SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DecemberMarch 26, 19992000
Commission file number: 0-21154
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1572719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Silicon Drive
Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 313-5300
(Registrant's telephone number, including area code)
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. [X][ X] Yes [ ] No
The number of shares outstanding of the registrant's common stock, par value
$0.0025 per share, as of January 20,April 19, 2000 was 32,989,048.33,142,278.
CREE, INC.
FORM 10-Q
For the Quarter Ended Decemberquarterly period ended March 26, 19992000
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Consolidated Balance Sheets at DecemberMarch 26, 19992000 (unaudited)
and June 27, 1999 3
Consolidated Statements of Income for the three and sixnine
months ended DecemberMarch 26, 19992000 and December 27, 1998March 28, 1999 (unaudited) 4
Consolidated Statements of Cash Flow for the sixnine months
ended DecemberMarch 26, 19992000 and December 27, 1998March 28, 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1112
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1719
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 1820
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
-2-Signatures 21
PART I.I - FINANCIAL INFORMATION
Item 1.1 - Financial Statements
CREE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
DecemberMarch 26, June 27,
2000 1999
1999
------------ ------------------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 38,164$108,033 $ 42,506
Marketable securities 5,708122,594 6,145
Accounts receivable, net 18,47824,576 16,285
Inventories 4,6097,082 3,977
Deferred income tax 296 296
Prepaid expenses and other current assets 4551,175 558
------------ ------------------- --------
Total current assets 67,710263,756 69,767
Long term marketable securities 77,984 --
Property and equipment, net 88,291108,514 69,884
Patent and license rights, net 1,9372,124 1,731
Deferred income taxes 2,827 2,827
Other assets 14715 8
------------ ------------------- --------
Total assets $ 160,912 $ 144,217
============ ==========$455,220 $144,217
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 6,1286,987 $ 7,487
Accrued salaries and wages 1,5122,865 819
Deferred income tax 13,213 --
Other accrued expenses 6,4101,685 1,239
------------ ------------------- --------
Total current liabilities 14,05024,750 9,545
Long term liabilities:
Long term liability 30 --
Deferred income tax 4,650 4,650
------------ ------------------- --------
Total long term liabilities 4,680 4,650
Shareholders' equity:
Preferred stock, par value $0.01; -- --
3,000 shares -- --
authorized at DecemberMarch 26,
19992000 and June 27, 1999; none issued
and outstanding
Common stock, par value $0.0025; 83 73
60,000 shares 74 73 authorized; shares
issued and outstanding 29,70033,142
and 29,258 at DecemberMarch 26, 19992000 and
June 27, 1999, respectively
Additional paid-in-capital 113,311380,716 111,136
Retained earnings 28,79744,991 18,813
------------ ------------------- --------
Total shareholders' equity 142,182425,790 130,022
------------ ------------------- --------
Total liabilities and shareholders'
equity $455,220 $144,217
========= ========
The accompanying notes are an integral part of the
consolidated financial statements.
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
--------------------- -----------------------
March 26, March 28, March 26, March 28,
2000 1999 2000 1999
--------- --------- --------- ----------
Revenue:
Product revenue, net $ 160,91226,195 $ 144,217
============14,084 $ 66,588 $ 37,609
Contract revenue, net 2,168 1,951 5,754 4,743
-------- --------- --------- ----------
Total revenue 28,363 16,035 72,342 42,352
Cost of revenue:
Product revenue 10,977 6,794 30,549 18,586
Contract revenue 1,541 1,503 3,799 3,755
-------- --------- --------- ----------
Total cost of revenue 12,518 8,297 34,348 22,341
-------- --------- --------- ----------
Gross profit 15,845 7,738 37,994 20,011
Operating expenses:
Research and development 2,245 1,515 5,087 3,442
Sales, general and 2,828 1,568 7,393 4,236
administrative
Other (income) expense 673 311 767 878
-------- --------- --------- ----------
Income from operations 10,099 4,344 24,747 11,455
Interest income, net 3,772 347 4,912 482
-------- --------- --------- ----------
Income before income taxes 13,871 4,691 29,659 11,937
Income tax expense 4,716 1,314 10,084 3,343
-------- --------- --------- ----------
Net income $ 9,155 $ 3,377 $ 19,575 $ 8,594
======== ========= ========= ==========
Other comprehensive income,
net of tax:
Unrealized holding gain (loss) 7,039 -- 6,603 --
-------- --------- --------- ----------
Comprehensive income $ 16,194 $ 3,377 $ 26,178 $ 8,594
======== ========= ========= ==========
Earnings per share:
Basic $ 0.28 $ 0.12 $ 0.64 $ 0.33
======== ========= ========= ==========
Diluted $ 0.26 $ 0.11 $ 0.60 $ 0.31
======== ========= ========= ==========
Shares used in per share
calculation:
Basic 32,169 27,266 30,364 26,258
======== ========= ========= ==========
Diluted 34,612 29,770 32,473 27,978
======== ========= ========= ==========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOMECASH FLOW
(In thousands, except per share data)
(Unaudited)thousands)
ThreeNine Months Ended
Six Months Ended
--------------------------- ---------------------------
December----------------------
March 26, December 27, December 26, December 27,March 28,
2000 1999
1998 1999 1998
------------- ------------ ------------ --------------------- ---------
(Unaudited)
Revenue:
Product revenue,Operating activities:
Net income $ 19,575 $ 8,594
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,231 3,679
Loss on disposal of property, equipment and patents 1,212 1,284
Amortization of patent rights 105 86
Proceeds from sale of marketable trading securities 2,280 1,421
Purchase of marketable trading securities (1,786) (234)
Loss (gain) on marketable trading securities (494) (141)
Changes in operating assets and liabilities:
Accounts receivable (8,291) (3,862)
Inventories (3,105) (1,337)
Prepaid expenses and other assets (624) 861
Accounts payable , trade (500) (986)
Accrued expenses 12,334 2,010
--------- ---------
Net cash provided by operating activities 27,937 11,375
--------- ---------
Investing activities:
Purchase of short term marketable securities (106,445) --
Purchase of long term marketable securities (77,984) --
Purchase of property and equipment (47,072) (24,816)
Proceeds from sale of property and equipment -- 189
Purchase of patent rights (499) (246)
--------- ---------
Net cash used in investing activities (232,000) (24,873
--------- ---------
Financing activities:
(Retirement) Proceeds of long-term debt -- (8,545)
Net proceeds from issuance of common stock 269,590 60,285
Receipt of Section 16(b) common stock profits -- 594
Repurchase of common stock -- (3,214)
--------- ---------
Net cash provided by financing activities 269,590 49,120
--------- ---------
Net increase in cash and cash equivalents 65,527 35,622
Cash and cash equivalents:
Beginning of period 42,506 17,680
========= =========
End of period $108,033 $ 22,13653,302
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts capitalized -- $ 12,805 $ 40,392 $ 23,525
Contract revenue, net 1,794 1,233 3,585 2,792
------------- ------------ ------------ ------------
Total revenue 23,930 14,038 43,977 26,317
