1

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington,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 SeptemberDecember 24, 2000


                         Commission file number: 0-21154


                                   CREE, INC.
             (Exact name of registrant as specified in its charter)


             North CarolinaNORTH CAROLINA                                56-1572719
     (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                    Identification No.)


          4600 Silicon Drive
        Durham, North CarolinaSILICON 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,  $0.0025common stock, par value
$0.00125 per share, as of October 17, 2000January 23, 2001 was 35,708,296.74,253,849.

   2

                                   CREE, INC.
                                    FORM 10-Q

                     For the Quarter Ended SeptemberDecember 24, 2000


                                      INDEX


                                                                        Page No.
                                                                        --------
PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

           Consolidated Balance Sheets at SeptemberDecember 24, 2000
           (unaudited) and June 25, 2000                                       3

           Consolidated Statements of Income for the three and
           six months ended SeptemberDecember 24, 2000 and SeptemberDecember 26,
           1999 (unaudited)                                                    4

           Consolidated Statements of Cash FlowsFlow for the threesix
           months ended SeptemberDecember 24, 2000 and SeptemberDecember 26, 1999
           (unaudited)                                                         5

           Notes to Consolidated Financial Statements
           (unaudited)                                                         6

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                          1213

Item 3.    Quantitative and Qualitative Disclosures ofAbout Market Risk         1619


PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings                                                  1719

Item 2.  Changes in Securities                                             174.    Submission of Matters to a Vote of Security Holders                20

Item 6.    Exhibits and Reports on Form 8-K                                   1721

SIGNATURES                                                                    1822

                                        2

   3

PART I - FINANCIAL INFORMATION
Item 1.  Financial StatementsITEM 1 - FINANCIAL STATEMENTS

                                   CREE, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands)

                                                September 24,          June 25,
                                                    2000                 2000
                                                -------------         ----------
                                                             (Unaudited)
ASSETS
Current assets:
       Cash and cash equivalents                  $  34,123           $ 103,843
       Short-term investments held to maturity      206,094             142,461
       Marketable securities                         16,215              15,842
       Accounts receivable, net                      19,992              12,406
       Interest receivable                            5,826               3,893
       Inventories                                   10,564               9,320
       Deferred income taxes                            139                  --
       Prepaid expenses and other current assets      3,741               1,254
                                                 -----------          ----------
              Total current assets                  296,694             289,019

       Property and equipment, net                  157,615             137,118
       Long-term investments held to maturity         9,936              41,965
       Deferred income taxes                         10,624              10,624
       Patent and license rights, net                 2,373               2,324
       Other assets                                  25,721               5,152
                                                 -----------          ----------
              Total assets                        $ 502,963           $ 486,202
                                                 ===========          ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
       Accounts payable, trade                    $  11,705           $  14,204
       Accrued salaries and wages                     4,429               3,133
       Other accrued expenses                        10,142               5,725
                                                 -----------          ----------
              Total current liabilities              26,276              23,062
Long term liabilities:
       Long term liability                              400                  --
                                                 -----------          ----------
              Total long term liabilities               400                  --

Shareholders' equity:
       Preferred stock, par value $0.01;                 --                  --
         3,000 shares authorized at September 24,
         2000 and June 25, 2000; none issued
         and outstanding
       Common stock, par value $0.0025;                  88                  88
         60,000 shares authorized at September 24,
         2000 and June 25, 2000; shares issued and
         outstanding 35,517 and 35,348 at September
         24, 2000 and June 25, 2000, respectively
       Additional paid-in-capital                   417,357             415,716
       Deferred compensation expense                 (1,604)             (1,755)
       Retained earnings                             60,811              48,156
       Accumulated other comprehensive                (365)                 935
         income (loss), net of tax
                                                 -----------          ----------
         Total shareholders' equity                 476,287             463,140
                                                 -----------          ----------
         Total liabilities and                    $ 502,963           $ 486,202
            shareholders' equity                 ===========          ==========

               The accompanying notes are an integral part of the
                       consolidated financial statements.thousands, except per share data)

