts of money in supporting our growth and may have
additional unexpected costs. Our systems, procedures or controls may not be
adequate to support our operations, and we may not be able to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development, and
administrative support. If we cannot attract qualified people or manage growth
effectively, our business operating results and financial condition could be
adversely affected.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS
TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE.
Beginning in fiscal 2001, we plan to begin shifting LED production from two-inch
wafers to three-inch wafers. We must first qualify our production processes on
systems designed to accommodate the larger wafer size, and some of our existing
production equipment must be refitted for the larger wafer size. Delays in this
process could have an adverse effect on our business. In addition, in the past
we have experienced lower yields for a period of time following a transition to
a larger wafer size until use of the larger wafer is fully integrated in
production and we begin to achieve production efficiency. We anticipate that we
will experience similar temporary yield reductions during the transition to the
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.
-18-
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
and equipment used in critical stages of our manufacturing processes. We
generally purchase these limited source items with purchase orders, and we have
no guaranteed supply arrangements with such suppliers. If we were to lose such
key suppliers, our manufacturing 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.
IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR
RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.
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.
LIMITATIONS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY.
Our intellectual property position is based in part on patents owned by us and
patents exclusively licensed to us by N.C. State. The licensed patents give us
rights to our SiC crystal growth process. The issued U.S. patents we own will
expire between 2008 and 2017. The expiration dates on the U.S. patents we
license from N.C. State run from 2007 to 2009. We have obtained a number of
corresponding patents and patent applications in certain foreign jurisdictions.
We intend to continue to file patent applications in the future, where
appropriate, and to pursue such applications with U.S. and foreign patent
authorities, 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, the U.S.
patent that the Company licenses 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
the Company could lose
-17-
patent protection in Europe for this particular method. 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 others and licensed to us) will provide significant commercial
protection. In addition to patent protection, we also rely on trade secrets and
other non-patented proprietary information relating to our product development
and manufacturing activities. We try to protect this information with
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.
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 wesuch assertions may be requiredrequire 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. Litigation
to determine the validity of infringement, or 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.
IF AN ADVERSE JUDGEMENT IS ENTERED IN THE PENDING PATENT LITIGATION, OUR
BUSINESS MAY SUFFER.
Our distributor in Japan is currently a party to patent litigation in Japan,
brought by Nichia, in which Nichia claims that our LED products infringe two
Japanese patents it owns. The complaints in the proceedings seek injunctive
relief that would prohibit our distributor from further sales of our LED
products in Japan. A result adverse to the distributor in these cases would
impair our ability to sell both our standard brightness and high brightness LED
products in Japan. Subject to contractual limitations, we have an obligation to
indemnify our distributor for certain patent infringement claims.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 62%69%, 74%59% and 79%58%
of our revenue in fiscal 2000, 1999 1998 and 1997,1998, respectively. We expect that
revenue from international sales will continue to be a significant part of our
total revenue. International sales are subject to a variety of risks, including
risks arising from currency fluctuations, the emergence of the Euro, trading
restrictions, tariffs, trade barriers and taxes. Also, future U.S. Government or
military export restrictions could limit or prohibit sales to customers in
certain countries because of their uses in military or surveillance
applications. Because all
-19-
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 FACE RISKS CONCERNING YEAR 2000 ISSUES.
We are evaluating all of our internal computers, computer equipment and other
equipment with embedded technology against Year 2000 concerns. Although we
believe our planning efforts are adequate to address our Year 2000 concerns, it
is still possible that we could experience negative consequences and material
cost caused by undetected errors or defects in the technology used in our
internal systems. Our most significant Year 2000 risk is that the systems of
other parties on which we rely, specifically 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, operating results and financial condition. At
this time, we are unable to estimate the most likely worst-case effects of the
arrival of the Year 2000.
-18-
Item 2. Properties
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. Cree is currently constructing an addition toIn the main production
facility containingsecond quarter of fiscal
2000, we completed a 42,000 square feet. The Company also recentlyfoot expansion of this facility. During the
third quarter of fiscal 2000, we purchased a 79-acre120,000 square foot shell building
on 17.5 acres of land near the existing production site closethat we plan to its presentuse for
administrative offices and as an employee services center. We are upfitting this
facility and have plans to begin using portions of it in the second quarter of
fiscal 2001. In addition, we are currently engaged in construction of a 250,000
square foot expansion of our main facility to provide added capacity for potentialour LED
and materials production and future expansion.
The Company currently leases spaceproduct lines. We are targeting primary
phases of this project to be finished in fiscal 2001, with the balance targeted
for some of its manufacturing facilities,
which occupycompletion in fiscal 2002.
We lease approximately 21,900 square feet in Durham, North Carolina.Carolina for support
of our manufacturing and administrative activities. This lease expires in
December 2001. In addition, the CompanyWe also leaseslease approximately 13,200 square feet in a separate
building in Durham, North Carolina that is expected to be
used for RF production and microwave
research and development projects.development. This lease expires in August 2000.
The Company also leases2002. We lease a small administrative office.3,000
square foot facility in Goleta, California for research and development
activities of Cree Lighting. This lease expires in April 2001. Finally we lease
facilities for two small administrative offices in West Lake Village, California
and Clearwater, Florida. The first lease is on a month to month renewal and the
other expires in December 1999.2000.
Item 3. Legal Proceedings
In December 1999, one of our distributors in Japan, Sumitomo, was named in a
lawsuit filed by Nichia in Tokyo District Court. The Companycomplaint in this
proceeding is notdirected to our standard brightness LED products and alleges that
these products infringe a partyJapanese patent owned by Nichia. The suit seeks a
permanent injunction against further distribution of the products in Japan. We
have intervened in the proceeding and filed a response denying the allegations
of infringement. In April 2000, Nichia commenced two additional lawsuits against
Sumitomo in Tokyo District Court in which it alleges that our high brightness
LED products infringe a second Japanese patent owned by Nichia. The complaints
in the new proceedings seek provisional and permanent injunctive relief
prohibiting Sumitomo from further sales of these products in Japan. We have
intervened in the new proceedings and have filed responses denying the
allegations of infringement. No monetary damages for infringement have been
sought in any of the lawsuits brought by Nichia against Sumitomo. Management
believes that the infringement claims are without merit and that the lawsuits
are motivated by competitive factors. We intend to any material litigation and is not aware of any
pending or threatened litigation that could have a material adverse effect
either upon the Company's business, operating results or financial condition.vigorously defend our
products against these claims.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.2000.
-20-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock Market Information. The Company's common stock is traded in the
NASDAQ National Market and is quoted under the symbol "CREE". The following
table sets forth, for the quarters indicated, the high and low bid prices as
reported by NASDAQ. Quotations represent interdealer prices without an
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
FY 2000 FY 1999*
FY 1998*
--------------- --------
High Low High Low
---- --- ---- ---
First Quarter $ 44.750 $23.500 $ 8.750 $ 5.250
$10.250 $ 5.875
Second Quarter $23.500 $79.000 32.125 23.500 6.813 $14.750 $ 7.813
Third Quarter $26.625 $15.125 $9.813 $ 6.750202.000 66.625 26.625 15.125
Fourth Quarter $36.688 $18.625 $8.813 $ 7.000175.000 83.000 36.688 18.625
*As adjusted for the two-for-one split effective on July 26, 1999.
-19-
Holders and Dividends. There were approximately 387530 holders of record of the
Company's common stock as of August 2, 1999.4, 2000.
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it 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 Company from paying dividends on its
common stock, but applicable state law may limit the payment of dividends. The
present policy of the Company is to retain earnings, if any, to provide funds
for the operation and expansion of its business.
On May 1, 2000, the Company acquired all of the outstanding shares of Nitres,
Inc. from its shareholders in exchange for 1,847,746 shares of the Company's
common stock. The issuance of shares of the Company's common stock was exempt
from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as
amended (the "Securities Act"), as a result of a fairness hearing conducted by
the Securities Administrator of the Office of the North Carolina Secretary of
State.
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to
the years ended June 25, 2000, June 27, 1999 and June 28, 1998, and June 30, 1997, and the
consolidated balance sheet data at June 27, 199925, 2000 and June 28, 199827, 1999 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the years ended June 30, 19961997 and 19951996 and the consolidated
balance sheet data at June 28, 1998, and June 30, 1997 1996 and 19951996 are derived from
audited consolidated financial statements not included herein. All consolidated
statement of operations and consolidated balance sheet data shown below are
adjusted to reflect the acquisition of Nitres, Inc. effective May 1, 2000. This
transaction was accounted for under the pooling of interests method. All share
amounts have been restated to reflect the Company's two-for-one stock split
effective July 26, 1999.
Selected Consolidated Financial Data
(In thousands, except per share data)
Years Ended
--------------------------------------------
June 27, June 28, June 30, June 30, June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $53,464 $34,891 $ 19,823 $ 9,689 $ 5,989
Contract revenue, net 6,586 7,640 6,535 3,945 3,011
License fee income -- -- 2,615 1,423 --
--------------------------------------------
Total revenue 60,050 42,531 28,973 15,057 9,000
Income (loss) from continuing 12,702 6,275 3,542 243 (17)
operations
Net income per share, basic $0.47 $0.24 $0.14 $0.01 $0.00
Net income per share, dilutive $0.45 $0.23 $0.13 $0.01 $0.00
Weighted average shares 28,432 26,987 26,251 25,230 20,734
outstanding
Years Ended
--------------------------------------------
June 27, June 28, June 30, June 30, June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $60,222 $27,603 $21,013 $18,596 $ 9,971
Total assets 144,217 72,724 50,137 43,796 20,924
Long-term obligations 4,650 10,804 1,638 -- --
Shareholders' equity $130,022 $54,865 $45,125 $40,672 $19,504
-20--21-
Selected Consolidated Financial Data
(In thousands, except per share data)
Years Ended
--------------------------------------------------------
June 25, June 27, June 28, June 30, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $ 96,742 $ 53,424 $ 34,891 $ 19,823 $ 9,689
Contract revenue, net 11,820 8,977 9,071 7,025 3,960
License fee income -- -- -- 2,615 1,423
-------- ------- -------- -------- --------
Total revenue 108,562 62,401 43,962 29,463 15,072
Income from continuing operations $ 30,520 $ 12,448 $ 6,243 $ 3,650 $231
Net income per share, basic $0.93 $0.43 $0.23 $0.14 $0.01
Net income per share, dilutive $0.87 $0.41 $0.22 $0.13 $0.01
Weighted average shares outstanding-diluted 35,217 30,432 28,987 28,251 25,230
Years Ended
--------------------------------------------------------
June 25, June 27, June 28, June 30, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $265,957 $ 59,889 $ 28,265 $ 21,121 $ 18,584
Total assets 486,202 145,933 74,379 50,568 43,811
Long-term obligations -- 4,650 11,046 1,638 --
Shareholders' equity 463,140 131,001 55,905 45,236 40,660
-22-
Item 7. 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," "will," "anticipate," "believe," "plan," "estimate,"
"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 "Certain Business Risks and Uncertainties" in
Item 1 of this report, as well as other risks and uncertainties referenced in
this report.
OVERVIEWOverview
- --------
We are the world leadersleader 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
recognize the largest portion of our revenue from the sale of blue and green LED
products. We offer LEDs at two brightness levels- high brightness blue and green
products and standard blue products. Our LED devices are utilized by end users
for automotive backlighting, LCD backlighting (including wireless handsets),
indicator lamps, miniature white lighting, indoor sign and arena displays,
outdoor full color stadium displays, traffic signals and other lighting
applications. LED products represented 51%63% of our revenue in fiscal 19992000 and 48%49%
in fiscal 1998.1999.
We also derive revenue from the sale of advanced materials products made from SiC that
are used primarily for research and development.development for new semiconductor
applications. We also sell SiC crystals to C3,C&C, which incorporates them in
gemstone applications. During late fiscal 1998
and fiscal 1999, C3 purchased equipment from us, which has more than doubled the
capacity for the production of crystals for C3. Sales of advancedSiC materials made
fromproducts and SiC crystals
represented 38%26% of our revenue in fiscal 19992000 and approximately 34%37% during
fiscal 1998.1999.