Cost of revenue:
Product revenue 10,075 6,377 19,572 11,792
Contract revenue 1,122 1,045 2,258 2,252
------------- ------------ ------------ ------------
Total cost of revenue 11,197 7,422 21,830 14,044
------------- ------------ ------------ ------------
Gross profit 12,733 6,616 22,147 12,273
Operating expenses:
Research and development 1,911 1,121 2,843 1,927
Sales, general and 2,639 1,450 4,565 2,668
administrative
Other (income) expense (8) 298 92 567
------------- ------------ ------------ ------------
Income from operations 8,191 3,747 14,647 7,111
Interest income, net 573 20 1,142 135
------------- ------------ ------------ ------------
Income before387
======== =========
Cash paid for income taxes 8,764 3,767 15,789 7,246
Income tax expense 2,980 916 5,368 2,029
------------- ------------ ------------ ------------
Net income $5,784 $ 2,851268 $ 10,421 $ 5,217
============= ============ ============ ============
Other comprehensive income,
net of tax:
Unrealized holding gain 1,981 -- (437) --
(loss) ------------- ------------ ------------ ------------
Comprehensive income $7,765 $ 2,851 $ 9,984 $ 5,217
============= ============ ============ ============
Earnings per share:
Basic $0.20 $0.11 $0.35 $0.20
============= ============ ============ ============
Diluted $0.18 $0.10 $0.33 $0.19
============= ============ ============ ============
Shares used in per share
calculation:
Basic 29,587 25,664 29,462 25,752
============= ============ ============ ============
Diluted 31,594 27,668 31,404 27,082
============= ============ ============ ============1,563
======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Six Months Ended
-----------------------------
December 26, December 27,
1999 1998
------------ ------------
Operating activities: (Unaudited)
Net income $ 10,421 $ 5,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,447 2,341
Loss on disposal of property, equipment and 44 951
patents
Amortization of patent rights 67 56
Proceeds from sale of marketable trading -- 489
securities
Purchase of marketable trading securities -- (232)
Loss (gain) on marketable trading securities -- (116)
Changes in operating assets and liabilities:
Accounts receivable (2,193) (1,964)
Inventories (632) (859)
Prepaid expenses and other assets (35) 1,004
Accounts payable , trade (1,360) (3,073)
Accrued expenses 5,894 420
------------ ------------
Net cash provided by operating activities 16,653 4,234
------------ ------------
Investing activities:
Purchase of property and equipment (22,898) (10,380)
Proceeds from sale of property and equipment -- 189
Purchase of patent rights (274) (194)
------------ ------------
Net cash used in investing activities (23,172) (10,385)
------------ ------------
Financing activities:
Proceeds from issuance of long-term debt -- 1,333
Net proceeds from issuance of common stock 2,177 2,527
Receipt of Section 16(b) common stock -- 594
profits
Repurchase of common stock -- (3,214)
------------ ------------
Net cash provided by financing activities 2,177 1,240
------------ ------------
Net decrease in cash and cash equivalents (4,342) (4,911)
Cash and cash equivalents:
Beginning of period 42,506 17,680
============ ============
End of period $ 38,164 $ 12,769
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts $ -- $ 275
capitalized
============ ============
Cash paid for income taxes $ 268 $ 1,396
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATIONBasis of Presentation
- ---------------------
The consolidated balance sheet as of DecemberMarch 26, 1999,2000, the consolidated statements
of income for the three and sixnine months ended DecemberMarch 26, 19992000 and December 27, 1998,March 28, 1999,
and the consolidated statements of cash flow for the sixnine months ended DecemberMarch 26,
19992000 and December 27, 1998March 28, 1999 have been prepared by the Company and have not been
audited. In the opinion of management, all normal and recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flow at DecemberMarch 26, 1999,2000, and for all periods presented, have been made. The
balance sheet at June 27, 1999 has been derived from the audited financial
statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's fiscal 1999 Form 10-K. The results of
operations for the period ended DecemberMarch 26, 19992000 are not necessarily indicative of
the operating results that may be attained for the entire fiscal year.
ACCOUNTING POLICIESAccounting Policies
- -------------------
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. Accordingly, all quarterly reporting reflects a 13 week
period in fiscal 2000 and fiscal 1999. The Company's current fiscal year extends
from June 28, 1999 through June 25, 2000.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This statement requires certain securities
to be classified into three categories:
(a) Securities Held-to-Maturity -- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities -- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included in
earnings.
-6-
(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 and losses excluded
from earnings and reported in retained earnings.
As of DecemberAt March 26, 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. In August 1999, MVIS filed a registration statement for the
Company's sale of these shares; however, Cree agreed not to sell the shares
until at least January 6, 2000. As of December 26, 1999, the Company was
restricted from trading these shares and sinceshare, or $4.5 million. Since management views this transaction as an
investment, the shares are accounted for as "available for sale" securities
under SFAS 115. Therefore unrealized gains or losses are excluded from earnings
and are recorded directly in retained earnings. As of DecemberMarch 26, 2000 and June
27, 1998,1999, the Company recorded unrealized holding gains on this investment of
$11.7 million and $1.6 million, respectively. 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.
As of March 26, 2000, the Company's short-term investments also include $106.4
million in high-grade corporate commercial paper, corporate bonds, government
securities, and other 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 marketable security with unpaid interest included
in accounts receivable.
As of March 26, 2000, the Company's long-term investments consisted of common stock$78.0
million in high- grade corporate bond holdings in C3, Inc ("C3"), the majority of which were bought in
November 1997.that mature beginning April 9,
2001. The Company also acquired additional sharespurchased the corporate bonds with a portion of C3 in September
1998 and acquired 24,601 shares directlythe proceeds
from C3 pursuant to the exercise of an
optionpublic stock offering in January 1997. This investment was treated2000. The Company has the intent and
ability to hold these securities until maturity; therefore, they are accounted
for accounting purposesas "securities held-to-maturity" under SFAS 115. The securities are reported
on the balance sheet at amortized cost, as long-term marketable securities with
unpaid interest included in accounts receivable if interest is due in less than
12 months, and as a trading security, with net realized and unrealized gains and losses includedlong term receivable if interest is due in net earnings. All common sharesmore than 12
months. As of C3 held by CreeMarch 28, 1999, the Company had no long-term investments.