December 24, June 25, 2000 2000 ----------------- --------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 59,496 $103,843 Short-term investments held to maturity 190,392 142,461 Marketable securities 7,832 15,842 Accounts receivable, net 22,708 12,406 Interest receivable 4,393 3,893 Inventories 13,335 9,320 Deferred income tax 139 -- Prepaid expenses and other current assets 1,541 1,254 ----------------- --------------- Total current assets 299,836 289,019 Property and equipment, net 185,393 137,118 Long-term investments held to maturity -- 41,965 Deferred income taxes 10,624 10,624 Patent and license rights, net 2,618 2,324 Other assets 26,821 5,152 ----------------- --------------- Total assets $525,292 $486,202 ================= =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 18,119 $ 14,204 Accrued salaries and wages 1,775 3,133 Deferred income tax 10,174 455 Other accrued expenses 5,950 5,270 ----------------- --------------- Total current liabilities 36,018 23,062 Long term liabilities: Long term liability 437 -- ----------------- --------------- Total long term liabilities 437 -- Shareholders' equity: Preferred stock, par value $0.01; 3,000 shares authorized at December -- -- 24, 2000 and June 25, 2000; none issued and outstanding Common stock, par value $0.00125; 200,000 and 120,000 shares authorized 89 88 at December 24, 2000 and June 25, 2000, respectively; shares issued and outstanding 71,577 and 70,696 at December 24, 2000 and June 25, 2000, respectively Additional paid-in-capital 421,568 415,716 Deferred compensation expense (1,476) (1,755) Retained earnings 74,671 48,156 Accumulated other comprehensive income (loss), net of tax (6,015) 935 ----------------- --------------- Total shareholders' equity 488,837 463,140 ----------------- --------------- Total liabilities and shareholders' equity $525,292 $486,202 ================= ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 4 CREE, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)data) (Unaudited) Three Months Ended ------------------------------------- September 24, September 26, 2000 1999 --------------- --------------- Revenue: Product revenue, net $ 34,311 $ 18,248 Contract revenue, net 3,331 2,613 --------------- --------------- Total revenue 37,642 20,861 Cost of revenue: Product revenue, net 14,489 9,496 Contract revenue, net 2,587 1,888 --------------- --------------- Total cost of revenue 17,076 11,384 Gross profit 20,566 9,477 Operating expenses: Research and development 2,101 931 Sales, general and administrative 3,957 2,056 Other expense -- 101 --------------- --------------- Income from operations 14,508 6,389 Other non-operating expense 88 -- Interest income, net 4,783 553 --------------- --------------- Income before income taxes 19,203 6,942 Income tax expense 6,548 2,388 --------------- --------------- Net income 12,655 4,554 =============== =============== Earnings per share: Basic $ 0.36 $ 0.15 =============== =============== Diluted $ 0.34 $ 0.14 =============== =============== Shares used in per share calculation: Basic 35,406 31,185 =============== =============== Diluted 37,630 33,163 =============== =============== The accompanying notes are an integral part of the consolidated financial statements.
Three Months Ended Six Months Ended --------------------------------------- ---------------------------------------- December 24, December 26, December 24, December 26, 2000 1999 2000 1999 ----------------- ------------------ ------------------ ------------------ Revenue: Product revenue, net $37,587 $22,137 $71,898 $40,385 Contract revenue, net 3,907 2,677 7,238 5,290 ----------------- ------------------ ------------------ ------------------ Total revenue 41,494 24,814 79,136 45,675 Cost of revenue: Product revenue 16,163 10,075 30,652 19,571 Contract revenue 3,257 2,012 5,844 3,900 ----------------- ------------------ ------------------ ------------------ Total cost of revenue 19,420 12,087 36,496 23,471 ----------------- ------------------ ------------------ ------------------ Gross profit 22,074 12,727 42,640 22,204 Operating expenses: Research and development 2,295 1,911 4,396 2,842 Sales, general and administrative 3,010 2,767 6,967 4,823 Other (income) expense 62 (8) 62 93 ----------------- ------------------ ------------------ ------------------ Income from operations 16,707 8,057 31,215 14,446 Other non operating income (loss) (11) -- (99) -- Interest income, net 4,322 573 9,105 1,126 ----------------- ------------------ ------------------ ------------------ Income before income taxes 21,018 8,630 40,221 15,572 Income tax expense 7,157 2,983 13,706 5,371 ----------------- ------------------ ------------------ ------------------ Net income $13,861 $ 5,647 $26,515 $10,201 ================= ================== ================== ================== Other comprehensive income, net of tax: Unrealized holding gain (loss) (5,532) 1,981 (6,950) (437) ----------------- ------------------ ------------------ ------------------ Comprehensive income $ 8,329 $ 7,628 $19,565 $ 9,764 ================= ================== ================== ================== Earnings per share: Basic $0.19 $0.09 $0.37 $0.16 ================= ================== ================== ================== Diluted $0.18 $0.08 $0.35 $0.15 ================= ================== ================== ================== Shares used in per share calculation: Basic 71,495 62,870 71,154 62,620 ================= ================== ================== ================== Diluted 75,200 67,084 75,230 66,705 ================= ================== ================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 5 CREE, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) Three Months Ended -------------------------------- September 24, September 26, 2000 1999 --------------- --------------- Operating activities: Net income $ 12,655 $ 4,554 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,128 2,076 Loss on disposal of property and equipment -- 43 Amortization of patent rights 15 32 Purchase of marketable trading securities (5,028) -- Proceeds from sale of marketable securities 5,837 -- Gain on marketable trading securities (1,182) -- Deferred income taxes 1,479 (118) Tax benefits associated with stock options 4,500 2,520 Amortization of deferred compensation 151 68 Changes in operating assets and liabilities: Accounts and interest receivable (9,519) (1,083) Inventories (1,244) (74) Prepaid expenses and other assets (2,626) (11) Accounts payable, trade (2,499) (1,484) Accrued expenses (1,166) 1,593 --------------- --------------- Net cash provided by operating activities 5,501 8,116 --------------- --------------- Investing activities: Purchase of property and equipment (24,626) (9,773) Purchase of securities held to maturity (50,613) -- Proceeds from securities held to maturity 19,010 -- Purchase of patent rights (64) (98) Increase in other long-term assets (20,569) (171) --------------- --------------- Net cash used in investing activities (76,862) (10,042) --------------- --------------- Financing activities: Net repayments of long term debt -- (48) Net proceeds from issuance of common stock 1,641 1,072 --------------- --------------- Net cash provided by financing activities 1,641 1,024 --------------- --------------- Net decrease in cash and cash equivalents $ (69,720) $ (902) Cash and cash equivalents: Beginning of period $ 103,843 $ 42,545 --------------- --------------- End of period $ 34,123 $ 41,643 =============== =============== Supplemental disclosure of cash flow information: Cash paid for income taxes -- $ 63 The accompanying notes are an integral part of the consolidated financial statements.