The balance of our revenue, 11% for fiscal 19992000 and 18%14% for fiscal 19981999 is
derived from government contract funding. Under various programs, U.S.
Government entities further the development of our technology by supplementingfunding our
research and development efforts. All resulting technology remains our property
after the completion of the contract, subject to certain license rights retained
by the 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.
In June 1999, Cree announced the first of a family ofWe have new product initiatives for RF and microwave transistortransistors and recently
began shipping limited quantities of our first RF devices. We believe that these
products made from SiC and designed for usecan be used in a variety of applications, including power amplification processes. A second phase of transistor products is expected to be
available in fiscal 2000. The Company expects that these products will be
marketed to a variety of amplifier producers, includingamplifiers
for wireless base stations
andinfrastructure, home-based subscriber units, digital broadcast
applications and solid state radar. We also have new product initiatives for
high power devices for power conversion and switching uses and blue laser diodes
for high-density digital versatile disk, or DVD, players and other optical
storage applications. While distributionWe are also developing LEDs with a higher luminous
efficiency to expand our existing family of samples will commence
in early fiscal 2000, during fiscal 2000 the Company believes that these
products will be sold in limited quantities as design cycles for the target
applications are generally several months. There can be no assurance that
customers will be able to
-21-
develop applications in the near future that will require commercial production
of the Company's RF products or that such products will be successful in the
market.
RESULTS OF OPERATIONS
- ---------------------devices.
The following table shows our statement of operations data expressed as a
percentage of total revenue for the periods indicated:
YEARS ENDED-23-
Years Ended
-----------------------------------
June 25, June 27, June 28,
June 30,2000 1999 1998 1997
-------- -------- --------
Revenue:
Product revenue, net...... 89.0% 82.0% 68.4%net................ 89.1% 85.7% 79.4%
Contract revenue, net..... 11.0 18.0 22.6
License fee income........ -- -- 9.0net............... 10.9 14.3 20.6
-------- -------- --------
Total revenue..........revenue................... 100.0 100.0 100.0
Cost of Revenue:
Product revenue, net...... 44.9 51.1 46.2net................ 40.0 43.2 49.4
Contract revenue, net.....net............. 8.2 14.7 19.711.5 17.1
-------- -------- --------
Total cost of revenue.. 53.1 65.8 65.9revenue........... 48.2 54.7 66.5
-------- -------- --------
Gross margin................. 46.9 34.2 34.1margin............................. 51.8 45.3 33.5
Operating expenses:
Research and development.. 7.4 4.2 6.3development.......... 6.5 7.1 4.0
Sales, general and administrative........... 10.1 9.6 14.9administrative 10.2 10.4 10.0
Other expense............. 1.8expense....................... 1.2 2.21.9 1.1
-------- -------- --------
Income from operations.... 27.6 19.2 10.7operations.............. 33.9 25.9 18.4
Other non-operating income............. 0.6 0.2 0.0
Interest income, net......... 1.8net.................... 8.6 1.7 2.11.7
-------- -------- --------
Income before income taxes 29.4 20.9 12.8taxes...... 43.1 27.8 20.1
Income tax expense........... 8.2 6.1 0.6expense....................... 15.0 7.8 5.9
-------- -------- --------
Net income................ 21.2% 14.8% 12.2%income.......................... 28.1% 20.0% 14.2%
======== ======== ========
FISCAL YEARS ENDED JUNEFiscal Years Ended June 25, 2000 and June 27, 1999
AND JUNE 28, 1998- --------------------------------------------------
Revenue
Revenue grew 41% from $42.574% to $108.6 million in fiscal 1998 to $60.12000 from $62.4 million in fiscal
1999. This increase was attributable to higher product revenue, which rose 81%
to $96.7 million in fiscal 2000 from $53.4 million in fiscal 1999. This increase
in product revenue was a result of the 124% rise in sales of our LED products
and a 24% increase in SiC material revenue in fiscal 2000 compared to fiscal
1999, respectively.
Our high brightness LED products experienced the heaviest demand. While our LED
chip volume has grown 78% in fiscal 2000 over units shipped in fiscal 1999, our
average sales prices for LEDs have also increased 26% over the prior year. The
greater average sales price reflects a significant shift in mix to the higher
priced high brightness LED products. During fiscal 2000, the high brightness
products sold for an average sales price that was 125% higher than the standard
brightness product. For fiscal 2000, more than 70% of LED sales were
attributable to high brightness products. During fiscal 1999, less than 15% of
LED sales were from the high brightness devices. The average sales price for the
high brightness product line declined 12% in fiscal 2000 as compared to the
prior year. The increase in high brightness unit volume was due to the strong
demand from customers and the availability of additional capacity from our
factory as a result of our facility and equipment expansion and yield
improvements. Unit shipments of the high brightness product also increased due
to the introduction of small-sized chips
-24-
during the fourth quarter of fiscal 2000. The small-sized high brightness chips
represented 8% of total LED volume for that quarter.
While we continue to improve our manufacturing process and yields on our high
brightness and standard 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 continue to be attractive to the marketplace due
to our low prices and industry standard vertical structure. We expect that in
order to increase market demand for all of our LED products, we must continue to
lower average sales prices, which is common in our industry. During fiscal 2001,
we believe that the average sales price for all LED products will decline based
on current and projected orders. However, we are targeting strong growth for our
LED revenue in fiscal 2001 to more than offset these lower prices with
significantly higher volume, stemming from strong customer demand and our
continued capacity expansion and yield improvements.
Revenue attributable to sales of SiC materials was 24% higher in fiscal 2000
than the same period in 1999 due to a significant increase in sales to C&C for
gemstone applications and demand for wafer products. In the second quarter of
fiscal 2000, C&C announced lower sales and higher inventory levels than
anticipated and we agreed to allow C&C to reschedule approximately one-half of
its purchase commitments from the first half of calendar 2000 to the second half
of the year. For fiscal 2001, we believe gemstone sales will comprise less than
5% of total revenue and strong demand from our LED business will more than
offset further reductions in gemstone sales. Demand for our wafer business
remains solid, and we are targeting increased revenue from these products in
fiscal 2001 due to higher demand for optoelectronic production and microwave and
power device research.
Contract revenue received from U.S. Government agencies increased 32% during
fiscal 2000 compared to fiscal 1999, due to increased revenue on a microwave
contract awarded in late fiscal 1999, and additional contract awards for Cree
Lighting during fiscal 2000. We are targeting contract revenue to increase
slightly in fiscal 2001 based on contracts awarded in late fiscal 2000.
Gross Profit
Gross profit increased 99% to $56.2 million in fiscal 2000 from $28.2 million in
fiscal 1999. This increase is due primarily to the rise in LED sales volume
discussed above and improved profitability. During fiscal 2000, the average
sales price of high brightness and standard brightness LED products declined 12%
and 21%, respectively, over the prior year. During the same comparative period,
the cost of these devices declined 45% and 28%, respectively. The lower costs
resulted from improved yields and greater throughput.
Profits on wafer and gemstone products have also improved during fiscal 2000 as
compared to fiscal 1999, due to higher quality materials being produced with
greater yields. As a result, average wafer costs for SiC material sales also
declined 34% during fiscal 2000 over the comparative period.
For fiscal 2001, we are targeting our average sales prices for LEDs to decline.
Historically, we have been successful in matching lower sales prices with lower
costs. During fiscal 2001, we plan to continue our focus on reducing costs
through higher production yields and from significantly greater volumes as fixed
costs are spread over a greater number of units.
-25-
Research and Development
Research and development expenses increased 59% in fiscal 2000 to $7.1 million
from $4.4 million in fiscal 1999. Much of this increase was caused by greater
investments for research and development in RF and microwave and optoelectronics
programs. In May of 1999, we signed a $2.6 million agreement with Microvision,
Inc. or MVIS, for the development of edge-emitting LEDs and blue laser diodes.
In April 2000, we amended our contract with MVIS to extend the agreement for an
additional two-year period. Under the amended agreement, MVIS will fund an
additional $10.0 million. As development costs are incurred under the original
and amended contract, funding from MVIS is offset against these expenses. During
fiscal 2000, approximately $3.1 million of funding from MVIS was offset against
research and development expenses. During fiscal 1999, only $500,000 was applied
to research and development expenses. The remaining $9.0 million of funding is
expected to be applied to research and development expenses in fiscal 2001 and
fiscal 2002, with $4.5 million of funding expected to be applied each year. We
believe that including the offset of MVIS funds in fiscal 2001, research and
development expenses will continue to grow in future periods; however, we
believe that as a percentage of revenue, research and development costs will
remain constant.
Sales, General and Administrative
Sales, general and administrative expenses increased 71% in fiscal 2000 to $11.1
million from $6.5 million in fiscal 1999 due primarily to the general growth in
our business. In future periods, we believe that total sales, general and
administrative costs will continue to increase in connection with the growth of
our business; however, we believe that as a percentage of revenue they will
remain constant.
Other Expense
Other expense increased 11% to $1.3 million during fiscal 2000 from $1.2 million
in fiscal 1999 due to higher write-downs for fixed assets during the year.
Other Non-Operating Income
Other non-operating income increased 372% to $700,000 in fiscal 2000 from
$100,000 in fiscal 1999 due to greater income recognized from the sale of
investment securities. During fiscal 2000, a $4.1 million gain was recognized on
the sale of securities. This gain combined with one-time proceeds from an
insurance recovery of $400,000, more than offset a $3.8 million one-time charge
for expenses incurred with the acquisition of Nitres, Inc. In fiscal 1999,
$100,000 was recognized on the sale of securities.
Interest Income, net
Interest income, net has increased 788% to $9.4 million in fiscal 2000 from $1.1
million in fiscal 1999 due to higher average cash balances being available in
fiscal 2000 as a result of two public stock offerings completed in January 2000
and February 1999. Higher interest rates in fiscal 2000 also contributed to
increased interest income. In addition, in November 1997, we obtained a $10.0
million term loan from NationsBank to fund the acquisition and construction of
our manufacturing facility in Durham, North Carolina. The majority of the
interest incurred in the first half of fiscal 1999 was expensed and was shown as
an offset to "Interest income, net". This loan was repaid in the third quarter
of fiscal 1999; therefore, there was no interest expense associated with this
loan in fiscal 2000.
-26-
Income Tax Expense
Income tax expense for fiscal 2000 was $16.3 million compared to $4.9 million in
fiscal 1999. This increase resulted from increased profitability during fiscal
2000 over fiscal 1999. Our effective tax rate during fiscal 2000 was 35%
compared to 28% in fiscal 1999 due to a reduction in the reserve for deferred
tax assets.
Fiscal Years Ended June 27, 1999 and June 28, 1998
- --------------------------------------------------
Revenue
Revenue grew 42% to $62.4 million in fiscal 1999 from $44.0 million in fiscal
1998. This increase was attributable to higher product revenue, which rose 53%
to $53.4 million in fiscal 1999 from $34.9 million in fiscal 1998 to $53.5 million in fiscal 1999.1998. This increase
in product revenue was a result of the 62% rise in sales of our LED products and
58% increase in materials revenue in fiscal 1999 compared to fiscal 1998,
respectively.
Growth in LED volume resulted from the introduction of the new high brightness
devices and improvements in the product design of and strong demand for the
standard brightness product. While 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
-22-
industry standard vertical structure. During fiscal 1999, LED volume grew 160% while
average sales prices declined 38%.
We expect that in order to increase market demand for all of our LED products,
we must continue to lower average sales prices, although pricing is anticipated
to be more stable in fiscal year 2000 than 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.