During the three months ended March 26, 2000, the Company purchased equity
securities that were subsequently sold during
fiscal 1999. Recognized gains on sharesin the same period. The purchase and sale
of C3 stock recorded to the statement of
income during fiscal 1999 bythese securities resulted in the Company were $140,000. This amount was recorded
as other income.recording a realized gain on the
sale of stock of $494,000 for the three and nine months ended March 26, 2000.
Long Term Debt
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10.0 million to finance the purchase and upfit of the new mainits principal
facility in Durham, North Carolina. Approximately $3.0 million was disbursed
under the loan to finance the initial purchase of the facility with the
remaining proceeds disbursed on a monthly basis based on actual expenditures
incurred. The loan, which was collateralized by the purchased property and
-7-
subsequent upfits, accrued interest at a fixed rate of 8% and carried customary
covenants, including the maintenance of a minimum tangible net worth and other
requirements. As of December 27, 1998 the entire $10.0 million loan was
outstanding, including a current portion of $121,000 and a long term amount of
$9.9 million. On February 17, 1999, the entire $10.0 million indebtedness was
repaid with proceeds received from a public stock offering.
During the three and sixnine months ended December 27, 1998,March 28, 1999, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with the facility. Interest capitalized for the three and sixnine months ended
December 27, 1998March 28, 1999 was $34,000$9,000 and $118,000,$128,000, respectively.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out (FIFO) method. Inventories consist of the
following:
-7-
DecemberMarch 26, June 27,
2000 1999
1999
------------ --------------------- --------
(In thousands)
Raw materials $ 1,7292,324 $ 1,290
Work-in-progress 1,5792,512 1,675
Finished goods 1,3012,246 1,012
------------ --------------------- --------
Total InventoryInventories $ 4,6097,082 $ 3,977
============ ===================== ========
Research and Development Accounting Policy
The U.S. Government provides funding for several of the Company's current
research and development efforts. The contract funding may be based on either a
cost-plus or a cost-share arrangement. The amount of funding under each contract
is determined based on cost estimates that include direct costs, plus an
allocation for research and development, general and administrative and 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. governmentGovernment and the Company based on the terms of the
contract. The government's cost share is then paid to the Company. Activities
performed under these arrangements include research regarding silicon carbide
and gallium nitride materials. The contracts typically require the submission of
a written report that documents the results of such research.
The revenue and expense classification for contract activities is based on the
nature of the contract. For contracts where the Company anticipates that funding
will exceed direct costs over the life of the contract, funding is reported as
contract revenue and all direct costs are reported as costs of contract revenue.
For contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, costs are reported as
research and development expenses and related funding as an offset of those
expenses. The following table
-8-
details information about contracts for which direct expenses exceed funding by
period as included in research and development expenses:
Three Months Ended SixNine Months Ended
December------------------ -----------------
March 26, December 27, DecemberMarch 28, March 26, December 27,March 28,
2000 1999 19982000 1999
1998
------------ ------------ ------------ --------------------- --------- --------- ---------
(In thousands)
Net R&D costs $ 134164 $ - $ 174298 $ -
Government funding 331227 - 398625 -
------------ ------------ ------------ --------------------- --------- --------- ---------
Total direct costs incurred $ 465391 $ - $ 572923 $ -
incurred ============ ============ ============ ============
-8-
========= ========= ========= =========
Significant Sales Contract
In September 1996, the Company entered into a Purchase Agreement with Siemens AG
("Siemens"), pursuant to which Siemens agreed to purchase light emitting diode
("LED") chips made with the Company's gallium nitride-on-silicon carbide
technology. In April 1997, December 1997 and September 1998, contract amendments
were executed that provided for enhanced product specifications requested by
Siemens and larger volume requirements, respectively. In December 1998, the
Purchase Agreement was further amended to provide for additional shipments of
LED products through September 1999. The Purchase Agreement was subsequently
assigned to an indirect subsidiary of Siemens, OSRAM Opto Semiconductors GMBH &
Co. OHG ("Osram"), effective as of January 1, 1999. All shipments under this
Purchase Agreement have been concluded.
In August 1999, the Company entered into a new Purchase Agreement with Osram,
pursuant to which Osram agreed to purchase and the Company is obligated to ship
stipulated quantities of both the standard brightness and the high brightness
LED chips and silicon carbide wafers through September 2000.
The agreement calls for certain quantities of standard brightness and high
brightness LED chips to be delivered by month. In the event the Company
materially defaults in delivering shipments, Osram may recover liquidated
damages of one percent per week of the purchase price of the delayed product,
subject to a maximum of ten percent of the purchase price. If product shipments
are delayed six weeks or more due to circumstances within the Company's control,
then in lieu of liquidated damages, Osram may claim damages actually resulting
from the delay up to 40% of the purchase price of delayed products.
The contract also gives Osram limited rights to defer shipments. For products to
be shipped in more than 24 weeks after initial notice, Osram can defer 30% and
20% of standard brightness and high brightness LEDs, respectively. For products
to be shipped in more than 12 weeks, but less than 24 weeks, Osram may defer 10%
of scheduled quantities for both standard brightness and high brightness LEDs.
Also, additional quantities of high brightness LEDs stipulated in the contract
may be deferred to the next quarter with 60 days notice at the election of
Osram. In all cases, Osram would be
-9-
required to accept all products within 90 days of the original shipment date.
Additionally, the Purchase Agreement provides for higher per unit prices early
in the contract with reductions in unit prices being available as the cumulative
volume shipped increases. The higher prices were negotiated by the Company to
offset higher per unit costs expected earlier in the contract.
Development Agreement Amendment
On March 17, 2000, the company signed an amendment to its development agreement
with Microvision, Inc. which became effective on April 12, 2000. The development
agreement, which was originally signed May 5, 1999, covers research directed to
the development of edge-emitting light emitting diodes, and laser diodes, and
committed MVIS to fund a one-year program at Cree for $2.6 million. With the
amendment, MVIS has committed to fund an additional two-year program for a total
of $10 million. Under the agreement, MVIS will fund $4.5 million payable in
quarterly installments to Cree for the first year commencing on April 13, 2000.