Six Months Ended ------------------------------------------- December 24, December 26, 2000 1999 --------------------- ----------------- Operating activities: (Unaudited) Net income $ 26,515 $ 10,201 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,050 4,588 Loss on disposal of property, equipment and patents 62 44 Amortization of patent rights 87 70 Issuance and amortization of deferred compensation 279 (101) Deferred income taxes 13,161 -- Loss (gain) on available for sale securities (1,182) -- Changes in operating assets and liabilities: Accounts receivable (10,802) (2,152) Inventories (4,015) (632) Prepaid expenses and other assets (287) (35) Accounts payable , trade 3,915 (1,354) Accrued expenses and long-term liability (243) 5,847 --------------------- ----------------- Net cash provided by operating activities 36,540 16,476 --------------------- ----------------- Investing activities: Purchase of available for sale securities (7,176) -- Proceeds from sale of available for sale securities 5,837 -- Purchase of property and equipment (57,388) (23,042) Purchase of securities held to maturity (56,606) -- Proceeds from securities held to maturity 50,640 -- Increase in other long-term assets (21,670) -- Purchase of patent rights (381) (304) --------------------- ----------------- Net cash used in investing activities (86,744) (23,346) --------------------- ----------------- Financing activities: Acquisition fees for purchase accounting transaction (674) -- Net proceeds from the issuance of short-term debt -- 200 Net proceeds from issuance of common stock 6,531 2,459 --------------------- ----------------- Net cash provided by financing activities 5,857 2,659 --------------------- ----------------- Net decrease in cash and cash equivalents (44,347) (4,211) Cash and cash equivalents: Beginning of period 103,843 42,545 ===================== ================= End of period $ 59,496 $ 38,334 ===================== ================= Supplemental disclosure of cash flow information: Cash paid for interest, net amounts capitalized $ 0 $ 0 ===================== ================= Cash paid for income taxes $ 414 $ 268 ===================== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 5 6 CREE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation(UNAUDITED) BASIS OF PRESENTATION The consolidated balance sheet as of SeptemberDecember 24, 2000, the consolidated statements of operationsincome for the three month periodsand six months ended SeptemberDecember 24, 2000 and SeptemberDecember 26, 1999, and the consolidated statements of cash flowsflow for the threesix months ended SeptemberDecember 24, 2000 and SeptemberDecember 26, 1999 have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position, results of operations and cash flowsflow at SeptemberDecember 24, 2000, and all for periods presented have been made. The balance sheet at June 25, 2000 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 2000 Form 10-K. The results of operations for the period ended SeptemberDecember 24, 2000 are not necessarily indicative of the operating results that may be attained for the entire fiscal year. Accounting PoliciesACCOUNTING POLICIES 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 1,847,7463,695,492 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 152,223304,446 options and warrants to purchase shares of Cree's common stock. 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. Principles of Consolidation The consolidated financial statements include the accounts of Cree, Inc., and its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Cree Research FSC, Inc., Cree Funding LLC, Cree Employee Services Corporation and 6 Cree Technologies, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. 6 7 Reclassifications Certain 2000 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2001 presentation. These reclassifications had no effect on previously reported net income or shareholders'shareholder's 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. Accordingly, all quarterly reporting reflects a 13 week13-week period in fiscal 2001 and fiscal 2000. The Company's current fiscal year extends from June 26, 2000 through June 24, 2001. Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three months or less when purchased. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term and long-term investments, available for sale securities, accounts and interest receivable, accounts payable, debt and other liabilities approximate fair value at SeptemberDecember 24, 2000 and June 25, 2000. 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-Held-to-Maturity -- Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. (b) Trading Securities-Securities -- Debt and equity securities that are bought and held principally for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. (c) Securities Available-for-Sale-Available-for-Sale -- Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains orand losses excluded from earnings and reported as a separate component of shareholders' equity. 7 As of SeptemberDecember 24, 2000, the Company's short-term investments held to maturity included $206.1$190.4 million consisting of $156.5$134.2 million in high-grade corporate bonds, $20.0$26.6 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.securities. The Companycompany 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 7 8 these securities until maturity; therefore, they are accounted for as "securities held-to-maturity"held-to maturity" under SFAS 115. The securities are reported on the balance sheet at amortized cost, as a short-term investment with unpaid interest included in interest receivable. As of September 24, 2000, the Company's long-term investments held to maturity consisted of $9.9 million in high-grade corporate bond holdings that mature after September 24, 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. At SeptemberDecember 24, 2000 and SeptemberDecember 26, 1999, the Company held a short-term equity investment in common stock 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 June 2000, 162,600162,500 MVIS shares were sold for $6.3 million, with a gain on sale recognized for $3.6 million.million realized from the sale. The Company has also purchased other securities for investment purposes. Management views these transactions as investments, and 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 in other comprehensive income or loss, net of tax. During the first quartersix months of fiscal 2001, the Company purchased and sold marketable trading securities that resulted in the Company recordingrealized a realized gain onof $1.2 million from the sale of stock of $1.2 million.available-for-sale securities. 