In September 1996, we entered into an agreement with Siemens where Siemens
agreed to purchase our blue LED chips. In December 1998, this agreement was
amended to provide for additional shipments of LED products through September
1999 and was assigned to an indirect subsidiary of Siemens, OSRAM Opto
Semiconductors GmbH & Co. ("Osram"), effective as of January 1, 1999. This
contract calls for declining prices based on an increase in the number of units
shipped. This pricing structure is common with customers in the semiconductor
industry and prior agreements with Siemens. Siemens (including its Osram
subsidiary) accounted for 37% of our revenue for fiscal 1999 and 40% in fiscal
1998. We are currently negotiating a new purchase agreement with Osram.
Our high brightness LED products, which were introduced during fiscal 1999,
continue to be ramped up to high volume production in our manufacturing
facility. During the fourth quarter of fiscal 1999, revenue from high brightness
products made up more than 25% of total LED revenue. We believe sales from these
products will surpass our standard brightness product during fiscal year 2000;
however, there can be no assurance that the product volume will increase or
yield improvements will be made to do so.
Revenue attributable to sales of SiC material was 58% higher in fiscal 1999 than
in the same period of fiscal 1998 due to a significant increase in sales to C3C&C
for gemstone applications and strong demand for wafer products. During fiscal
1998, C3C&C was in the initial stages of operation; therefore, unit sales were
limited. Revenue from sales of SiC wafers were higher in fiscal 1999 as compared
to fiscal 1998, due to quality improvements in wafers, along with the
availability of the larger two-inch wafer during fiscal 1999.
During fiscal 1999, sales from our displays business declined 96% from the prior
year period as we havehad chosen to discontinue this product line. Contract revenue
received from U.S. Government agencies also declined 14%1% during fiscal 1999
compared to fiscal 1998, as a significant contract that funded optoelectronic
research was exhausted in early fiscal 1999.
We anticipate contract revenue to
increase slightly in fiscal 2000 as additional contract awards have been
received in late fiscal 1999.
Gross Profit
Gross margin climbed to 47%45% of revenue during fiscal 1999 as compared to 34%
during fiscal 1998. This increase is predominantly attributable to design and
manufacturing improvements that occurred over the past yearin fiscal 1999 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. During much of fiscal 1998, 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 fiscal 1998; therefore, average die
yields were significantly lower. -23-
During fiscal 1999, margins realized on the
high brightness products were lower than those derived from our standard blue
LED product, as the yield from the manufacturing process was less than our
standard product.
Historically, we have
experienced lower margins with many new product introductions. While we continue
to make improvements to output and yield, the high brightness products may
continue to pressure margins in the short term if we are not able to meet our
yield objectives.
Average wafer costs for SiC material products sales also declined 32% during
fiscal 1999 over the comparative period due to more efficient processes and
improved yield.
-27-
Research and Development
Research and development expenses increased 150% in fiscal 1999 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 the new high
brightness LED products. In May of 1999, the company signed a $2.6 million
agreement with MVIS for the development of edge-emitting LEDs and blue laser
diodes. As development costs arewere incurred under this contract, funding from
MVIS iswas offset against these expenses. During fiscal 1999, approximately
$0.5 million$500,000 of funding from MVIS was offset against research and development
expenses. The remaining $2.1 million of funding is anticipated to bewas applied to research and
development expenses in fiscal 2000. We expect that including the offset of MVIS
funds in fiscal 2000, research and development expenses will remain relatively
stable compared to fiscal 1999 amounts.
Sales, General and Administrative
Sales, general and administrative expenses increased 47%48% in fiscal 1999 to $6.1$6.5
million from $4.1$4.4 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 $0.4 million.$400,000. As a result of the dismissal of a securities
class action lawsuit in November 1997, we were reimbursed $0.2
million$200,000 for costs
incurred in connection with the lawsuit. Most of these expenses were recorded in
fiscal 1997. In addition, we received a $0.2 million$200,000 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 profit sharing accrual (which was based
on 5% of operating income) has grown $0.4 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 Expense
Other expense increased 107%135% to $1.1$1.2 million during fiscal 1999 from $0.5
million$500,000 in
fiscal 1998. During 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. We also wrote-off other assets that had no future
value to us.
Other Non-Operating Income
Other non-operating income increased 100% to $100,000 in fiscal 1999 due to a
gain recorded for the Company. These write-offs were slightly offset by income
recognized under our equipment build-out agreement with C3.sale of securities in that year. In fiscal 1998 and
1999, we sold equipment manufactured by us to C3 at cost plus an overhead
allocation equivalent to that recognized on our government contracts. The
reimbursement by C3 of actual manufacturing coststhere was
recorded as a reduction in
fixed assets, while the overhead allocation portion of the funds offsetno "Other expense."
-24-
non-operating income".
Interest Income, net
Interest income, net has increased 45%40% to $1.1 million in fiscal 1999 from
$0.7
million$800,000 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.
Income Tax Expense
Income tax expense for fiscal 1999 was $4.9 million compared to $2.6 million in
fiscal 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.
FISCAL YEARS ENDED JUNE 28, 1998 AND JUNE 30, 1997
Revenue
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 the purchase agreement
with Siemens. This agreement-28-
Liquidity 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 in the
worldwide research community for SiC-based products, as well as revenues from
C3. C3 activity grew as a result of the execution in July 1997 of the new supply
agreement and development agreement. Revenues for the 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. Contracts 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. Pursuant to this
agreement, we granted Shin-Etsu a license to use certain epitaxial and device
fabrication process technology for the manufacture of our blue LED product. We
did not record any license fee revenue during fiscal 1998.
-25-
Gross Profit
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 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 capacity and yield efficiencies. The greater throughput enabled us to
spread fixed cost investments over a larger volume of product. 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.
Research and Development
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 the blue laser
research. 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 million for the closure of our Eastern European
Division, located in St. Petersburg, Russia.
Sales, General and Administrative Expenses
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
million 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 million
reimbursement of medical expenses that were incurred under a partially
self-funded insured health plan. As a percentage of revenue, these costs have
decreased to 10% in fiscal 1998 from 15% in fiscal 1997.
Other Expense
In fiscal 1998, other expenses included a net loss recorded on the write-down of
leasehold improvements, the disposal of certain other fixed assets and a
write-off of $66,000 for the remaining value of goodwill associated with the
acquisition of the 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
-26-
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 increased by $0.1 million in fiscal 1998 over fiscal 1997
due to higher investable cash balances available in fiscal 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.
Income Tax Expense
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.
LIQUIDITY AND CAPITAL RESOURCESCapital Resources
- -------------------------------
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. On February 17, 1999, we completed
our public stock offering and raised approximately $45.3 million, net of
offering expenses and the repayment of long-term debt. There were no selling
shareholders. The Company expects that the majority of these funds will continue
to be used to expand facilities and equipment capacity. The remainder will be
used for general corporate purposes, including working capital and potential
acquisitions of or investments in complementary businesses. The Company may also
issue additional shares of common stock for the acquisition of complementary
businesses or other significant assets. Although the Company from time to time
evaluates potential acquisitions of and investments in businesses and
anticipates continuing to make such evaluations, the Company has no present
commitments or agreements with respect to the acquisition or investment in
another business. As of June 27, 1999,25, 2000, we had working
capital of approximately
$60.2$266.0 million, including $48.7$246.3 million in cash, and cash equivalents
and marketable securities.short-term investments. Operating activities generated $19.9$63.0 million in
cashfiscal 2000 compared with $20.4 million generated during fiscal 1999. This
increase was primarily attributable primarily to net income of $12.7 million,and other non-cash expenses of
$7.2$42.7 million, $3.5a $12.8 million increase in deferred incomeaccounts payable and accrued
expenses, and a $27.3 million tax benefits and $2.7
million for tax benefitsbenefit associated with stock options.option
exercises. These amounts were partly offset by ana $11.6 million increase of $6.2 million in
accounts receivabledeferred income taxes, and a $1.4$5.3 million rise in inventory.
Most of the $45.3$274.6 million of cash used in investing activities in fiscal 19992000
was related to purchases of held to maturity investments. We also invested $12.5
million to acquire available for sale marketable securities. We invested $78.0
million in capital expenditures associated withduring fiscal 2000 compared to $41.4 million
during the same period of the prior fiscal year. The majority of the increase in
spending was due to new equipment additions to increase manufacturing capacity
in our crystal growth, epitaxy and package and test areas. Also we completed a
42,000 square foot facility expansion at our production site near Research
Triangle Park, North Carolina and began the construction of an additional
250,000 square foot facility expansion at the same site. In addition, we
acquired a 120,000 square foot shell building on 17.5 acres of land near our
new
manufacturingpresent facility. We plan to use this facility in Durham, North Carolinafor sales, general and
increased manufacturing
capacity in the crystal growth, epitaxial, clean room and pack and test areas.administrative, as well as for general employee service functions. The Company also invested $4.5 millioncost to
acquire an investment inthis facility (not including the common
stock of MVIS.upfit costs for completing the shell
building) was $8.2 million.
The $50.1$272.9 million of cash provided by financing activities induring fiscal 19992000
related primarily to the receipt of $61.4$266.1 million related toin net proceeds from the
publicJanuary 2000 stock offering and the exercise of stock warrantsoptions and stock
options from
the Company's employee stock option plan. This significant inflow of cash was
partly offset by the $10.0 million payoff of long term debt and a $3.2 million
repurchase of common stock. This stock was repurchased at an average price of
$6.84 per share.warrants. The stock warrants exercised were distributed in connection with our
September 1995 private placement and have an exercise price of $13.62. As of
June 27, 199925, 2000 warrants remained outstanding to purchase 258,000231,000 shares; these
warrants will expire in September 2000.
-27-
We may also issue additional shares of common stock for the acquisition of
complementary businesses or other significant assets. From time to time we
evaluate potential acquisitions of and investments in complementary businesses
and anticipate continuing to make such evaluations.
We are currently engaged in construction activities relatedrelating to a new packaging
area and the250,000 square
foot expansion of our crystal growth department. These additions, whichmain facility to provide added capacity for our LED and
materials and future product lines. We are expectedtargeting phases of this project to
be completed by calendar year end, will allow us to consolidate
all LED and wafer manufacturing facilities to one sitefinished beginning in December 2000, with improved
manufacturing capabilities. In order to grow existing products and provide
expanded facilitiesthe balance targeted for our new microwave product line, we anticipate a second
phase of expansion to facilities and infrastructure to begin in fiscal 2000.completion
within 18 months. We anticipate total costs for these expensesfacilities to be between
$15$45.0 million and $20$50.0 million. Estimates for equipment costs relatedrelating to this
expansion alsoand other additions total between $15
and $20approximately $65.0 million. We plan to fund
these capital projectsthis expansion with internally
generated cash plusfrom operations and cash on hand.
IMPACT OF THE YEAR 2000
State of Readiness
We have evaluated all of our internal software, embedded systems and products
against Year 2000 concerns and believe that our products and businesses will not
be substantially affected by the advent of the year 2000. We have completed a
Year 2000 compliance plan that included four phases: inventory, assessment,
remediation and testing. A detailed inventory of all computers and related
systems was completed and all critical upgrades were finished for all computers
that were non-Year 2000 compliant. All factory-dependent computers were also
tested and are now Year 2000 compliant. The only other remaining steps include a
network patch that impacts our utilities and the conversion of the electronic
mail system. We do not believe that these conversions are business critical.
Individual software installations are also being reviewed. These remaining areas
should be completed no later than September 1999.
Although we cannot control whether and how third parties will address the Year
2000 issue, we have now contacted critical vendors and suppliers and have been
informed that they have the ability to ensure smooth delivery of products
without disruptions caused by Year 2000 problems. Based on the responses of
these vendors to our survey, we believe that our vendors are either
substantially Year 2000 compliant or that any noncompliance will not have a
material effect on our operations. We have now received assurances from 95% of
these vendors. We anticipate that the remaining vendors also will be able to
ensure delivery of product; however, we do not expect that this assessment will
be complete until September 1999.
Costs
We do not believe that the costs associated with Year 2000 compliance have had a
material adverse effect on our business, results of operations or financial
condition. As of June 27, 1999, this project is substantially complete and we do
not anticipate that we will incur any material costs in winding up the project.
Year 2000 Risks
Although we believe that our planning efforts are adequate to address our Year
2000 concerns, there can be no assurance that we will not experience negative
consequences and material costs as a result of undetected errors or defects in
the technology used in our internal systems. Also, there is no assurance that
the systems of third parties on which we rely will be made compliant on a timely
basis. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
-28--29-
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 alternate 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. 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.