In addition, the amendment provides that MVIS will fund an additional $5.5
million payable in quarterly installments to Cree for the second year beginning
April 13, 2001. All costs incurred under the program will be charged as research
and development expenses with related funding offsetting these costs. Several
milestones have been identified in the amendment to the development agreement.
Cree is obligated to use best efforts to achieve all milestones; however, Cree
is not obligated to incur costs in excess of funding paid under the agreement.
The agreement provides that failure to achieve milestones is not grounds for
termination of the agreement or to withhold payment of the development fee, that
Cree has no liability for the failure to achieve any milestone, and that any
funding received by Cree is nonrefundable. Cree has also granted exclusive
rights to MVIS for the purchase of products developed in the program for use in
scanned beam applications for seven years after the commencement of the amended
development agreement or expiration of the agreement, subject to certain
conditions.
Depreciation
The Company has adopted lower useful lives on new manufacturing equipment. The
useful life for all manufacturing equipment purchased since the beginning of
fiscal year 2000 is estimated to be 5 years. No changes have been made to the
estimated useful life of 9 years for manufacturing equipment placed in service
prior to fiscal 2000. In management's estimate, this policy change was necessary
due to technology changes anticipated with the future development of larger
diameter wafers. Based on information available at this time, management
estimates that the change in policy may reduce the Company's fiscal 2000 net
income by $660,000 or $0.02 per share, but actual results may vary.
-9-
Income Taxes
The Company has established an estimated tax provision based upon an effective
rate of 34%. The estimated effective rate was based upon projections of income
for the fiscal year and the Company's ability to utilize remaining net operating
loss carryforwards and other tax credits. However, the actual effective rate may
vary depending upon actual pre-tax book income for the year or other factors.
EARNINGS PER SHARE-10-
Earnings Per Share
- ------------------
The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
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 128.
The following computation reconciles the differences between the basic and
diluted presentations:
Three Months Ended Six Months Ended
December December December December
26, 27, 26, 27,
1999 1998* 1999 1998*
-------- -------- -------- --------
(In thousands, except per share amounts)
Net income $ 5,784 $ 2,851 $10,421 $ 5,217
Weighted average common shares 29,587 25,664 29,462 25,752
-------- -------- -------- --------
Basic earnings per common share $ 0.20 $ 0.11 $ 0.35 $ 0.20
======== ======== ======== ========
Net income $ 5,784 $ 2,851 $10,421 $ 5,217
Diluted weighted average common
shares:
Common shares outstanding 29,587 25,664 29,462 25,752
Dilutive effect of stock options 2,007 2,004 1,942 1,330
and warrants -------- -------- -------- --------
Total diluted weighted average 31,594 27,668 31,404 27,082
common shares -------- -------- -------- --------
Diluted earnings per common share $ 0.18 $ 0.10 $ 0.33 $ 0.19
======== ======== ======== ========
Three Months Ended Nine Months Ended
------------------ -----------------
March 26, March 28, March 26, March 28,
2000 1999* 2000 1999*
--------- --------- --------- ---------
(In thousands, except per share amounts)
Net income $ 9,155 $ 3,377 $19,575 $ 8,594
Weighted average common shares 32,169 27,266 30,364 26,258
--------- --------- --------- ---------
Basic earnings per common share $ 0.28 $0.12 $0.64 $0.33
========= ========= ========= =========
Net income $ 9,155 $ 3,377 $19,575 $ 8,594
Diluted weighted average common shares:
Common shares outstanding 32,169 27,266 30,364 26,258
Dilutive effect of stock options and warrants 2,443 2,504 2,109 1,720
--------- --------- --------- ---------
Total diluted weighted average common shares 34,612 29,770 32,473 27,978
--------- --------- --------- ---------
Diluted earnings per common share $ 0.26 $0.11 $0.60 $0.31
========= ========= ========= =========
* Weighted average shares and per share amounts have been adjusted for the two
for one stock split effective July 26, 1999.
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these shares were not included in calculating diluted income per share. As of
DecemberMarch 26, 19992000 and December 27, 1998,March 28, 1999, there were no potential shares considered to
be antidilutive.
-10-
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.
SUBSEQUENT EVENT-11-
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$266.7 million after deducting
underwriting discounts and commissions and estimated offering costs. The net
proceeds will be used primarily for manufacturing facility expansion and
purchase of additional equipment, the acquisition of an additional facility,
research and development, and general corporate purposes.
Subsequent Events
- -----------------
On April 11, 2000, the Company announced it had signed a definitive agreement to
acquire privately held Nitres, Inc. ("Nitres"), a company engaged in research
and development of nitride-based semiconductor devices with offices in Goleta
and West Lake Village, California. Under the terms of the agreement, the Company
will acquire all of the outstanding and vested shares of Nitres stock in
exchange for approximately 1.5 million shares of the Company's common stock in a
pooling of interests transaction. In connection with the transaction, the
Company will issue approximately 350,000 unvested common shares in exchange for
unvested Nitres shares and assume all outstanding Nitres stock options and
warrants which will be exercisable for approximately 150,000 shares of the
Company's common stock. As a result of the acquisition, Nitres will become a
wholly-owned subsidiary of the Company called "Cree Lighting Company." The
transaction is expected to be completed by the end of May 2000 subject to
satisfaction of customary closing conditions. As a result of the transaction,
the Company expects to take a one-time charge of approximately $3.5 million for
the quarter ended June 25, 2000 for fees and other costs relating to the
acquisition.
On April 13, 2000, the Company purchased 250,000 shares of common stock of MVIS
in a private equity transaction at $50.00 per share, or $12.5 million. MVIS has
filed a registration statement to register the shares. Cree will account for its
investment in MVIS under FAS 115 as an "available for sale" security.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934. These statements
represent our judgment concerning the future and are subject to risks and
uncertainties that could cause our actual operating results and financial
position to differ materially. Forward looking statements are typically
identified by the use of such terms as "may," "will," "anticipate," "believe,"
"plan," "estimate," "expect," and "intend" and similar words, although some
forward looking statements are expressed differently. Our actual operating
results could differ materially from those contained in the forward looking
statements due to a number of factors, including the risk our customers may fail
to honor
-12-
contractual purchase commitments, fluctuations in our operating results,
production yields in our manufacturing processes, whether we can produce
sufficient quantities ofto meet delivery requirements, the risk that demand for
our high brightness blue and green LEDsLED products may be less than we expect, the risk of price
reductions or other actions by competitors that may impair sales, uncertainty
whether we can continue to meet demand,margin goals, risk of manufacturing delays or
increased costs due to variability in the complex processes used to manufacture
our products, risk of unanticipated facility or equipment outages, our
dependence on a few customers, whether new customers will emerge, whether we can
develop, introduce and create market demand for new products, the ability to
complete the Nitres acquisition and integrate it with Cree's current operations,
the ability to continue Nitres' research and development successfully and
commercialize products on a timely and cost effective basis, the actual costs of
combining the businesses, whether we can manage our growth effectively,
assertion of intellectual property rights by others or loss of pending patent
litigation and the risk of adverse economic conditions. See Exhibit 99.1 for
additional factors that could cause our actual results to differ.