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: 8 SeptemberDecember 24, June 25, 2000 2000 --------------- ------------ (in---------------------- -------------------- (In thousands) Raw materials $ 2,3392,850 $ 2,415 Work-in-process 3,396Work-in-progress 4,569 3,094 Finished goods 4,8295,916 3,811 --------------- ---------------------------------- -------------------- Total InventoriesInventory $ 10,56413,335 $ 9,320 =============== ================================== ==================== Research and Development Accounting Policy The U.S. Government provides funding through research contracts 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. government 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. 8 9 The revenue and expense classification for contract activities is based on the nature of the contract. For contracts where the Company anticipates that funding will exceed direct costs over the life of the contract, funding is reported as contract revenue and all direct costs are reported as costs of contract revenue. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses and related funding as an offset of those expenses. The following table details information about contracts for which direct expenses exceed funding by period as included in research and development expenses: Three months ended ---------------------------------- September 24, September 26, 2000 1999 --------------- -------------- (in thousands) Net research and development costs $ 136 $ 40 Government funding 347 67 --------------- -------------- Total direct costs incurred $ 483 $ 107 =============== ============== 9
Three Months Ended Six Months Ended ----------------------------------------- ------------------------------------------ December 24, December 26, December 24, December 26, 2000 1999 2000 1999 ----------------- ------------------- -------------------- ------------------ (In thousands) Net R&D costs $174 $ 134 $ 239 $ 174 Government funding 314 331 660 398 ----------------- ------------------- -------------------- ------------------ Total direct costs incurred $488 $ 465 $ 899 $ 572 ================= =================== ==================== ==================
Significant Sales Contract In July 2000, the Company entered into a new Purchase Agreement with Osram Opto Semiconductors GmbH & Co. ("Osram"), pursuant to which Osram agreed to purchase and the Company is obligated to ship certain quantities of both the standard brightness, and the high brightness and ultra-brightness LED chips and silicon carbide wafers through September 2001. The agreement calls for certain quantities of standard brightness, and high brightness and ultra-brightness LED chips to be delivered by month. In the event the Company is unable to ship at least 85% of the cumulative quantity due to have been shipped each month, Osram is entitled to liquidated damages. These damages ofare calculated at one percent per week of the purchase price of the delayed product, subject to a maximum of ten percent of the purchase price. If product shipments are delayed six weeks or more due to circumstances within the Company's control, then in lieu of liquidated damages, Osram may claim damages actually resulting from the delay up to forty percent of the purchase price of delayed products. 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 25% of standard brightness LEDs and high brightness and ultra-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 and ultra-brightness LEDs. In each case, Osram is required to accept all products within 90 days of the original shipment date. In all other cases, Osram may reschedule shipments only with the Company's mutual written agreement. 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 9 10 higher prices were negotiated by the Company to offset higher per unit costs expected earlier in the contract. 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 ShareEARNINGS PER SHARE The Company presents earnings per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" ("SFAS 128"). SFAS No. 128 required the Company to change its method of computing, presenting and disclosing earnings per share information. 10 The following computation reconciles the differences between the basic and diluted presentations: Three months ended ---------------------------------- September 24, September 26, 2000 1999 --------------- -------------- (in
Three Months Ended Six Months Ended ------------------ ---------------- December 24, December 26, December 24, December 26, 2000 1999* 2000 1999* --------------- ---------------- ---------------- ---------------- (In thousands, except per share amounts) Net income $ 13,861 $ 5,647 $26,515 $ 10,201 Weighted average common shares 71,495 62,870 71,154 62,620 --------------- ---------------- ---------------- ---------------- Basic earnings per common share $ 0.19 $0.09 $0.37 $0.16 =============== ================ ================ ================ Net income $13,861 $5,647 $ 26,515 $10,201 Diluted weighted average common shares: Common shares outstanding 71,495 62,870 71,154 62,620 Dilutive effect of stock options and warrants 3,705 4,214 4,076 4,085 --------------- ---------------- ---------------- ---------------- Total diluted weighted average common shares 75,200 67,084 75,230 66,705 --------------- ---------------- ---------------- ---------------- Diluted earnings per common share $0.18 $0.08 $0.35 $0.15 =============== ================ ================ ================
* Weighted average shares and per share data) Basic: Net income $ 12,655 $ 4,554 =============== ============== Weighted average common shares 35,406 31,185 =============== ============== Basic income per common share $ 0.36 $ 0.15 =============== ============== Diluted: Net income $ 12,655 $ 4,554 =============== ============== Weighted average common shares-basic 35,406 31,185 Dilutive effect ofamounts have been adjusted for the two for one stock options and warrants 2,224 1,978 --------------- -------------- Weighted average common shares-diluted 37,630 33,163 =============== ============== Diluted income per common share $ 0.34 $ 0.14 =============== ==============split effective December 1, 2000. 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. Accordingly, 765,000 and 476,0001,034,441 shares for the three and six months ended SeptemberDecember 24, 2000, and September 26, 1999, respectively, were not included in calculating diluted income per share for the periods presented. New Accounting PronouncementsFor the three and six months ended December 26, 1999, there were no potential shares considered antidilutive. 10 11 The Company effected a two-for-one split of its common stock in December 2000. The stock split was effected by an amendment to the Company's Articles of Incorporation that became effective at the close of business on December 1, 2000. Each issued and unissued authorized share of common stock, $0.0025 par value per share, was automatically split into two whole shares of common stock, $0.00125 par value per share. On December 8, 2000, the Company issued to each holder of record of common stock a certificate evidencing the additional shares of common stock resulting from the stock split. All references in this document to common stock and per common share data have been adjusted to reflect the common stock split, unless otherwise stated. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, The Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is required to be adopted in years beginning after June 15, 1999.. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In the first quartersix months of fiscal 2001, the Company adopted SFAS 133. 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. SUBSEQUENT EVENT On December 29, 2000 the Company completed the acquisition of the UltraRF division ("business") of Spectrian Corporation ("Spectrian"), through the purchase of the assets of the business by Cree's wholly-owned subsidiary, Zoltar Acquisition, Inc. The subsidiary was renamed UltraRF, Inc. ("UltraRF") following the completion of the acquisition. UltraRF designs, manufactures and markets a line of bipolar transistors and laterally diffused metal oxide semiconductor ("LDMOS") radio frequency ("RF") power semiconductors. The asset purchase was consummated pursuant to an Asset Purchase Agreement dated November 20, 2000 (the "Asset Purchase Agreement") between Spectrian and UltraRF. Under the terms of the Asset Purchase Agreement, Cree's subsidiary, UltraRF, acquired substantially all of the assets of the business, including inventories, equipment and tangible property, intangible assets, contract rights, records, supplies, rights associated with prepaid expenses, certain rights against third parties, certain software and trade accounts receivable attributable to external sales (offset by accounts payable, with no obligation of Cree, to collect accounts receivable), and assumed certain specified liabilities of the business, including obligations and liabilities under certain contracts, warranty obligations and tax obligations and liabilities relating to the business, in exchange for a total of 2,656,917 shares of Cree common stock. Of the total shares issued, 191,094 shares were placed in escrow to secure Spectrian's representations, warranties and covenants under the Asset Purchase Agreement. The escrow period is one year, with 50% of the escrowed shares to be released after six months if there have been no indemnification claims. The acquired assets included equipment and other physical property used by the business is designing, manufacturing and marketing bipolar and LDMOS RF power semiconductors and Cree intends to continue such use through its UltraRF subsidiary. 11 Item12 The UltraRF facility is located in a building on one of two parcels of land in Sunnyvale, California, that Spectrian leased in November 1996 for a 15-year term (with three options to extend the lease for up to an additional fifteen years). In connection with the acquisition of the assets of the business, Spectrian and Cree's subsidiary, UltraRF, also entered into a sublease agreement with respect to the UltraRF facility. Under the sublease, if Spectrian exercises its option to extend the term of its master lease with its landlord, UltraRF may also exercise an option to extend its sublease of the UltraRF facility. Cree has guaranteed the obligations of its subsidiary under the sublease. In addition, at the closing of the acquisition, Cree's subsidiary, UltraRF signed a supply agreement with Spectrian. Under this agreement, Spectrian has committed to purchase semiconductor components having a minimum aggregate purchase price of approximately $58 million during the two years ended December 31, 2002. In addition, UltraRF agreed to allocate sufficient capacity to supply Spectrian with quantities in excess of its minimum commitment by up to 20%. The minimum purchase amounts are fixed for each quarter during the two-year term of the agreement, with the aggregate of the eight quarters equaling $58.0 million. Cree, UltraRF and Spectrian also entered into a development agreement, under which Spectrian has agreed to provide funding of $2.4 million during calendar 2001. This work will support development by Cree and UltraRF directed to improve high linearity and gain LDMOS power modules, and silicon carbide based RF power transistors for potential use in Spectrian's power amplifier products. The acquisition will be recorded using the purchase method of accounting. 12 13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT'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"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 the Company's judgment concerning the future and are subject to risks and uncertainties that could cause the Company'sour actual operating results and financial position to differ materially. Such forward-looking statements can be identified by the use of forward-looking terminology such as "may," "will," "anticipate," "believe," "plan," "estimate," "expect," and "intend" or the negative thereof or other variations thereof or comparable terminology. The Company cautions that any such forward-looking statements are further qualified by important factors that could cause the Company's actual operating results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, fluctuations inuncertainty whether we can achieve our operating results,targets for increased yields and cost reductions needed to permit lower product pricing without margin reductions; risks associated with the production yieldsramp-up for our new ultra-bright LED chips, including the possibility of unexpected delays, increased costs and manufacturing difficulties or less than expected market acceptance; the risk of variability in our manufacturing processes whether wethat can produce greater quantitiesadversely affect yields and product performance; uncertain product demand; concentration of high brightness blue and green LEDs, our dependence on abusiness among few customers, whether new customers will emerge, whether we can develop, introduce and create market demand for new products, whether we can ramp up manufacturing production of new products to meet demand,customers; whether we can manage our growth effectively, assertion ofand integrate acquired businesses effectively; uncertainty whether our intellectual property rights by others,will provide meaningful protection; the possibility of adverse results in our pending intellectual property litigation and general economic conditions, and insufficient capital resources.conditions. See Exhibit 99.1 for additionalfurther discussion of factors that could cause the Company's actual results to differ. Overview 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 light emitting diode ("LED") products. The Company offers LEDs at twothree brightness levels -- high brightnesslevels: ultra-bright blue and green devices, high-brightness blue and green products and standard brightness blue products. Our LED devices are utilized by end users for automotive dashboard lighting, liquid crystal display ("LCD") backlighting, including wireless handsets and other consumer products, indicator lamps, miniature white lights, indoor signssign and arena displays, outdoor full color displays, traffic signals and other lighting applications. The demand for high brightnessCompany's ultra-bright LED products continuedwere introduced to be strong through the first quarter.customers in sample quantities in October 2000. During the firstsecond quarter of fiscal 2001, revenues derived from high