Contingencies
We have not yet developed a contingency plan to address what the Company should
do if we are unable to address the Year 2000 issue. We expect the contingency
plan to be in place after the inquiry of vendors and customers is completed.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures:
- -------------------------
As of June 27, 1999,25, 2000, the Company maintains an investment in equity securities
that is treated for accounting purposes under SFAS 115 as "available for sale"
securities. This investment is carried at fair market value based upon quoted
market price of that investment as of June 27, 1999,25, 2000, with net unrealized gains
or losses excluded from earnings and reported as a separate component of
stockholder's equity. This investment, which consists of common stock of MVIS,
is subject to market risk of equity price changes. The common stock of MVIS is
publicly traded on the Nasdaq National Market. The Company acquired these268,600
shares from MVIS in a private placement and has agreed not to sellin May 1999. In April 2000, the company
purchased 250,000 additional shares until at
least January 6, 2000; however, MVIS filed a registration statement in August
1999 coveringof common stock of MVIS. In June 2000,
162,600 shares from the Company's sale of these shares. Since the Company is currently
restricted from trading theseinitial investment were sold, leaving 356,000 shares
and managementremaining. Management views this transactionstock holding as an investment,investment; therefore, the
shares are accounted for as "available for sale" securities under SFAS 115. The
fair market value of this investment as of June 27, 1999,25, 2000, using the closing sale
price as of June 25, 1999,23, 2000, was $6.1 million, representing
268,600 shares.$15.8 million.
During the third quarter of fiscal 2000, the Company invested some of the
proceeds from its January 2000 public offering into high-grade corporate debt,
commercial paper, government securities and other investments at fixed interest
rates that vary by security. No other material changes in market risk were
identified during the most recent quarter.
During fiscal 1999, the Company repaid the term loan that was outstanding as of
June 28, 1998. The Company currently has no debt outstanding, therefore, Cree is
no longer subject to interest rate risk.outstanding.
Qualitative Disclosures:
- ------------------------
The investment in MVIS common stock is subject to the market risk of equity
price changes. While the Company can not predict or manage the future market
price for such stock, management continues to evaluate its investment position
on an ongoing basis.
-29--30-
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors..............................................31Auditors...............................................32
Report of Independent Accountants...........................................32Accountants............................................33
Consolidated Balance Sheets as of June 27, 199925, 2000 and June 28, 1998...........3327, 1999............34
Consolidated Statements of Operations for the years ended June 25, 2000,
June 27, 1999 and June 28, 1998 and June 30, 1997.............................................341998..............................................35
Consolidated Statements of Cash Flow for the years ended June 25, 2000,
June 27, 1999 and June 28, 1998 and June 30, 1997.............................................351998..............................................36
Consolidated Statements of Shareholders' Equity for the years ended
June 25, 2000, June 27, 1999 and June 28, 1998 and June 30, 1997..............................361998...............................37
Notes to Consolidated Financial Statements..................................37
-30-Statements...................................38
-31-
REPORT OF INDEPENDENT AUDITORSReport of Independent Auditors
The Board of Directors and Shareholders of
Cree, Research, Inc.
We have audited the accompanying consolidated balance sheetsheets of Cree, Research, Inc. and
subsidiaries as of June 25, 2000 and June 27, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the yearyears then
ended. 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 audit.audits. The consolidated financial statements of Cree,
Research,
Inc. and subsidiaries as of and for the two year period ended June 28, 1998 were audited by
other auditors whose report dated July 22, 1998, except for the restatement of
the fiscal 1998 financial statements as a result of the business combination
described in the first three paragraphs of Note 2 for which the date is May 1,
2000, expressed an unqualified opinion on those statements.
We conducted our auditaudits in accordance with auditing standards generally accepted
auditing standards.in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit providesaudits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cree,
Research, Inc. and subsidiaries as of June 25, 2000 and June 27, 1999, and the
consolidated results of their operations and their cash flows for the yearyears then
ended, in accordanceconformity with accounting principles generally accepted accounting principles.in the United
States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
July 23, 1999
-31-21, 2000
-32-
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Cree, Research, Inc.
In our opinion, the accompanying consolidated balance sheetbased on our audit and the relatedreport of other auditors, the
consolidated statements of operations,income, of shareholders' equity, and of cash flowsflow for
the year ended June 28, 1998 present fairly, in all material respects, the
financial positionresults of operations and cash flows of Cree, Research, Inc. and its subsidiaries at June 28, 1998, and the results of their
operations and their cash flows for the
yearsyear ended June 28, 1998, and June 30,
1997, in conformity with accounting principles generally
accepted accounting principles.in the United States. 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.audit. The consolidated financial
statements give retroactive effect to the merger of Nitres, Inc. on May 1, 2000
in a transaction accounted for as a pooling of interest, as described in Note 2
to the consolidated financial statements. We did not audit the financial
statements of Nitres, Inc. which statements reflect total revenues of
$1,430,561, for the year ended June 28, 1998. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Nitres,
Inc., is based solely on the report of the other auditors. We conducted our
auditsaudit of these statements in accordance with auditing standards generally
accepted auditing standardsin the United States, 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
auditsaudit and the report of other auditors provide a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements of Cree, Inc. for any period subsequent to June 28, 1998.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 22, 1998, -32-except for the restatement
of the fiscal 1998 financial statements as
a result of the business combination
described in the first three paragraphs
of Note 2 for which the date is May 1, 2000
-33-
CREE, RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 25, June 27,
June 28,2000 1999
1998ASSETS --------- ---------
ASSETS
Current assets:
Cash and cash equivalents $103,843 $ 42,506 $ 17,68042,545
Short-term investments held to maturity 142,461 --
Marketable securities available for sale 15,842 6,145 657
Accounts receivable, net 16,285 10,47912,406 16,099
Interest receivable 3,893 109
Inventories 3,977 2,5439,320 3,986
Deferred income taxes -- 296 1,952
Prepaid expenses and other current assets 558 1,3471,254 991
--------- ---------
Total current assets 69,767 34,658289,019 70,171
Property and equipment, net 69,884 36,476137,118 71,130
Long-term investments held to maturity 41,965 --
Deferred income taxes 10,624 2,879
Patent and license rights, net 1,731 1,525
Deferred income taxes 2,827 --2,324 1,742
Other assets 8 655,152 11
--------- ---------
Total assets $144,217 $ 72,724$486,202 $145,933
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 7,48714,204 $ 5,5957,757
Current maturities of long term debt -- 17478
Accrued salaries and wages 3,133 819 391
Other accrued expenses 1,239 1,0525,725 1,228
--------- ---------
Total current liabilities 9,545 7,05523,062 10,282
Long term liabilities:
Long term debt -- 8,650
Deferred income taxes -- 4,650 2,154
--------- ---------
Total long term liabilities -- 4,650 10,804
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares -- --
authorized at June 27, 1999 and 2,7503,000 shares authorized at June 28, 1998;25,
2000 and June 27, 1999; none issued
and outstanding
Common stock, par value $0.0025; 60,000 shares 73 65
authorized at June 27, 1999 and 29,00088 77
shares authorized at June 28, 1998;25, 2000 and
June 27, 1999; 35,348 and 31,258 shares
issued and outstanding 29,258at June 25, 2000
and 25,978 at June 27, 1999, and June 28, 1998, respectively
Additional paid-in-capital 111,136 49,676415,716 113,268
Deferred compensation expense (1,755) (967)
Retained earnings 18,813 5,124
--------- ---------48,156 17,636
Accumulated other comprehensive income, 935 987
net of tax -------- --------
Total shareholders' equity 130,022 54,865
--------- ---------463,140 131,001
-------- --------
Total liabilities and shareholders' equity $144,217 $ 72,724$486,202 $145,933
======== ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-33-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
June 27, June 28, June 30,
1999 1998 1997
--------- -------- --------
Revenue:
Product revenue, net $ 53,464 $34,891 $19,823
Contract revenue, net 6,586 7,640 6,535
License fee income -- -- 2,615
--------- -------- --------
Total revenue 60,050 42,531 28,973
Cost of revenue:
Product revenue, net 26,977 21,727 13,388
Contract revenue, net 4,943 6,252 5,707
--------- -------- --------
Total cost of revenue 31,920 27,979 19,095
Gross profit 28,130 14,552 9,878
Operating expenses:
Research and development 4,443 1,774 1,826
Sales, general and administrative 6,064 4,131 4,301
Other expense 1,041 502 639
--------- -------- --------
Income from operations 16,582 8,145 3,112
Interest income, net 1,060 730 607
--------- -------- --------
Income before income taxes 17,642 8,875 3,719
Income tax expense 4,940 2,600 177
--------- -------- --------
Net income $12,702 $ 6,275 $ 3,542
========= ======== ========
Other comprehensive income, net of tax
Unrealized holding gains 987 -- --
========= ======== ========
Comprehensive income $13,689 $ 6,275 $ 3,542
========= ======== ========
Earnings per share:
Basic $0.47 $0.24 $0.14
========= ======== ========
Diluted $0.45 $0.23 $0.13
========= ======== ========
Shares used in per share calculation:
Basic 27,015 25,726 24,911
========= ======== ========
Diluted 28,432 26,987 26,251
========= ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
-34-
CREE, RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWINCOME
(In Thousands)thousands, except per share amounts)
Year Ended
-----------------------------------------
June 25, June 27, June 28,
June 30,2000 1999 1998 1997
-------- -------- --------
Revenue:
Product revenue, net $ 96,742 $ 53,424 $ 34,891
Contract revenue, net 11,820 8,977 9,071
-------- -------- --------
Total revenue 108,562 62,401 43,962
Cost of revenue:
Product revenue, net 43,399 26,968 21,727
Contract revenue, net 8,963 7,195 7,496
-------- -------- --------
Total cost of revenue 52,362 34,163 29,223
-------- -------- --------
Gross profit 56,200 28,238 14,739
Operating activities:
Netexpenses:
Research and development 7,054 4,443 1,774
Sales, general and administrative 11,091 6,472 4,383
Other expense 1,305 1,180 502
-------- -------- --------
Income from operations 36,750 16,143 8,080
Other non-operating income $ 12,702 $ 6,275 $ 3,542
Adjustments to reconcile656 139 --
Interest income, net income
to net cash provided by operating
activities:
Depreciation and amortization 5,382 4,217 3,356
Loss on disposal of property and
equipment 1,602 719 631
Loss on write off of patents 51 17 141
Amortization of patent rights 117 102 108
Amortization and write off of goodwill -- 86 41
Purchase of marketable trading
securities (233) (1,500) --
Proceeds from sale of marketable
trading securities 1,421 421 --
Loss (gain) on marketable trading
securities (141) 32 --
Deferred9,400 1,058 754
-------- -------- --------
Income before income taxes 3,494 394 (192)46,806 17,340 8,834
Income tax benefits from stock
option exercises 2,672 1,791 96
Changes in operating assets and liabilities:
Accounts receivable (6,196) (2,398) (891)
Inventories (1,434) 1,406 (723)
Prepaid expenses and other assets (1,981) (882) (262)
Accounts payable, trade 1,892 1,092 (226)
Accrued expenses 598 320 476expense 16,286 4,892 2,591
-------- -------- --------
Net cash provided by operating activities 19,946 12,092 6,097
-------- -------- --------
Investing activities:
Maturity of investment securities -- -- 1,787
Purchase of available for sale
security (4,500) -- --
Purchase of property and equipment (40,578) (15,287) (8,115)
Proceeds from sale of property and
equipment 186 463 13
Purchase of patent rights (374) (377) (310)
-------- -------- --------
Net cash used in investing
activities (45,266) (15,201) (6,625)
-------- -------- --------
Financing activities:
Net proceeds from issuance of long
term debt 1,350 8,667 --
Net repayment of long term debt (10,000) -- --
Net proceeds from issuance of common
stock 61,415 2,936 926
Receipt of Section 16(b) common
stock profits 594 -- --
Repurchase of common stock (3,213) (1,262) (112)
-------- -------- --------
Net cash provided by financing
activities 50,146 10,341 814
-------- -------- --------
Net increase in cash and cash equivalents $ 24,826 $ 7,232 $ 286
Cash and cash equivalents:
Beginning of year $ 17,680 $ 10,448 $10,162
-------- -------- --------
End of year $ 42,506 $ 17,680 $10,448income $30,520 $12,448 $6,243
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of
amounts capitalized $ 257 $ 74 $ --
-------- -------- --------
Cash paid for income taxes $ 2,175 $ 336 $ 300Earnings per share:
Basic $0.93 $0.43 $0.23
======== ======== ========
Diluted $0.87 $0.41 $0.22
======== ======== ========
Shares used in per share calculation:
Basic 32,965 29,015 27,726
======== ======== ========