-11-
OVERVIEWOverview
- --------
Cree, Inc. is the world leader in developing and manufacturing semiconductor
materials and electronic devices made from silicon carbide ("SiC"). We recognize
product revenue at the time of shipment or in accordance with the terms of the
relevant contract. We derive the largest portion of our revenue from the sale of
blue and green LED products. We offer LEDs at two brightness levels: high
brightness blue and green products and standard brightness blue products. Our
LED devices are utilized by end users for automotive dashboard backlighting,
liquid crystal display ("LCD") backlighting, including wireless handsets and
other consumer products, indicator lamps, miniature white lights, indoor sign
and arena displays, outdoor full color stadium displays, traffic signals and other
lighting applications.
LED products represented 57% of our revenue for the
first six months of fiscal 2000 and represented 48% of our revenue in the first
six months of fiscal 1999.
During the first sixnine months of fiscal 2000, revenues derived from sales of high
brightness LEDs were greater than 60%70% of the total LED sales mix. Historically,
we have experienced low margins with many new product introductions, including
the high brightness products. We have continued to make improvements to output
and yield since the high brightness products were introduced in fiscal 1999.
During the first sixnine months of fiscal 2000, we madecontinued to make progress
towards our fiscal 2000 goal of a 50% cost reduction for high brightness LED
products through a 36%44% reduction in unit costs from the fourth quarter of fiscalJune 1999. During the remainderfourth
quarter of fiscal 2000, we plan to continue our focus on reducing unit costs
through higher production yields and increased volume.
We derive revenue from the sale of SiC wafers that are used for device
production and research and development. In addition, we sell SiC crystals to
C3, Inc., or "C3" which uses them in gemstone applications. Sales of advanced materials made
from SiC represented approximately 35% of our revenue for the first six months
of fiscal 2000 and approximately 41% during the first six months of fiscal 1999.
During late fiscal 1998, fiscal 1999 and early fiscal 2000, C3 purchased crystal
growth equipment we constructed but retain to use in manufacturing material for
C3; this equipment has more than doubled our capacity allocated to the
production of crystals for C3. In the fall of 1999,
C3 announced lower sales and higher inventory levels than anticipated. C3 also
launched a new marketing campaign for its gemstone products. Recently,In the second
quarter of fiscal 2000, we agreed that C3 could reschedule approximately
one-half of its purchase commitments from the first half of calendar 2000 to the
second half of the year. As a result, sales to C3 declined 34% during the third
quarter of fiscal 2000. We anticipate that overall sales to C3 will decrease in calendar 2000 and we may use manufacturing capacity that
becomes available due to a reduction in sales to C3 for our other product
applications. We anticipate that product revenue from C3 will decrease to
less than 10% of our revenue for the fourth quarter of fiscal 2000, and will
continue to decline as a percentage of revenue through the first half of fiscal
2001.
-13-
The balance of our revenue 8% for the first six months of fiscal 2000 and 11%
for fiscal 1999, is derived from government contract funding. Under
various programs, U.S. Government entities support the development of our
technology by supplementing our research and development funding. We retain
ownership of patent rights on technology developed under such contracts, 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.
-12-
In June 1999, we announced the introduction of the first of a family of RF and
microwave transistor products made from SiC. These products are designed for use
in a variety of power amplification applications. A second phase of transistor
products is expected to be available in fiscalcalendar 2000. We expect that these
products will be marketed to a variety of amplifier producers for a number of
uses, including wireless base station and digital broadcast applications. While
distribution of these products on a sample basis commenced in early fiscal 2000,
we believe that these products will be sold in limited quantities as evaluation
kits during fiscal 2000 since design cycles for the target applications
generally exceed six months. There can be no assurance that customers will
develop applications requiring commercially significant volumes of our RF
products or that such products will be successful in the market.
In September 1996, we entered into an agreement with Siemens under which Siemens
agreed to purchase a fixed quantity of our blue LED chips. In December 1998,
this agreement was amended to provide for additional shipments of LED products
through September 1999. This contract was assigned to Osram, an indirect
subsidiary of Siemens, effective January 1, 1999. Siemens (including its Osram
subsidiary) accounted for 40% of our revenue for fiscal 1998 and 37% of our
revenue in fiscal 1999.
In August 1999, we entered
into a new purchase agreement with Osram pursuant to which Osram agreed to
purchase, and we are obligated to ship, stipulated quantities of both standard
brightness and high brightness LED chips, as well as SiC wafers, through
September 2000. This contract gives Osram limited rights to defer shipments. It
also provides for recovery of liquidated damages, and actual damages in some
instances, if we materially default in meeting shipment schedules. The contract
provides for higher unit prices early in the contract term, with unit price
reductions becoming available as the cumulative volume of products shipped
increases.
RESULTS OF OPERATIONSResults of Operations
- ---------------------
Three Months Ended DecemberMarch 26, 19992000 and December 27, 1998March 28, 1999
Revenue. Revenue increased 71%77% from $14.0$16.0 million in the secondthird quarter of fiscal
1999 to $23.9$28.4 million in the secondthird quarter of fiscal 2000. This increase was
attributable to an increase in product revenue of 73%86% from $12.8$14.1 million in the
secondthird quarter of fiscal 1999 to $22.1$26.2 million in the secondthird quarter of fiscal
2000. This rise in product revenue was a result of the 105%149% increase in sales of
our LED products in the secondthird quarter of fiscal 2000 compared to the secondthird
quarter of fiscal 1999. Growth in LED volume wasgrew 74% during the same period compared to
the prior year due to a significant increase in demand for high brightness blue
and green LED products. These high brightness products which represented over 50%80% of
total LED shipmentssales for the secondthird quarter of fiscal 2000.