brightness LED sales were greater than 80%these products represented 8% of the total LED sales mix. The increase inWe believe the ultra-bright chips are two-times brighter than our high-brightness devices, and they will replace some of the demand for highour older products over time. The ultra-bright chips are priced slightly higher than the high-brightness devices; therefore, the cost per lumen of brightness to the customer has been substantially reduced with the introduction of this product. As a result, the ultra-bright devices have gained 13 14 strong initial acceptance from our customers, but will require a design-in cycle that is expected to continue for several months. The ultra-bright products was due to strong demand from customers. Unit shipmentsmay allow new applications for Cree customers, including additional outdoor displays and traffic signal designs as a result of the small-sized highhigher brightness level. We are targeting these products to ramp quickly, and we believe they may account for up to 25% of our LED chip volume in the March 2001 quarter if we meet our production milestones. Historically, we have experienced lower margins with many new product introductions, including the ultra-brightness products. We will strive to make improvements to output and yield over the next several quarters for these products. During the second quarter of fiscal 2001, our high-brightness chips designed for 12 handset applications, more than doubled duringmade-up the first quarter and represented more than 15%largest portion of our revenue at 71% of LED sales. However, these sales have declined as a percentage of total LED volumerevenue from 82% in the three months ended September 2000 due to the sales of our new ultra-bright products. We believe the high-brightness chips will continue to decline as a percentage of our LED sales if we meet our production targets for our ultra-bright devices. The standard-brightness products are targeted to maintain a range of 15-20% of our LED volume due to the low price and customers current designs requiring the device. Through the first quarterhalf of fiscal 2001.2001, average sales prices for LEDs have declined 13%. We target average sales prices for these products to decline at a rate of 25% for the entire fiscal year; however, greater declines may be necessary depending on future market conditions. In anticipation of these declines in average sales prices, our management team is focused on the execution of yield improvements in our LED production processes. We have continued to make improvements to our LED output and yield. Duringyield; however, during the first quarterhalf of fiscal 2001, marginswe did not meet our internal cost reduction goals, as declines in cost only kept pace with reductions in average sales prices. Wafer yield improvements will be critical to our success in the next few quarters. In addition, the Company must continue to ramp capacity for high brightnessour ultra-bright LED products were strong due to improvements in yield.as we pursue market penetration and acceptance. During the remainder of fiscal 2001, we planCree must continue to focus on reducing costsadding capacity through higheryield improvements. If we are unable to meet yield improvement objectives, continue the production yieldsramp of our ultra-bright products and from significantly higher volumes as fixed costs are spread over a greater number of units.gain new LED customers, future margins may decline or our revenue growth may slow. We derive additional revenue from the sale of advanced materials made from SiC that are used primarily for research and development for new semiconductor applications. WeDuring the second quarter of fiscal 2001, sales of SiC wafers increased by 40% over the September 2000 quarter. Strong demand from the corporate and research communities is driving this growth, including new interest in SiC for microwave and power devices from certain customers. During the first half of fiscal 2001, we also sellsold SiC crystals to Charles & Colvard, Ltd. ("C&C"), for use in gemstone applications. We anticipate little to no revenue from the gemstone business over the next several quarters as they balance their inventory levels. C&C sales made up approximately 5% of total revenue during the second quarter of fiscal 2001. The balance of our revenue is derived from government and customer research contract funding. Under various programs, U.S. Government entities further the development of our technology by funding our research and development efforts. Results of Operations14 15 RESULTS OF OPERATIONS Three Months Ended SeptemberDecember 24, 2000 and SeptemberDecember 26, 1999 Revenue. ForRevenue grew 67% from $24.8 million in the second quarter ended September 24,of fiscal 2000 to $41.5 million in the Company reportedsecond quarter of fiscal 2001. This increase was attributable to an increase in product revenue of 70% from $22.1 million in the second quarter of fiscal 2000 to $37.6 million reflecting an 80%in the second quarter of fiscal 2001. This rise in product revenue was a result of the 114% increase in sales over the first quarter of fiscal 2000. First quarter product revenue of $34.3 million, which includes sales of light emitting diodes ("LEDs") and materials, increased 88% over the first quarter of fiscal 2000. Higher product revenue was primarily the result ofour LED revenue growth of 146%products in the first quarter of fiscal 2001 as compared to the same period in the prior year. Much of this growth was attributed to a 120% increase in LED volumes over the comparable period with a substantially higher mix of high brightness blue and green LED products. The increase in high brightness unit volume was due to 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. Average LED sales prices paid by customers increased 12% in the firstsecond quarter of fiscal 2001 compared to the samesecond quarter inof fiscal 2000. LED volume rose 161% over the prior year due to a significant increase in demand for ultra-bright and high-brightness blue and green LED products, as well as greater capacity from our manufacturing facility. Average sales prices for LED products have declined 18% in the shift in sales mix to the higher priced high brightness LED products. During the firstsecond quarter of fiscal 2001 more than 80% of LED sales were attributedcompared to the high brightness product. During the comparable period in fiscal 2000 less than 34%due to expected contractual volume discounts and other factors. Revenue attributable to sales of LED sales were from the high brightness devices. The average sales price for the high brightness product declined 5% and 2%SiC materials was 6% lower in the firstsecond quarter of fiscal 2001 and 2000, respectively, overthan in the prior sequential quarter. 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 to our industry. 