Diluted 35,217 30,432 28,987
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-35-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDING JUNE 27, 1999, JUNE 28, 1998 AND JUNE 30, 1997
(In Thousands)
Total
Common Additional Share-
Stock Paid-in Retained Treasury holders'
Par Value Capital Earnings Stock Equity
--------- ---------- --------- --------- --------
Balance at June 30, 1996 $ 61 $45,342 $(4,693) $ (38) $ 40,672
Common stock options
exercised for cash, 104
shares................... 160 160
Common stock warrants
exercised for cash, 406
shares................... 1 766 767
Purchase of common stock
for the treasury, 20 shares (112) (112)
Retirement of 40 treasury
shares................... (150) 150 --
Income tax benefits from
stock option exercises... 96 96
Net income............... 3,542 3,542
--------- ---------- --------- --------- --------
Balance at June 30, 1997 62 46,214 (1,151) -- 45,125
Common stock options
exercised for cash, 434
shares................... 1 1,693 1,694
Common stock warrants
exercised for cash, 662
shares.................. 2 1,240 1,242
Purchase of common stock
for the treasury, 164 shares (1,262) (1,262)
Retirement of 164 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 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, 2,990
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 $ -- $130,022
========= ========== ========= ========= =========
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Year Ended
-----------------------------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------------------- ------------------- ------------------
Operating activities:
Net income $ 30,520 $ 12,448 $6,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,803 5,593 4,368
Loss on retirement of property and equipment 1,256 1,602 719
Loss on write off of patents -- 51 17
Amortization of patent rights 145 117 102
Amortization and write off of goodwill -- -- 86
Purchase of marketable trading securities (1,786) (233) (1,500)
Proceeds from sale of marketable trading securities 2,280 1,421 421
Loss (gain) on marketable trading securities (494) (141) 32
Loss (gain) on available for sale securities (3,567) -- --
Deferred income taxes (11,617) 628 382
Income tax benefits from stock option exercises 27,336 2,672 1,791
Amortization of deferred compensation 980 142 10
Changes in operating assets and liabilities:
Accounts and interest receivable (91) (5,753) (2,656)
Inventories (5,334) (1,443) 1,406
Prepaid expenses and other current assets (263) 414 (880)
Accounts payable, trade 6,447 2,049 1,141
Accrued expenses 6,356 799 350
-------------------- ------------------- ------------------
Net cash provided by operating activities 62,971 20,366 12,032
-------------------- ------------------- ------------------
Investing activities:
Purchase of available for sale securities (12,500) (4,500) --
Proceeds from sale of available for sale securities 6,291 -- --
Purchase of securities held to maturity (195,883) -- --
Proceeds from maturities of securities held to 11,457 -- --
maturity
Purchase of property and equipment (78,047) (41,439) (15,894)
Proceeds from sale of property and equipment -- 186 463
Purchase of patent rights (727) (379) (383)
Increase in other long term assets (5,141) -- --
-------------------- ------------------- ------------------
Net cash used in investing activities (274,550) (46,132) (15,814)
-------------------- ------------------- ------------------
Financing activities:
Net proceeds from issuance of long term debt -- 1,350 8,891
Net repayment of long term debt (47) (10,241) --
Net proceeds from issuance of common stock 272,924 61,470 3,736
Receipt of Section 16(b) common stock profits -- 594 --
Repurchase of common stock -- (3,213) (1,262)
-------------------- ------------------- ------------------
Net cash provided by financing activities 272,877 49,960 11,365
-------------------- ------------------- ------------------
Net increase in cash and cash equivalents 61,298 24,194 7,583
Cash and cash equivalents:
Beginning of year 42,545 18,351 10,768
-------------------- ------------------- ------------------
End of year $103,843 $42,545 $ 18,351
==================== =================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized $ 13 $ 282 $ 93
==================== =================== ==================
Cash paid for income taxes $ 272 $ 2,175 $ 336
==================== =================== ==================
Non-cash investing and financing activities:
Deferred compensation $ 1,768 $ 1,016 $ 98
==================== =================== ==================
Conversion of note payable to common stock $ 431 $ -- $ --
==================== =================== ==================
Equipment donated for common stock $ -- $ -- $ 150
==================== =================== ==================
The accompanying notes are an integral part of the
consolidated financial statements.
-36-
CREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 25, 2000, JUNE 27, 1999 AND JUNE 28, 1998
(In thousands)
Compre-
Common Additional Deferred hensive Total
Stock Paid-in Compen- Retained Income Shareholders'
Par Value Capital sation Earnings Equity
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 30, 1997 $ 64 $46,234 $(5) $(1,055) $ -- $45,238
Common stock options exercised for
cash, 434 shares 1 1,693 1,694
Common stock warrants exercised for
cash, 662 shares 2 1,240 1,242
Employees granted stock, 52 shares 98 (98) --
Issuance of common stock for cash 1 949 950
and assets, 558 shares
Purchase of common stock for the
treasury, 164 shares (1,262) (1,262)
Retirement of 164 treasury shares (1,262) 1,262 --
Income tax benefits from stock
option exercises 1,791 1,791
Amortization of deferred 10 10
compensation
Net income 6,243 6,243
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 28, 1998 68 50,743 (93) 5,188 -- 55,906
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
Employees & directors granted
stock, 441 shares 1 1,015 (1,016) --
Issuance of common stock for cash,
3,010 shares 7 55,290 55,297
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
Amortization of deferred 142 142
compensation
Net income 12,448 12,448
Unrealized gain (loss) on
securities available for sale, net 987 987
of tax of $658
--------------
Comprehensive income 13,435
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 27, 1999 77 113,268 (967) 17,636 987 131,001
Common stock options exercised for
cash, 927 shares 3 6,383 6,386
Common stock warrants exercised for
cash, 27 shares 367 367
Employees granted stock options,
137 shares 785 (785) --
Employees granted stock, 171 shares 983 (983) --
Common stock warrants granted, 16 31 31
shares
Loan converted to common stock, 169
shares 431 431
Issuance of common stock for cash,
3,289 shares 8 266,132 266,140
Income tax benefits from stock
option exercises 27,336 27,336
Amortization of deferred 980 980
compensation
Net income 30,520 30,520
Unrealized gain (loss) on
securities available for sale, net (52) (52)
of tax of $(27)
--------------
Comprehensive income 30,468
----------- ------------- ---------- ------------ ----------- --------------
Balance at June 25, 2000 $ 88 $415,716 $ (1,755) $ 48,156 $ 935 $463,140
=========== ============= ========== ============ =========== ==============
The accompanying notes are an integral part of the
consolidated financial statements.
-37-
CREE, RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree, Research, Inc., the "Company," or "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
("LED"), and silicon carbide ("SiC") based materials. The Company markets its
blue and green 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. The Company recovers the costs of a significant
portion of its research and development efforts from revenues on these contracts with
agencies of the Federal government. This funding is recorded as contract
revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Business Combination
On May 1, 2000 the Company acquired Nitres, Inc. in a business combination
accounted for as a pooling of interests. Nitres, Inc., became a wholly owned
subsidiary (Cree Lighting Company) of the Company through the exchange of
1,847,746 shares of the Company's common stock for all of the outstanding stock
of Nitres, Inc. In addition, the Company assumed outstanding stock options and
warrants, which after adjustment for the exchange represented a total of 152,223
options and warrants to purchase shares of Cree's common stock. The accompanying
consolidated financial statements for fiscal 2000 are based on the assumption
that the companies were combined for the full year. All prior period
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows of Nitres, Inc., as though Nitres,
Inc. had been a part of the Company for all periods presented.
Reconciliation of Previously Reported Operations - Selected Financial Data
The following table reflects the summarized results of operations of the
separate companies for the nine months ended March 26, 2000, the nearest
practical reporting period prior to the business combination on May 1, 2000. In
addition, a reconciliation of the amounts of net sales and net income previously
reported with restated amounts is included.
-38-
(Unaudited)
Nine Months
ended (Year Ended (in 000s)
March 26, ---------------------
2000 June 27, June 28,
(in 000s) 1999 1998
----------- -------- --------
Net sales and other revenue:
As previously reported by Cree, Inc. $ 72,342 $ 60,050 $ 42,531
Nitres, Inc. 2,887 2,391 1,431
Elimination of intercompany transactions (27) (40) -
----------- -------- --------
As restated $ 75,202 $ 62,401 $ 43,962
=========== ======== ========
Net income (loss):
As previously reported by Cree, Inc. $ 19,575 $ 12,702 $ 6,275
Nitres, Inc. (392) (234) (32)
Elimination of intercompany transactions (20) (20) -
----------- -------- --------
As restated $ 19,163 $ 12,448 $ 6,243
=========== ======== =========
Elimination of Prior Intercompany Transactions
Prior to May 1, 2000, the Company and Nitres, in the normal course of business,
entered into certain transactions for the purchase and sale of merchandise.
These intercompany transactions have been eliminated in the accompanying
restated consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Research,
Inc., and
its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Real
Color Displays, Inc.Incorporated. ("RCD"), Cree Research FSC, Inc. ("FSC"), Cree
Funding LLC. ("Cree Funding") and Cree Technologies, Inc. ("Tech"). All material
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain 1999 and 1998 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 2000 presentation. These
reclassifications had no effect on previously reported net income or
shareholders' equity.
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. In fiscal 1998, the Company changed its fiscal year from the
twelve months ending June 30, to the 52-weekannual period ending on the last Sunday in
the month of June.
Estimates
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 27, 199925, 2000 and June 28,
1998,27,
1999, and the reported amounts of revenues and expenses during the years ended
June 25, 2000, June 27, 1999 and June 28, 1998 and June 30, 1997.1998. Actual amounts could differ from
those estimates.
-39-
Revenue 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
-37-
development efforts.technology. The applicable contracts
generally provide that the Company may elect to retain ownership of inventions
made in performing the work, subject to a non-transferable, non-exclusive
license retained by the government to practice the inventions for government
purposes. Contract revenue includes funding of direct research and development
costs and a portion of the Company'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 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. ("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 27, 1999,25, 2000, all license fees havehad been received.
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.recognized in that year.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
Marketable SecuritiesFair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term and long-term
investments, available for sale securities, accounts and interest receivable,
accounts payable, debt, and other liabilities approximate fair value at June 25,
2000 and June 27, 1999.
Investments
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". This statement requires certain securities to be
classified into three categories:
(a) Securities Held-to-Maturity- Debt securities that the entity has
the positive intent and ability to hold to maturity are reported
at amortized cost.
-40-
(b) Trading Securities- Debt and equity securities that are bought
and held principally for the purpose of selling in the near term
are reported at fair value, with unrealized gains and losses
included in earnings.
(c) Securities Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading
securities are reported at fair value with unrealized gains or
losses excluded from earnings and reported as a separate
component of shareholders' equity.
As ofAt June 25, 2000, and June 27, 1999, the Company'sCompany held a short-term investments consisted ofequity
investment in 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, or $4.5 million. Pursuant to an agreement signed March 17,
2000, the Company committed to increase its equity position in MVIS by investing
an additional $12.5 million in MVIS common stock. This additional investment was
completed on April 13, 2000, when the Company purchased 250,000 shares at a
price of $50.00 per share. In August 1999,June 2000, 162,600 MVIS filedshares were sold for $6.3
million, with a registration statementgain on sale recognized for the Company's
sale of$3.6 million. Management views 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 sharestransactions as investments, and management views this transaction as an investment, the shares are accounted for as "available for
sale"
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securities under SFAS 115. Therefore unrealized gains or losses are
excluded from earnings and are recorded in other comprehensive income, net of
tax. For the years ended June 25, 2000, June 27, 1999 and June 28, 1998, the
Company recorded unrealized holding gains on this investment of $900,000 (net of
tax of $600,000), $1.0 million (net of tax of $700,000), and $0, respectively.