-14-
As a result of the increasing mix of high brightness products, average LED sales
prices have increased 25%44% in the secondthird quarter of fiscal 2000 compared to the
secondthird quarter of fiscal 1999.
Revenue attributable to sales of SiC materials was 37%4% higher in the secondthird
quarter of fiscal 2000 than in the same period of fiscal 1999 due to a
significant increase in sales to C3 for gemstone applications. During1999. In the fourthsecond
quarter of fiscal 1999 and the first quarter of fiscal 2000, C3 purchased
additional equipment from us to increase our capacity to manufacture gemstone
products for them by more than 50%. Recently, we agreed to spread shipments of gemstone products for
the remainder of fiscal 2000 over the next twelve months.
We believe that thesemonths, which resulted in
lower revenue from C3 sequentially, but slightly higher amounts over the prior
year. The reduced orders for the second half of fiscal 2000 can befrom C3 have been offset with additional LED revenue.revenue in
the third quarter of fiscal 2000, and we believe that additional LED revenue in
the fourth quarter of fiscal 2000 will again offset these reduced orders.
Contract revenue received from U.S.the U.S Government agencies increased 45%11% during the secondthird
quarter of fiscal 2000 compared to the secondthird quarter of fiscal 1999 due to
additional awards received in late fiscal 1999 and in the first quarter of
fiscal 2000.
-13-
Gross Profit. Gross margin was 53%56% of revenue during the secondthird quarter of fiscal
2000 as compared to 47%48% during the secondthird quarter of fiscal 1999. This increase
is due primarily to the increases in LED sales volumes and average sales price
per chip for LEDs discussed above. In addition, higher throughput and
manufacturing yield on high brightness LEDs and materials products have resulted
in lower unit costs. Wafer costs for SiC material sales also declined 44% induring the
secondthird quarter of fiscal 2000 compared to the secondthird quarter of fiscal 1999. Over
the next few quarters, we target gross margin to decline slightly from levels
attained in the third quarter of fiscal 2000, due to the initial integration of
our three-inch wafer into device manufacturing.
Research and Development. Research and development expenses increased 71%48% in the
secondthird quarter of fiscal 2000 to $1.9$2.2 million from $1.1$1.5 million in the secondthird
quarter of fiscal 1999. Much of this increase was caused by greater investments
for research in the RF and microwave and optoelectronics programs. In addition,
spending under the MVIS contract was higher than funding received. We anticipate
that internalOn March 17,
2000, the Company agreed to an amendment of its original agreement with MVIS,
signed in May 1999. Under the terms of the amended agreement, MVIS will commit
$10.0 million in funding over a two-year period for the continued development of
new products will continueedge-emitting LEDs and laser devices. As development costs are incurred under
this contract, funding from MVIS is offset against these expenses. This amended
development agreement became effective on April 13, 2000. We expect internal
research and development expenses to grow in future periods, while we believe that government funding for our development
projects will remain constant.periods.
Sales, General and Administrative. Sales, general and administrative expenses
increased 82%81% in the secondthird quarter of fiscal 2000 to $2.6$2.8 million from $1.5$1.6
million in the secondthird quarter of fiscal 1999, due to greater spending to support
the overall growth of the business. We anticipate that total sales, general and
administrative costsexpenses will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue they will remain
relatively constant.
Other (Income) Expense. Other (income) expense has decreased 103%increased 117% to ($8,000)$673,000
during the secondthird quarter of fiscal 2000 from $298,000$311,000 for the secondthird quarter of
fiscal 1999. During the third quarter of fiscal 2000, we recorded $1.2 million
in write-down charges for the retirement of manufacturing equipment and other
building improvements. This loss was offset by gains realized on the sale of
trading securities bought and sold during the quarter. In the secondthird quarter
-15-
of fiscal 1999, we realized impairments to leasehold costs as a result of
management's decision to move equipment from our leased facility to our new
manufacturing site.
This was offset somewhat by
investment income recognized on stock held in C3.
Interest Income, Net. Interest income, net has increased to $570,000$3.8 million in the
secondthird quarter of fiscal 2000 from $20,000$347,000 in the secondthird quarter of fiscal 1999
due to a higher available cash balance as a resultfollowing the completion of theour public
stock offering in February 1999. InterestJanuary 2000. Higher interest rates were also higher in fiscal 2000.2000 also
contributed to increased interest income. A portion of the proceeds from the
February 1999 public stock offering was used to repay the $10.0 million term
loan from NationsBank in the third quarter of fiscal 1999; therefore, no
interest expense was incurred in the secondthird quarter of fiscal 2000. Interest
expense incurred with the term loan was capitalized as a part of the
construction improvements made to the facility in fiscal 1999. However, the
majority of the interest incurred in the secondthird quarter of fiscal 1999 was
expensed.
Income Tax Expense. Income tax expense for the secondthird quarter of fiscal 2000 was
$3.0$4.7 million compared to $900,000$1.3 million in the secondthird quarter of fiscal 1999. This
increase resulted from higher profitability during the secondthird quarter of fiscal
2000 over the same period in fiscal 1999 and a higher effective tax rate. Our
tax rate during the secondthird quarter of fiscal 2000 was 34% compared to 24%28% in the
secondthird quarter of fiscal 1999, due to a reduction in the reserve for deferred tax
assets.
-14-
SixNine Months Ended DecemberMarch 26, 19992000 and December 27, 1998March 28, 1999
Revenue. Revenue increased 67%71% from $26.3$42.4 million in the first sixnine months of
fiscal 1999 to $44.0$72.3 million in the first sixnine months of fiscal 2000. This
increase resulted from an increase in product revenue of 72%77% from $23.5$37.6 million
in the first sixnine months of fiscal 1999 to $40.4$66.6 million in the first six months
of fiscal 2000. This rise in product revenue was largely a result of the 99%118%
increase in sales of our LED products in the first sixnine months of fiscal 2000
compared to the first sixnine months of fiscal 1999. Our high brightness LED
products experienced the heaviest demand. While our LED chip sales volume has
grown 88%82% in the first sixnine months of fiscal 2000 over units shipped in the
first sixnine months of fiscal 1999, our average sales prices for LEDs have also
increased 6%35% in the first sixnine months of fiscal 2000 over the same period in
the prior year. The greater average sales price reflects a significant shift in
mix to the higher priced high brightness LED products. For the first sixnine months
of fiscal 2000, more than 60%70% of LED sales were attributable to high brightness
products. For the first sixnine months of fiscal 1999, less than 15%approximately 10% of LED
sales were from high brightness products.