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. We also plan to introduce a new ultra bright LED product targeted 13 for the second halfsame period of fiscal 2001 that is expected2000, due to offer two times the brightness of our high brightness devices. We believe this new product will drive a portion of the demand, however; if we are unablesignificant decline in sales to meet the manufacturing rampC&C for gemstone materials. C&C ramped up of this producttheir gemstone business in the appropriate timeframe, revenue may be lower than anticipated. Wafer sales grew 53% in the firstsecond quarter of fiscal 20012000 and have since reduced their orders as they balance their inventory. We anticipate little to no revenue from the gemstone business over the prior year. Much of this growth was attributed to a 121% increase innext several quarters. SiC wafer volume over the comparable period due to strong demand for silicon carbide materials by the corporate and research communities. Overall, silicon carbide based material sales declined by 2%have increased 89% in the firstsecond quarter of fiscal 2001 compared to the same period of fiscal 2000. The decrease2000, due to demand from the corporate and research communities, including new interest in revenue was attributable to lower gemstone sales. During fiscal 2000, C&C announced lowerSiC for microwave and power devices from certain customers. Wafer units have increased 95%, while average sales and higher inventory levels than anticipated. The Company agreed to allow C&C to reduce its purchase commitments for calendar 2000. While C&C remains optimistic about future business, we are targeting no revenue from gemstone materialsprices have declined 2% in the second halfquarter of fiscal 2001. We believe that strong demand from our LED business will more than offset2001 compared to the reduction in gemstone sales.three months ended December 1999. Contract revenue received from U.S. Government agencies and customers increased 27%46% during the firstsecond quarter of fiscal 2001 as compared to the samesecond quarter in the prior year. The additional revenue was anticipated asof fiscal 2000 due to additional contract awards were received in late fiscal 2000 and in the first quarterhalf of fiscal 2001. Gross Profit. Gross profit increased 117%73% to $20.6$22.1 million in the firstsecond quarter of fiscal 2001. Compared to the prior year, gross marginsmargin increased to 55%53% from 45%51% of revenue due primarily to the successful execution of cost reduction programs combined with rising average sales prices for LEDs due to the shift in mix toward higher priced high brightness products during this timeframe. Lower product costs stem from higher throughput and manufacturing yield on LEDhigh brightness LEDs and materials products thereby loweringthat have resulted in lower unit costs. During the costsecond quarter of fiscal 2001, we increased wages for non-exempt employees one-dollar per unit. In recent quarters, wehour. Without the hourly wage increase, product margins would have continued to be successful in reducing LED costs at a faster rate than average sales prices.been 57.6% of product revenue for the quarter. For the remainder of fiscal 2001, we plan to continue the strategy of reducing LED costs through higher production yields. Wafer costs for SiC material sales also declined 23% in the second quarter of fiscal 2001 compared to the second quarter of fiscal 2000 due to improved yields and from significantly greater volumes as fixed costs are spread over a greater numberthroughput of units.materials. Research and Development. Research and development expenses forincreased 20% in the three months ending September 24, 2000, increased 126%second quarter of fiscal 2001 to $2.1$2.3 million from $0.9$1.9 million in the comparable prior year period. Thissecond quarter of fiscal 2000. Much of this increase was due to increasescaused by greater investments for research in internal research and development efforts forthe RF and microwave and optoelectronics programs. We believe that research and development expenses will continue to grow during the remainder of fiscal 2001 due to increased funding necessary to releasedevelop products for future products;release; however, as a percentage of revenue thesetheses expenses are targeted to remain relatively even. 15 16 Sales, General and Administrative. Sales, general and administrative expenses forincreased 9% in the three month period ended September 24, 2000 increased by 92%second quarter of fiscal 2001 to $4.0$3.0 million from $2.1$2.8 million in the same period insecond quarter of fiscal 2000, due to greater spending to support the prior year due primarily tooverall growth of the general growth in our business and additional legal expenses.expenses resulting from the patent litigation. During the second quarter of fiscal 2001, the Company changed its employee profit sharing bonus program. This plan was changed to provide that, in lieu of a cash bonus, employees would be granted options to purchase common stock of the Company upon achieving quarterly financial objectives. This change reduced S,G&A expenses by $500,000 during the second quarter of fiscal 2001 as compared to the same quarter in the prior year. For the remainder of fiscal 2001, we believeanticipate that total sales, general and administrative costs 14 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 or possibly decline.constant. Other (Income) Expense. Other expense declined 100%has increased to $0 in the first quarter from $101,000 in the same period of the prior year as the Company took asset write-offs$62,000 during the firstsecond quarter of fiscal 2001 from income of $8,000 recognized for the second quarter of fiscal 2000. Other Non-Operating Expense. Other non-operating expenses forIn the three-month period ended September 24, 2000 was $88,000 compared to $0 in the prior year period, due to additional costs associated with the acquisition of Nitres, Inc. Interest Income, Net. Net interest income increased $4.2 million to $4.8 million in the firstsecond quarter of fiscal 2001, comparedwe instituted a physical tagging system for fixed assets that resulted in the write-down of $62,000 of assets. Interest Income, Net. Interest income, net has increased $3.7 million to $0.6$4.3 million in the second quarter of fiscal 2001 from $573,000 in the prior year period. This was due to higher average cash balances being available in the firstsecond quarter of fiscal 2001 as a result of the public stock offering completed in January 2000. Higher interest rates in the second quarter of fiscal 2001 also improved interest income. Income Tax Expense. Income tax expense for the second quarter of fiscal 2001 was $7.2 million compared to $3.0 million in the second quarter of fiscal 2000. This increase resulted from higher profitability during the second quarter of fiscal 2001 over the same period in fiscal 2000. Our tax rate provision was 34% for both periods. Six Months Ended December 24, 2000 and December 26, 1999 Revenue. Revenue increased 73% from $45.7 million in the first six months of fiscal 2000 to $79.1 million in the first six months of fiscal 2001. This increase resulted from a rise in product revenue of 78% from $40.4 million in the first six months of fiscal 2000 to $71.9 million in the first six months of fiscal 2001. Greater product revenue was largely a result of the 128% increase in sales of our LED products in the first six months of fiscal 2001 compared to the first six months of fiscal 2000. Our high brightness LED products