The fair market value of the MVIS investment as of June 25, 2000, using the
closing sale price as of June 23, 2000, was $15.8 million, representing 356,000
shares. The fair market value of this investment as of June 27, 1999 was $6.1
million.
As of June 25, 2000, the Company's short-term investments held to maturity
included $142.5 million consisting of $97.9 million in high-grade corporate
bonds, $15.0 million in government securities, and $29.6 million in a closed end
mutual fund investing in high grade corporate securities that mature within one
year. The Company purchased the investments with a portion of the proceeds from
its public stock offering in January 2000. The Company has the intent and
ability to hold these securities until maturity; therefore, they are accounted
for as "securities held-to-maturity" under SFAS 115. The securities are reported
on the balance sheet at amortized cost, as a separate componentshort-term investment with unpaid
interest included in interest receivable.
As of shareholders' equity.June 25, 2000, the Company's long-term investments held to maturity
consisted of $42.0 million in high-grade corporate bond holdings that mature
after June 25, 2001. The Company purchased the corporate bonds with a portion of
the proceeds from the public stock offering in January 2000. The Company has the
intent and ability to hold these securities until maturity; therefore, they are
accounted for as "securities held-to-maturity" under SFAS 115. The securities
are reported on the balance sheet at amortized cost, as a long-term held to
maturity investment with unpaid interest included in interest receivable if
interest is due in less than 12 months, and as a long-term other asset if
interest is due in more than 12 months.
During fiscal 2000, the Company purchased and sold marketable trading securities
that resulted in the Company recording a realized gain on the sale of stock of
$500,000.
As of June 28, 1998, the Company's short-term investments consisted of common
stock holdings in C3, Inc ("C3"),Charles & Colvard, or C&C, the majority of which were bought
in November 1997. The Company also acquired additional shares of C3C&C in
September 1998 and acquired 24,601 shares directly from C3C&C pursuant to the
exercise of an option in January 1997. This investment was treated for
accounting
-41-
purposes as a trading security, with net realized and unrealized gains and
losses included in net earnings. All common shares of C3C&C held by Cree were
subsequently sold during fiscal 1999. Realized gains on shares of C3C&C stock sold
during fiscal 1999 by the Company were $140,000. This amount was recorded as
other income. Approximately $32,000 of net loss was recorded to other income
(expense) in fiscal 1998 related to this investment.
As of June 28, 1998, the Company's president had promised to indemnify the
Company for losses 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 stock sold by Cree. As a result, at June 28, 1998, the
Company had recorded a $390,000 receivable from the president based upon this
agreement for the net realized and unrealized losses on this investment. Since
Cree sold its shares of C3 for a net gain, the indemnity has been terminated
with no payments becoming due.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method. Inventories consist of
the following:
Year Ended (in 000s)
-----------------------------------
June 25, June 27,
June 28,2000 1999
1998
in (000)s in (000)s
--------- ------------------------ ----------------
Raw materials $ 1,290 $ 999
Work-in-progress$2,415 $1,290
Work-in-progre 3,094 1,675 752
Finished goods 1,012 792
--------- ---------
$ 3,977 $2,543
========= =========3,811 1,021
--------------- ----------------
$9,320 $3,986
=============== ================
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from three to
twenty 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 years ended
June 25, 2000, June 27, 1999 and June 28, 1998, the Company recorded $1.3
million, $1.6 million and $700,000, respectively, as losses on retirement of
property and equipment reflected in other operating expense on the consolidated
statements of income.
The Company has entered into two agreements with C3C&C to sell crystal growth
equipment manufactured by the Company to C3C&C at cost plus a reasonable overhead
allocation. As a result of these transactions, the Company has recognized
an
overhead allocation of$227,000, $473,000 and $332,000, in fiscal 2000, fiscal 1999 and fiscal 1998,
respectively, as "other operating income".
-39-
for the overhead allocation portion of
the sales price. These equipment agreements were completed in October 1999. In
May 2000, the Company agreed to purchase all of the crystal growth equipment
previously sold to C&C for a purchase price of $5.0 million, which was less than
the Company's direct cost to manufacture the equipment.
In November 1997, the Company purchased real property consisting of
approximately thirty 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 Carolina, in
the vicinity of the Research Triangle Park. The purchase price for the land and
buildings was $3,000,000.$3.0 million. The Company has now moved the majority of its
employees and production to this facility.
In the second quarter of fiscal 2000, the Company completed a 42,000 square foot
facility expansion at its production site near Research Triangle Park, North
Carolina. In the third quarter of fiscal 2000, the
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Company purchased a 120,000 square foot facility on 17.5 acres of land adjacent
to the existing production site. The Company plans 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) was
$8.1 million. In addition, the Company is currently engaged in construction
activities relating to a 250,000 square foot expansion of its facility.
Impairment of Long-Lived Assets
The Company assesses the realizability of the carrying value of its investment
in property and equipmentlong-lived assets whenever events or changes in circumstancecircumstances 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 of June 27, 1999,25,
2000, the Company has not recorded anyan impairment in the carrying value of its
property andlong-lived assets.
Depreciation
The Company has changed its depreciation policy to reflect lower useful lives on
new manufacturing equipment. The useful life has been reduced from 9 years to 5
years for all manufacturing equipment purchased since the beginning of fiscal
year 2000. In management's estimate, this new policy was necessary due to the
changes in estimated useful lives of new equipment caused by technology changes
anticipated with the future development of larger diameter wafers. Management
estimates that the change in policy reduced the Company's fiscal 2000 net income
by $889,000 or $0.03 per share.
Patent 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-line basis.
During fiscal 1997, the Company changed its previous estimate of the useful life
of patents from 17 years, beginning at the date of patent issue, to 20 years
from the date of patent application. This change was made 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 toon 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 $148,000,
$117,000, $102,000 and $108,000$102,000 for the years ended June 25, 2000, June 27, 1999, and
June 28, 1998, and June
30, 1997, respectively. Total accumulated amortization for patents and
license rights was approximately $813,000 and $669,000 at June 25, 2000 and $560,000 at June
27, 1999, and June 28, 1998, respectively.
Goodwill
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.
-43-
Research and Development
Policy
The CompanyU.S. Government provides funding through research contracts withfor several of
the U.S. government for many of itsCompany's 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, theThe amount of
funding under each contract is determined based on cost estimates that include
direct costs, plus an allocation for research and development, general and
administrative and the cost of capital expenses. Cost-plus funding is determined
based on actual costs plus a set percentage margin. For the cost-share
contracts, the actual costs are divided between the U.S. government and the
Company based on the terms of the contract. The government's cost share is then
fundedpaid 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 that documents the results
of such research.
FundingThe revenue and expense classification for contract activities is based on the
nature of the contract. For contracts under whichwhere the Company anticipates that funding
will exceed direct costs over the life of the contract, funding is recordedreported as
contract revenue and relatedall direct costs are reported as a costcosts of contract revenue.
-40-
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 shownreported 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 reflectedincluded in the statements of
operations:research and development
expenses:
Year ended (in 000s)
---------------------------------------
June 25, June 27, June 28,
June 30,2000 1999 1998 1997
-------- -------- --------
Net research and development costs $ 538 $ -- $ 276
$ 671
Government funding 868 -- 601 2,186
-------- -------- --------
Total direct costs incurred $ 1,406 $ -- $ 877
$ 2,857
======== ======== ========
As of=========
Interest Capitalization
No interest was capitalized in the fiscal year 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 Capitalization25, 2000. During the
fiscal years ended June 27, 1999, and June 28, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with theits newly acquired facility.facilities. Interest capitalized for the fiscal years 1999
and 1998 was $128,000, and $128,000, respectively.
Credit Risk, Major Customers and Major Suppliers
Financial instruments, which may subject the Company to a concentration of
credit risk, consist principally of marketable securities, cash equivalents and
accounts receivable. Marketable securities consist primarily of high-grade
corporate debt, commercial paper, government securities and other investments at
interest rates that vary by security. The Company's cash equivalents consist
primarily of commercial paper.money market funds. 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 10%19% and 18%10%, respectively, of the Company's accounts receivable
balance at June 25, 2000 and June 27, 1999 and June 28, 1998 was
-44-
due from the Department of Defense. In addition, theThe Company had amounts due from Siemens
A.G. (or its indirect subsidiary, Osram) totaling 35%19% and 37%35%, of accounts
receivable balances at June 27, 199925, 2000 and June 28, 1998, respectively. At June 27, 1999, and
June 28, 1998,respectively. In
addition, the Company had amounts due from C3Sumitomo Corporation totaling 17%22% of
accounts receivable balances at June 25, 2000.
In May 2000, the Company agreed to purchase $5 million of manufacturing
equipment from C&C. As consideration for this equipment the Company offset
existing accounts receivable from C&C and 23%,
respectively,future product shipments up to the $5
million purchase price. As a result, no accounts receivable balances were due
from C&C at June 25, 2000. At June 27, 1999, the Company had amounts due from
C&C totaling 17% of accounts receivable balances.
The Company has derived its product and contract revenue from sales primarily in the
United States, the Far East, and Europe as follows:
Year Endedended
------------------------------
June 25, June 27, June 28,
2000 1999 1998
1997
---- ---- ------------ -------- --------
United States....... 38% 26% 21%States 31% 41% 42%
Far East............ 50% 49% 33%
Europe..............East 64% 48% 39%
Europe 5% 11% 24% 44%
Other............... 1% 1% 2%
-41-
19%
One customer accounted for 37%26%, 40%35%, and 31%40% of revenue for fiscal 2000, 1999,
1998 and 1997,1998, respectively. Another customer accounted for 19%15%, 11%18%, and 2%10% of
revenue for fiscal 2000, 1999, and 1998, respectively. A third customer
accounted for 25%, 7%, and 1997,8% of revenue fiscal 2000, 1999, and 1998,
respectively. The Department of Defense accounted for 100%90%, 93%96%, and 99%94% of
contract revenues during fiscal 2000, 1999, 1998,
and 1997,1998, respectively.
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.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of
common stock shares outstanding. Diluted earnings per common share is computed
using the weighted average number of common stock shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock.
Accounting for Stock Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, Accounting"Accounting for
Stock Issued to Employees,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.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 ("FASSFAS 123"), "Accounting for Stock Based Compensation." 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. FASSFAS 123 permits the Company to choose
between adoption of
-45-
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 will provide only
the pro forma disclosures required by FASSFAS 123.
3. ACCOUNTS RECEIVABLE, NET
The following is a summary of the components of accounts receivable:
Year Ended (in 000s)
-----------------------
June 25, June 27,
2000 1999
June 28, 1998
(in 000s) (in 000s)
------------- -------------
Trade-------- --------
Billed trade receivables $ 14,68510,262 $ 8,971
Other short term14,645
Unbilled contract receivables 1,775 1,659
------------- --------------
16,460 10,6302,394 1,629
-------- --------
12,656 16,274
Allowance for doubtful accounts (250) (175)
(151)
------------- ---------------------- --------
Total accounts receivable, net $ 16,28512,406 $ 10,479
============= ==============
-42-
16,099
======== ========
The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 25, 2000, June 27, 1999, and June 28,
1998 and1998:
Year Ended (in 000s)
------------------------------------------
June 30,
1997:25, June 27, June 28,
June 30,2000 1999 1998
1997
(in 000s) (in 000s) (in 000s)
--------- --------- ----------------- -------- --------
Balance at beginning of year $ 151 $ 216 $ 50
Charges to cost and expenses 24 50 190
Deductions (write-offs to reserve) -- (115) (24)
--------- --------- ---------
Balance at end of year $ 175 $ 151 $ 216
========= =========Charges to cost and expenses 75 24 50
Deductions (write-offs to reserve) -- -- (115)
-------- -------- ---------
Balance at end of year $ 250 $ 175 $ 151
======== ======== =========
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
Year ended (in 000s)
-------------------------------
June 25, June 27,
June 28,2000 1999
1998
(in 000s) (in 000s)
--------- ----------------- --------
Office equipment and furnishings $ 1,9482,765 $ 1,3721,948
Land & Buildings 41,087 21,031 3,501
Machinery and equipment 46,199 28,13677,856 47,804
Leasehold improvements 1,461 1,549
4,697
--------- ---------
70,727 37,706-------- --------
123,169 72,332
Accumulated depreciation (13,311) (10,304)
--------- ---------
57,416 27,402(22,633) (13,670)
-------- --------
100,536 58,662
Construction in progress 36,582 12,468
9,074
--------- ----------------- --------
Net Property & Equipment $69,884 $36,476
========= =========$137,118 $71,130
======== ========
Depreciation and amortization of property and equipment totaled $5,382,000,
$4,217,000$10.8 million,
$5.6 million, and $3,356,000$4.4 million for the years ended June 25, 2000, June 27, 1999,
and June 28, 1998, and
June 30, 1997, respectively.