Revenue attributable to sales of SiC material was 41%28% higher in the first sixnine
months of fiscal 2000 than in the same period of fiscal 1999 due to a
significant increase in sales to C3 for gemstone applications. During the fourth
quarter of fiscal 1999 and the first quarter of fiscal 2000, C3 purchased
additional equipment from us to increase our capacity to manufacture gemstone
products for them by more than 50%. Recently,them. In the second quarter of fiscal 2000, we agreed to spread
shipments of gemstone products for the remainder of fiscal 2000 over the next
twelve months. We believe that theseThese reduced orders for the second half of fiscal 2000 can befrom C3 have been offset with additional LED
revenue.revenue in the third quarter of fiscal 2000, and we believe that additional LED
revenue in the fourth quarter of fiscal 2000 will again offset these reduced
orders. Contract revenue received from U.S. Government agencies increased 28%21%
during the first sixnine months of fiscal 2000 compared to the first sixnine months of
-16-
fiscal 1999 due to new contracts that have been awarded to us duringthe Company in late
fiscal 1999 and in the first quarter of fiscal 2000.
Gross Profit. Gross profit increased 80%90% from $12.3$20.0 million in the first sixnine
months of fiscal 1999 to $22.1$38.0 million in the first sixnine months of fiscal 2000.
This increase is due primarily to the increases in LED sales volumes and average
sales price per chip for LEDs discussed above. During the first sixnine months of
fiscal 2000, the average cost ofto manufacture high brightness LEDs has been
reduced 36%44%. Margins on wafer and gemstone products have also improved during
the first sixnine months of fiscal 2000 as higher quality materials are being
produced with greater yields.
Research and Development. Research and development expenses increased 48% in the
first sixnine months of fiscal 2000 to $2.8$5.1 million from $1.9$3.4 million in the first
sixnine months of fiscal 1999. Much of this increase was caused by a greater
investment made for research in the RF and microwave and optoelectronics
programs. We anticipate that internalIn addition, spending under the MVIS contract was higher than funding
forreceived. As development of new products
will continue to grow in future periods, while we believe that governmentcosts are incurred under this contract, funding for our development activities will remain constant.
-15-
from
MVIS is offset against these expenses.
Sales, General and Administrative. Sales, general and administrative expenses
increased 71%74% in the first sixnine months of fiscal 2000 to $4.6$7.4 million from $2.7$4.2
million in the first sixnine months of fiscal 1999, due to greater spending to
support the overall growth of the business.
We anticipate that total sales,
general and administrative costs will continue to increase in connection with
the growth of the business; however, we believe that as a percentage of revenue
they will remain constant.
Other (Income) Expense. Other (income) expense decreased 84%11% to $92,000$767,000 during
the first sixnine months of fiscal 2000 from $567,000$878,000 for the first sixnine months of
fiscal 1999. During the third quarter of fiscal 2000, we recorded $1.2 million
in write-down charges for the retirement of manufacturing equipment and other
building improvements. This loss was offset by gains realized on the sale of
trading securities bought and sold during the quarter. In the first sixnine months
of fiscal 1999, we realized impairments to leasehold costs as a result of
management's decision to move equipment from our leased facility to our new
manufacturing site. This was offset somewhat by investment income recognized on
stock held in C3.
Interest Income, Net. Interest income, net increased 746%920% to $1.1$4.9 million in the
first sixnine months of fiscal 2000 from $135,000$482,000 in the first sixnine months of
fiscal 1999 due to a higher available cash balance as a resultfollowing the completion of
our public stock offerings in January 2000 and February 1999. Higher interest
rates in fiscal 2000 also contributed to increased interest income. A portion of
the proceeds from the February 1999 public stock offering in February 1999. Interest rates were also higher in fiscal 2000. In
addition, in November 1997, we obtained awas used to repay the
$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 six monthsthird quarter of fiscal 1999 was expensed.1999.
Income Tax Expense. Income tax expense for the first sixnine months of fiscal 2000
was $5.4$10.1 million compared to $2.0$3.3 million in the first sixnine months of fiscal
1999. This increase resulted from higher profitability during the first sixnine
months of fiscal 2000 over the first sixnine months of fiscal 1999 and a higher
effective tax rate. Our tax rate during the first sixnine months of fiscal 2000 was
34% compared to 28% in the first sixnine months of fiscal 1999 due to a reduction in
the reserve for deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES1999.
-17-
Liquidity and Capital Resources
- -------------------------------
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. As of DecemberMarch 26, 1999,2000, we had
working capital of $53.7$239.0 million, including $38.2$231.0 million in cash and
cash
equivalents.short-term investments. Not included in working capital is an additional $78.0
million in high-grade marketable securities included as a long-term investment.
Operating activities generated $16.7$27.9 million for the first sixnine months of fiscal
2000 compared with $4.2$11.4 million generated during the comparative period in
fiscal 1999. This increase was primarily attributable to higher profitability and was supplemented by timing differences and the net
increase in accrued expenses due mostly to a higher income tax provision.profitability.
We invested $22.9$47.1 million in capital expenditures during the first sixnine months
of fiscal 2000 compared to $10.4$24.8 million during the same period in the prior
fiscal year. The majority of the increase in spending was due to new facilities
and equipment additions to increase manufacturing capacity in our crystal
growth, epitaxy, and epitaxypackage and test areas. Also,In the second quarter of fiscal
2000, we recently completed a 42,000 square foot facility expansion at our production
site near Research Triangle Park, North Carolina. -16-
Also, during the third quarter
of fiscal 2000, we purchased a 120,000 square foot facility on 17.5 acres of
land adjacent to the existing production site that will support administration
and portions of research and development. The cost to acquire this facility was
$8.1 million.
We are currently engaged in construction activities relating to a 125,000250,000 square
foot expansion of our epitaxialmain facility to provide added capacity for our LED and
clean room fabrication facilities. We also
intend to expand our facilitymaterials and future product lines. Phases of this project will be finished
beginning in December 2000, with the balance targeted for RF and microwave test and packaging areas in
calendar 2000. We believe these additions will allow us to dramatically increase
capacity at our facility for LED, RF and microwave and power products.completion within 18
months. We anticipate total costs for these facilities to be between $25.0$40.0
million and $30.0$50.0 million. Estimates for equipment costs relating to this
expansion total between $25.0$30.0 million and $30.0 million. We also recently committed to purchase
a 120,000 square foot facility under construction on 17.5 acres of land near our
present facility. We plan to use this facility for sales, general and
administrative and research and development personnel, as well as for general
employee services functions. The cost to acquire this facility (not including
the upfit costs for completing the shell building) is $8.1$40.0 million. We plan to fund all of thesethis
expansion activities with the net proceeds of the January 2000 stock offering.