-46-
5. SHAREHOLDERS' EQUITY
On January 20, 2000, the Company completed a public offering of 3,289,000 shares
of its common stock at a price to the public of $85.125 per share. The Company
received net aggregate proceeds of approximately $266.1 million after deducting
underwriting discounts and commissions and estimated offering costs. The net
proceeds are being used primarily for manufacturing facility expansion and
purchase of additional equipment, the acquisition of an additional facility,
research and development, and general corporate purposes.
At June 27, 1999, the Articles of Incorporation of the Company authorized the
Company to issue up to 30,000,000 shares of common stock, with a par value of
$0.005 per share, and 3,000,000 shares of preferred stock, with a par value of
$0.01 per share. The preferred stock may be issued in one or more classes or
series with the number of shares, designation, relative rights, preferences, and
limitations of each class or series to be determined by resolution of the Board
of Directors. The Articles of Incorporation were amended, effective at the close
of business on July 26, 1999, to effect a two-for-one split of the common stock.
As a result, as of the effective date of the amendment, the Articles of
Incorporation authorize the Company to issue up to 60,000,000 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.
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 numbersdata have been restatedadjusted to give effect toreflect the common stock split.
On February 17, 1999, the Company completed a public offering selling 2,990,000
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
underwriter discounts and estimated offering costs. A portion of the net
-43-
proceeds, $10 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.
At June 25, 2000, the Company had reserved a total of 5,486,472 shares of its
common stock for future issuance as follows.
Number of shares
----------------
For exercise of outstanding warrants to purchase
common stock 246,680
For exercise of outstanding common stock options 4,089,527
For future common stock option awards 872,904
For possible future issuance to employees under the
Employee Stock Purchase Plan 277,361
----------------
Total reserved 5,486,472
================
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6. STOCK OPTIONS AND STOCK WARRANTS
As permitted by FASSFAS 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 has recorded
deferred compensation expense of $1.8 million, $1.0 million, and $100,000, for
the difference between the grant price and the deemed fair value of stock and
stock options granted for the years ended June 25, 2000, June 27, 1999, and June
28, 1998, respectively. Of this deferred compensation amount, $980,000,
$142,000, and $10,000 was amortized for the years ended June 25, 2000, June 27,
1999, and June 28, 1998, respectively.
As of June 25, 2000, the Company's Amended and Restated Equity Compensation Plan
(the "Plan") has authorized the grant of options for up to 5,400,0006,880,000 shares of
the Company's common stock. All options granted have 10 year terms and vest and
become fully exercisable within 5 years. The Company had granted 192,000 options
with a 10 year term for shares of the Company's common stock under the Stock
Option Plan for Non-Employee Directors. This plan was terminated in November
1997 and all 192,000 options granted under this plan are now fully vested. At
June 25, 2000, there were also outstanding options to purchase 136,543 shares of
the Company's common stock pursuant to option agreements assumed in the
acquisition of Nitres, Inc. 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.
Pro forma information regarding net income and earnings per share is required by
StatementSFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of thethat Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with weighted average risk free rates of interest of 5.3%6.24%
and 5.6%5.3%, for the years ended June 27, 199925, 2000 and June 28, 1998,27, 1999, respectively. The
volatility factor of the expected market price of the Company's common stock is
1.1740.882 and the weighted-average expected life of the options was 7 years for
executives and directors and 5 years for other employees.
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:
Year ended (in 000's, except per share data)
--------------------------------------------
June 25, June 27, June 28,
June 30,2000 1999 1998
1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------------- -------- --------
Net income, as reported $30,520 $ 12,70212,448 $ 6,275 $3,5426,243
Earnings per share, as reported:
Basic $0.93 $0.43 $0.23
Diluted $0.87 $0.41 $0.22
Pro forma net income, as adjusted 8,968 4,405 1,41821,507 8,714 4,373
for FASSFAS 123
Pro forma earnings per share:share,
as adjusted for SFAS 123:
Basic $ 0.33 $ 0.17 $ 0.05
Diluted $ 0.32$0.65 $0.30 $ 0.16
Diluted $0.61 $0.29 $ 0.050.15
The following table details the number of stock options outstanding and their
related exercise prices and weighted-average remaining contractual lives as of
June 27, 1999:
-44-25, 2000:
-48-
Number of Options Outstanding as of June 27, 1999
Weighted-Average
Remaining
Exercise Price Number of Options Contractual Life
-------------- ----------------- ---------------------------------
$ 0.21 2,866 1 year0.01 136,543 9 years
$ 1.56 16,000 54 years
$ 1.81 322,584 491,161 3 years
$ 1.88 10,6689,668 1 year
$ 2.00 87,200 542,350 4 years
$ 2.19 12,000 54 years
$ 3.41 8,000 43 years
$ 3.69 12,000 54 years
$ 4.69 38,80030,530 7 years
$ 5.13 13,200 7 years
$ 5.60 15,950 6 years
$ 6.49 544,250 7 years
$ 7.13 39,150 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
$ 7.19 330,950124,210 6 years
$ 7.63 1,189,800 9969,800 8 years
$ 7.88 96,000 772,000 6 years
$ 8.19 38,400 937,630 8 years
$ 8.38 10,000 98,000 8 years
$ 8.88 33,600 928,990 8 years
$ 9.38 71,800 854,300 7 years
$ 9.69 20,000 8 years
$12.32 90,000 8 years
$20.50 115,200 9 years
$12.32 114,000$22.60 125,745 9 years
$20.50 134,400$22.63 66,450 9 years
$33.56 208,500 9 years
$34.31 12,000 9 years
$37.75 468,000 9 years
$83.94 576,900 10 years
$22.60 139,600 10 years
$22.63 78,000$104.94 141,000 10 years
-----------------
3,613,168
Total Option Activity
-------------------------------------------------------------
June 27, 1999 June 28, 1998 June 30, 1997
Weighted Weighted Weighted
Options Average Options Average Options Average
(in 000s) Price (in 000s) Price (in 000s) Price
--------- -------- --------- -------- --------- --------
Outstanding -
beginning of year 2,410 $ 5.10 1,854 $ 2.38 1,264 $ 2.20
Granted 1,712 $10.85 1,084 $ 6.99 762 $ 6.78
Exercised (418) $ 3.63 (434) $ 3.90 (104) $ 1.54
Forfeited (91) $ 7.08 (94) $ 4.34 (68) $ 4.03
--------- --------- ---------
Outstanding -
end of year 3,613 $ 8.14 2,410 $ 5.10 1,854 $ 2.38
Exerciseable at
end of year 1,478 $ 5.39 1,198 $ 4.20 1,404 $ 3.72
-45-4,089,527
=================
Total Stock Option Activity - Year ended
-------------------------------------------------------------------------
June 25, 2000 June 27, 1999 June 28, 1998
Number of Weighted Number of Weighted Number of Weighted
Options Average Options Average Options Average
(in 000s) Price (in 000s) Price (in 000s) Price
--------- -------- --------- -------- --------- --------
Outstanding -
beginning of year 3,613 $ 8.14 2,410 $ 5.10 1,854 $ 2.38
Granted 1,753 51.45 1,712 10.85 1,084 6.99
Exercised (1,075) 5.13 (418) 3.63 (434) 3.90
Forfeited (201) 16.14 (91) 7.08 (94) 4.34
--------- -------- --------- -------- --------- --------
Outstanding -
end of year 4,090 $27.09 3,613 $ 8.14 2,410 $ 5.10
========= ======== ========= ======== ========= ========
Exercisable at
end of year 1,353 $ 5.98 1,478 $ 5.39 1,198 $ 4.20
========= ======== ========= ======== ========= ========
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In connection with the Company's September 1995 private placement, the Company
issued 600,000 warrants, which have an exercise price of $13.62, which
represents fair value on the date of grant, and expire September 2000. Warrants
to purchase 27,000 and 342,000 shares of common stock were exercised during the
fiscal yearyears ended June 25, 2000 and June 27, 1999.1999, respectively. Warrants to
purchase 258,000231,000 shares remain outstanding under this private placement as of
June 27, 199925, 2000. As of June 25, 2000, there were also outstanding warrants to
purchase 15,680 shares of the Company's common stock, at an exercise price of
$2.55 per share, which expire February 2007. These warrants were originally
issued by Nitres, Inc. in February 2000 and representwere assumed by the only warrants outstanding.Company in its
acquisition of Nitres, Inc. in May 2000.
7. LEASE COMMITMENTS
The Company currently leases threefive facilities. These facilities are comprised of
both office and manufacturing space. The first facility has a remaining lease
period of approximately twoone and one half years. The lease term for the second
facility began in September 1995. This1995 and a renewal option was exercised in September
1999. At June 25, 2000, the second facility lease has a remaining lease period
of approximately one-yeartwo years with two optionsan option to renew for a total of fouran additional two years.
The leaseleases for the third facility expiresand fourth facilities expire in December 1999.2000 and April
2001, respectively. The lease term on the fifth facility runs from month to
month. All of thesethe remaining lease 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 $430,000,
$522,000$420,000,
$478,000, and $549,000$562,000 for the years ended June 25, 2000, June 27, 1999, and
June 28, 1998, and June
30, 1997, respectively. Future minimum rentals as of June 27, 199925, 2000 under
these leases are as follows:
Minimum Rental
Amount
Fiscal Years Ended Amount (in 000s)
------------------ --------------
June 25, 2000 $ 312
June 24, 2001 247$383
June 30, 2002 119
-----207
June 30, 2003 12
--------------
Total $ 678
=====$602
==============
8. LONG-TERM DEBT
In December 1998, Cree Lighting (previously Nitres, Inc.) received a $431,000
bridge loan from a group of investors to finance its working capital needs. The
bridge loan was made to Cree Lighting subject to conversion rights that would
cause conversion to shares of the Company's common stock in the event of a
financing or one year passing. At June 27, 1999, the investor bridge loan was
still outstanding. In February 2000, the $431,000 bridge loan was converted to
168,750 shares of the Company's common stock. In September 1997, Cree Lighting
purchased equipment on credit and issued a note to the equipment manufacturer
for $382,000. Payments on the note were made in quarterly installments beginning
in January 1998. At June 27, 1999, obligations under the equipment note were
approximately $48,000. The balance on the note was repaid in September 1999.
In November 1997, the Company entered into a term loan with 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 with the
remaining proceeds disbursed on a monthly basis based on actual expenditures
incurred. The loan, which was collateralized by the purchased property and
subsequent upfits, accrued interest at a
-50-
fixed rate of 8% and carried customary covenants, including the maintenance of a
minimum tangible net worth and other requirements. On February 17, 1999, the
entire $10,000,000$10.0 million indebtedness was repaid with proceeds received from the
public stock offering. AtInterest expense was $13,000, $282,000, and $93,000 for
the years ended June 25, 2000, June 27, 1999, and June 28, 1998,
short term and long term borrowings associated with this loan were $17,000 and
$8,650,000, respectively.
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FASSFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of FASSFAS 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
-46-
settled. Under FASSFAS 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 for the years ended June 29,25, 2000, June 27, 1999,
and June 28, 1998
and June 30, 1997 differed from the amounts computed by applying the U.S.
federal tax rate of 35% in fiscal 2000 and fiscal 1999, and 34% in fiscal 1998, and 1997,
to pretax earnings as a result of the following:
Year Ending (in 000s)
----------------------------------
June 25, June 27, June 28,
June 30,2000 1999 1998
1997
(in 000s) (in 000s) (in 000s)
--------- --------- ----------------- -------- --------
Federal income tax provision at
statutory rate $ 16,382 $ 6,174 $ 3,018
$ 1,265
statutory rate
State tax provision 1,517 211 166 193
Increase (decrease) in income
tax expense resulting from:
Foreign sales corporation (1,682) (510) (214) --
Decrease in valuation allowance -- (290) (358) (1,279)
Research and development (258) (251) -- --
State tax credits -- (394) --
Non-deductible transaction costs 327 -- --
Other -- (12) (2)
--------- --------- ---------(48) (21)
-------- -------- --------
Income tax expense $ 4,94016,286 $ 2,6004,892 $ 177
========= ========= =========2,591
======== ======= ========
The following are the components of the provision for income taxes for the years
ended June 25, 2000, June 27, 1999, and June 28, 1998 and1998:
Year Ending (in 000s)
------------------------------------
June 30, 1997:25, June 27, June 28,
June 30,2000 1999 1998
1997
(in 000s) (in 000s) (in 000s)
--------- --------- ----------------- -------- --------
Current:
Federal $ 856 $ 2,553 $ 699
$ 54
Foreign Tax Withholding -- -- 50
220
State 200 300 269
95
--------- --------- ----------------- -------- --------
1,056 2,853 1,018
369
Deferred:
Federal 2,347 1,582 (442)15,111 2,299 1,573
State 119 (260) --
250
--------- --------- ---------
2,087 1,582 (192)-------- -------- --------
15,230 2,039 1,573
Net Provision $16,286 $ 4,9404,892 $ 2,600 $ 177
========== ========= =========
-47-2,591
======== ======== ========
-51-
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
Year Ending (in 000s)
----------------------
June 25, June 27,
2000 1999
June 28, 1998
(in 000s) (in 000s)
------------- --------------------- --------
Deferred tax assets:
Net operating loss carryforwards $11,641 $ 97 $ 1,304
Research tax credits 785 420
169
Compensation 268 105
62
Inventory 202 126 120
Bad debt 93 65 56
Alternative minimum tax 1,690 1,513 261
Foreign tax credit 2700 270
Other 526 527
--
------------- --------------------- --------
Total gross deferred tax assets 15,205 3,123 2,242
Less valuation allowance -- (290)
------------- ---------------
-------- --------
Total net deferred tax assets 15,205 3,123 1,952
Deferred tax liabilities:
Marketable equity securities 658 --658
Property and equipment depreciation 6,060 3,992
2,154
------------- --------------------- --------
Gross deferred tax liabilities 6,718 4,650
2,154
------------- --------------------- --------
Net deferred tax liabilityassets (liability) $ (1,527) $ (202)
============= =============
The net change in the total valuation allowance for the years ended June 27,
1999 and June 28, 1998 was $290,000. The primary reason for the reduction in the
valuation allowance in 1999 and 1998 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.8,487 $(1,527)
======= ========
As of June 27, 1999,25, 2000, the Company has net operating loss carryforwards for
federal purposes of $75,000$25 million and $1,400,000$38 million for state purposes. The net
operating losses have been generated from the tax benefits associated with stock
options, which have been accounted for as an addition to paid-in capital. The
state net economic loss carryforward expirationwill expire beginning in 2004 and federal
operating loss carryforwards will expire beginning in 2020.
10. EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") on
November 2, 1999. The Purchase Plan provides employees of the Company, and its
majority-owned subsidiaries, with an opportunity to purchase common stock
through payroll deductions. The purchase price is set at 85% of the lower of the
fair market value of common stock at the beginning of the participation period
is 2011or on a purchase date. Contributions are limited to 201915% of an employee's
compensation. The participation periods have a 12 month duration, with new
participation periods beginning in November and May of each year. Each
participation period has two purchase dates, one in October and the other in
April. The first participation period began on November 2, 1999 and the first
purchase date was April 30, 2000. The Board of Directors has reserved 300,000
shares of common stock for federal tax purposes and fromissuance under the Purchase Plan. As of June 25,
2000, to 2004
for state purposes.
10.22,639 shares of common stock had been purchased under the Purchase Plan.
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
-52-
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 Pension Benefit Guaranty Corporation does not insure the Plan. The
-48-
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
25, 2000, June 27, 1999, and June 28, 1998 or June 30, 1997.
11.1998.
12. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share", 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.
The following computation reconciles the differences between the basic and
diluted presentations:
Year ended (in 000's, except per share data)
--------------------------------------------
June 25, June 27, June 28,
June 30,2000 1999 1998
1997
(in 000s) (in 000s) (in 000s)
--------- --------- ----------------- -------- --------
Basic:
Net income $ 12,70230,520 $ 6,27512,448 $ 3,542
========= ========= =========6,243
======== ======== ========
Weighted average common shares 27,015 25,726 24,911
========= ========= =========32,965 29,015 27,726
======== ======== ========
Basic incomeearnings per common share $0.93 $ 0.470.43 $ 0.24 $ 0.14
========= ========= =========0.23
======== ======== ========
Diluted:
Net income $ 12,70230,520 $ 6,27512,448 $ 3,542
========= ========= =========6,243
======== ======== ========
Weighted average common shares-basic 27,105 25,726 24,911shares
-basic 32,965 29,015 27,726
Dilutive effect of stock options
& warrants 2,252 1,417 1,261
1,340
--------- --------- ----------------- -------- --------
Weighted average common shares-diluted 28,432 26,987 26,251
========= ========= =========shares
-diluted 35,217 30,432 28,987
======== ======== ========
Diluted incomeearnings per common share $0.87 $ 0.450.41 $ 0.23 $ 0.13
========= ========= =========0.22
======== ======== ========
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 June 25, 2000 and June 27, 1999, there were no potential shares
considered to be antidilutive. For the yearsyear ended June 28, 1998, and June 30, 1997, there were
225,000 and 574,000
shares respectively, that were not included in calculating diluted incomeearnings per share
because their effect was antidilutive.
12.3. NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 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 Company 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 year ended June 28, 1998, the Company had no
items of other comprehensive income.
-49-
In fiscal 1999, the Company adopted Statement of Financial Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 changes the way public companies report segment information in
annual financial statements and also require 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 of the new rules does not
have a significant impact on the Company's financial statements as the Company
only operates in a single segment.
In June 1998, The Financial Accounting Standards Board issues 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. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters
of fiscal 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information called for in items 10 through 13 is incorporated by reference
from the Company's definitive proxy statement relating to its annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 1999.
-50-2000.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial statements and financial statement schedule - the
financial statements and reports of independent auditors are filed as part
of this report (see index to Consolidated Financial Statements at Part II
Item 8 on page 30 of this Form 10-K). The financial statement schedules are
not included herein as they are either not applicable or are included as
part of the consolidated financial statements.
(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
------- ------------------------------------------------------------------------------- -----------
3.1 Articles of Incorporation, as amended July 26, 1999(1)
3.2 Bylaws, as amended May 28, 1999(1)
4.1 Specimen Common Stock Certificate adopted July 21, 1999(1)
10.1 Amended and Restated Equity Compensation Plan, as amended June 28,
1999*and restated
August 24, 1999 (2) *
10.2 Stock Option Plan for Non-Employee Directors (terminated
as to future grants pursuant to Board action dated
September 1, 1997) (1)(3) *
10.3 Management Incentive Compensation Program - Fiscal Year
2000 Plan (1) *
10.4 License Agreement between the Company and North Carolina
State University dated December 3, 1987 (2)
10.4(4)
10.5 Amendment to License Agreement between the Company and
North Carolina State University dated September 11, 1989 (2)
10.5(4)
10.6 Development, License and Supply Agreement between the
Company and Siemens A.G. dated October 24, 1995 (3)
10.6(5)
10.7 Purchase Agreement between the Company and Siemens A.G.
dated September 6, 1996 (4)
10.7(6)
10.8 First Amendment to Purchase Agreement between the Company
and Siemens A.G. dated April 22, 1997 (5)
10.8(7)
10.9 Second Amendment to Purchase Agreement between the Company
and Siemens A.G. dated December 9, 1997 (6)
10.9(8)
10.10 Third Amendment to Purchase Agreement between the Company
and Siemens A.G. datedA.G.dated September 8, 1998 (7)
10.10(9)
10.11 Fourth Amendment to Purchase Agreement between the Company
and Siemens A.G. dated December 16, 1998 (8)
10.11(10)
10.12 Transformation Agreement with Siemens A.G. and OSRAM Opto
Semiconductors GmbH & Co. OHG effective January 1, 1999 (11)
10.13 Purchase Agreement between the Company and Osram Opto Semi-
conductors GmbH & Co. dated August 30, 1999 (2)
10.14 Merger Agreement dated as of April 10, 2000 among Cree,
Inc., Crystal Acquisition, Inc., Nitres, Inc. and share-
holders of Nitres, Inc. listed on signature pages thereto
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of Registrant
(9)
23.1 Consent of Ernst & Young LLPIndependent Auditors
23.2 Consent of PricewaterhouseCoopers LLPIndependent Accountants
27.1 Financial Data Schedule -51-(for SEC use only)
99.1 Report of Independent Auditors
-55-
(1) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3, Registration No. 333-94013, and
declared effective by the Securities and Exchange Commission on January 13,
2000.
(2) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on November 4, 1999.
(3) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-8, Registration No. 33-98958, and
effective with the Securities and Exchange Commission on November 3, 1995.
(2)(4) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form SB-2, Registration No. 33-55998, and
declared effective by the Securities and Exchange Commission on February 8,
1993.
(3)(5) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3, Registration No. 33-98728, and
declared effective by the Securities and Exchange Commission on December
27, 1995. Confidential treatment of portions of this exhibit was granted by
the Securities and Exchange Commission pursuant to Rule 24b-2 by order
dated December 29, 1995.
(4)(6) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on September 30, 1996. Confidential treatment of portions of
this exhibit was granted by the Securities and Exchange Commission pursuant
to Rule 24b-2 by order dated November 21, 1996.
(5)(7) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on May 2, 1997. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated June 26, 1997.
(6)(8) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 12, 1998.
(7)(9) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on October 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated November 23, 1998.
(8)(10) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 28, 1999. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 24, 1999.
(9)(11) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on August 19, 1998.12, 1999.
* Compensatory Plan
-52-(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Company
during the three months ended June 25, 2000.
-56-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CREE, RESEARCH, INC.
Date: August 11, 199910, 2000
By: /s/ F. Neal Hunter
-----------------------------------------------------------------------
F. Neal Hunter
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ F. Neal Hunter Chairman of the Board and August 11, 199910, 2000
- ---------------------------- Chief Executive Officer
F. Neal Hunter
/s/ Cynthia B. Merrell Chief Financial Officer August 11, 199910, 2000
- ----------------------------
Cynthia B. Merrell
/s/ Calvin H. Carter, Jr. Director August 11, 199910, 2000
- ----------------------------
Calvin H. Carter, Jr., Ph.D.
/s/ James E. Dykes - ---------------------------- Director August 11, 199910, 2000
- ----------------------------
James E. Dykes
/s/ Michael W. Haley Director August 11, 199910, 2000
- ----------------------------
Michael W. Haley
/s/ John W. Palmour Director August 11, 199910, 2000
- ----------------------------
John W. Palmour, Ph.D
/s/ Walter L. Robb - ---------------------------- Director August 11, 199910, 2000
- ----------------------------
Walter L. Robb, Ph.D.
/s/ Dolph W. von Arx Director August 11, 199910, 2000
- ----------------------------
Dolph W. von Arx
-53--57-