Althoughoffering and cash from
operations.
From time to time we evaluate potential acquisitions of and investments in
complementary businesses and anticipate continuing to make such evaluations,evaluations.
Except for the acquisition of Nitres, which is anticipated to be completed by
the end of May 2000, we have no present commitments or agreements with respect
to the potential acquisition of or investment in another business.
Cash provided by financing activities during the first sixnine months of fiscal
2000 reflected the receipt of $2.2$266.7 million in net proceeds from the January
2000 stock offering and $2.9 million in proceeds from the exercise of stock
options from our employee stock option plan.
At September 27, 1998, we had a loan outstanding for $10.0 million from a
commercial bank to finance portions of the upfit of the production facility. The
final draw to this loan was made during the first quarter of fiscal 1999 for
$1.3 million. The loan was subsequently paid off in the third quarter of fiscal
1999. We also committed $3.2 million during the first quarter of fiscal 1999 to
repurchase common stock.
We anticipate that internally generated cash plus the proceeds of the January
2000 stock offering will be sufficient to fund our capital requirements for the
next 12 months.
IMPACT OF THE YEAR-18-
Impact of the Year 2000
- -----------------------
Even though the date is now past January 1, 2000 and we have not experienced any
immediate adverse impact from the transition to the Year 2000, we cannot provide
assurance that our suppliers and customers have not been affected in a manner
that is not yet apparent. In addition, certain computer programs which were date
sensitive to the Year 2000 may not process the Year 2000 as a leap year, and any
negative consequential effects remain unknown. As a result, we will continue to monitor our Year 2000
compliance and the Year 2000 compliance of our suppliers and customers.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the third quarter of fiscal 2000, the Company invested some of the
proceeds from the public offering into high-grade corporate debt, commercial
paper, government securities and other investments at interest rates that vary
by security. No other material changes in market risk have been identified
during the most recent quarter.
-17--19-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
InThe Company's report on Form 10-Q for the period ended December 26, 1999
the Company intervened as a party todescribes a lawsuit pending in Tokyo District Court brought by Nichia
Corporation against Sumitomo Corporation, one of the Company's distributors in
Japan. Nichia'sAs previously reported, the complaint against Sumitomo,
filed December 1, 1999, allegedin this proceeding is directed to
the Company's standard brightness LED products and alleges that certain blue LEDs sold by Sumitomothe products
infringe a Japanese patent owned by Nichia. The allegation pertained to the Company's
standard brightness LED products purchased by Sumitomo. The complaint
principally sought provisional relief in the nature ofsuit seeks a preliminarypermanent
injunction prohibiting Sumitomo from makingagainst further salesdistribution of the productproducts in Japan. The Company
as an intervenor,has intervened in the proceeding and filed a response that denied any infringement with
respect to its products.denying the allegations of
infringement. Nichia thereafter voluntarily dismissed the first
complaint butsubsequently commenced a second actionadditional proceedings against
Sumitomo in Tokyo District Court seekingin which it alleges that the Company's high
brightness LED products infringe a second Japanese patent owned by Nichia. The
new proceedings, filed April 10, 2000 and served on Sumitomo thereafter, seek
preliminary and permanent injunction based oninjunctions prohibiting Sumitomo from further sales of
the same patent. The complaintproducts in the
second suit was filed December 24, 1999.Japan. The Company has intervened in the second suitnew preliminary
injunction proceeding and filed a response denying any infringement.intends to seek intervention in the related case. No
monetary damages for infringement have been sought in either action. The Companyany of the lawsuits
brought by Nichia against Sumitomo. Management believes that the infringement
claim isclaims are without merit and that the lawsuits are motivated by competitive
factors. The Company intends to vigorously defend its products against the claim.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on November 2, 1999. The
following proposals were introduced and voted upon:
PROPOSAL NO. 1 -- Election of Directors
Votes Votes
Name For Withheld
------------------------ ----------------- ---------------
F. Neal Hunter 26,381,618 281,803
Calvin H. Carter, Jr. 26,381,694 281,727
John W. Palmour 26,381,674 281,747
Walter L. Robb 26,375,554 287,867
Michael W. Haley 26,380,804 282,617
Dolph W. von Arx 26,084,724 578,697
James E. Dykes 26,381,054 282,367
PROPOSAL NO. 2 - Approval of amendment to Articles of Incorporation to change
name to Cree, Inc.
FOR 26,571,069
AGAINST 74,077
ABSTAINED 18,275
BROKER NON-VOTES 0
PROPOSAL NO. 3 - Approve amendments to the Equity Compensation Plan
FOR 16,319,065
AGAINST 1,497,423
ABSTAINED 83,599
BROKER NON-VOTES 8,763,334
-18-
PROPOSAL NO. 4 - Approval of adoption of 1999 Employee Stock Purchase Plan
FOR 17,153,415
AGAINST 504,881
ABSTAINED 59,635
BROKER NON-VOTES 8,945,490
PROPOSAL NO. 5 - Ratification of the selection of Ernst & Young LLP as auditors
for the fiscal year ending June 25, 2000
FOR 26,628,967
AGAINST 14,476
ABSTAINED 19,978
BROKER NON-VOTES 0
The matters listed above are described in detail in the Company's definitive
proxy statement dated September 30, 1999, for the Annual Meeting of Shareholders
held on November 2, 1999.these
claims.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
99.1 Certain Business Risks and UncertaintiesRisk Factors
(b) Reports on Form 8-K:
No reportsThe Company filed a report on Form 8-K were filed byon January 3, 2000
regarding its financial results for the Company during the quarterperiod ended December 26,
1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREE, INC.
Date: January 31,April 25, 2000 By: /s/ Cynthia B. Merrell
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Cynthia B. Merrell
Chief Financial Officer and Treasurer
(Authorized Officer and Chief Financial
and Accounting Officer)
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EXHIBIT INDEX
Exhibit No.
Description
- ----------- ----------------------------------------27.1 Financial Data Schedule
99.1 Certain Business Risks and Uncertainties
-21-Risk Factors
-22-