experienced the heaviest demand; however, our standard brightness chips also increased 48% during the comparative period. Overall LED chip volume grew 140% in the first six months of fiscal 2001 over units shipped in the first six months of fiscal 2000, while our average sales prices for LEDs has declined 5% during this time frame. Revenue attributable to sales of SiC material was 4% lower in the first six months of fiscal 2001 than in the same period of fiscal 2000, due to a significant decline in sales to C&C for gemstone applications. C&C ramped up their gemstone business in the first half of fiscal 2000 and have since reduced their orders as they balance their inventory. We anticipate little to no revenue from 16 17 the gemstone business over the next several quarters. SiC wafer sales have increased 72% in the first six months of fiscal 2001 compared to the same period of fiscal 2000, due to heavy demand from the corporate and research communities, including new interest in SiC for microwave and power devices from certain customers. Wafer units have increased 106%, while average sales prices have declined 17% in the first half fiscal 2001 compared to the first six months of fiscal 2000. Average sales prices have declined due to a shift in mix of products sold. Contract revenue received from U.S. Government agencies and customers increased 37% during the first six months of fiscal 2001 compared to the first six months of fiscal 2000 due to new contract awards received in the first half of fiscal 2001. Gross Profit. Gross profit increased 92% from $22.2 million in the first six months of fiscal 2000 to $42.6 million in the first six months of fiscal 2001. This increase is due primarily to the rise in LED sales volumes combined with LED cost declines that stayed ahead of reductions in average sales prices. Average LED costs were lower due to higher throughput and manufacturing yield on high brightness LEDs and materials products. Margins on wafer products have also improved during the first six months of fiscal 2001 as higher yields have reduced costs 27% compared to the same period of the prior year. Research and Development. Research and development expenses increased 55% in the first six months of fiscal 2001 to $4.4 million from $2.8 million in the first six months of fiscal 2000. Much of this increase was caused by a greater investment made for research in the RF and microwave and optoelectronics programs. We anticipate that internal funding for development of new products will continue to grow in future periods, while we believe that government funding for our development activities will remain constant. Sales, General and Administrative. Sales, general and administrative expenses increased 44% in the first six months of fiscal 2001 to $7.0 million from $4.8 million in the first six months of fiscal 2000, 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 theses costs will remain constant. Other Expense. Other expense decreased 33% to $62,000 during the first six months of fiscal 2001 from $93,000 for the first six months of fiscal 2000. In the first six months of fiscal 2000, the Company incurred a greater amount of fixed asset write-downs. Other Non-Operating Expense. Other non-operating expenses for the first six months of fiscal 2001 were $99,000 compared to $0 in the prior year period, due to additional costs associated with the acquisition of Nitres, Inc. In addition, during the first quarter of fiscal 2001, the Company realized a $1.2 million gain on the sale of marketable securities. This gain was offset by a one-time charitable contribution of $1.2 million made to the University of California at Santa Barbara to endow a Cree chair in solid state lighting and displays. Interest Income, Net. Interest income, net increased 709% to $9.1 million in the first six months of fiscal 2001 from $1.1 million in the first six months of fiscal 2000. This was due to higher average cash balances being available in the first half of fiscal 2001 as a result of the public stock 17 18 offering completed in January 2000. Higher interest rates in the first half of fiscal 2001 also increasedimproved interest income. Income Tax Expense. Income tax expense for the first quarterhalf of fiscal 2001 was $6.5$13.7 million compared to $2.4$5.4 million in the first quarter of fiscal 2000.six months ended December 1999. This increase resulted from increasedhigher profitability during the first quarterhalf of fiscal 2001 over the same period ofin fiscal 2000. Our tax rate provision rate was 34% for both periods. Liquidity and Capital ResourcesLIQUIDITY 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 SeptemberDecember 24, 2000, we had working capital of $270.4$263.8 million, including $257.7 million in cash cash equivalents and short-term investments of $240.2 million. Net cash provided by operations was $5.5investments. Operating activities generated $36.5 million for the threefirst six months ended September 24, 2000of fiscal 2001 compared to $8.1with $16.5 million that was generated during the comparative period in fiscal 2000. The decreaseThis increase was primarily attributable to the timing of payments made and received. Accounts and interest receivable and other prepaid expenses increased $12.1 million due to increased product shipments combined with higher interest receivable related to higher yielding securities balances and other timing in the collection of invoices. Additional timing differences led to decreases of $3.7 million in accounts payable and accrued expense balances.profitability. Most of the $76.9$86.7 million used in investing activities in the first quartersix months of fiscal 2001 was related to the purchase of held to maturity investments.investments and capital improvements. We also invested $24.6$57.4 million in capital expenditures during the first quartersix months of fiscal 2001 compared to $9.8$23.0 million during the same period ofin the prior fiscal year. The majority of the increase in spending for capital expenditures was due to new equipment additions to increase manufacturing capacity in our epitaxy, crystal growth, clean room,cleanroom and package and test areas. The CompanyWe are also continues construction onnearing the completion of a 125,000 square foot facility expansion at the existingour production site that is scheduled to be completed by December 2000 and equipped during the next few quarters.near Research Triangle Park, North Carolina. The investmentincrease in other long-term assets of $20.6$21.7 million in the first six months of fiscal 2001 represents thestrategic investments made in private companies such as Xemod, Inc. and other companies. Cash 15 provided by financing activities during the first six months of fiscal 2001 related primarily to the receipt of $1.6$6.5 million in proceeds from the exercise of stock options from the Company's employee stock option plan and the exercise of outstanding stock warrants. WeOn January 18, 2001, Cree announced that its Board of Directors has authorized the repurchase of up to four million shares, or about five percent, of its outstanding common stock. The Company expects to use available cash to finance purchases under the program, which extends to January 2002. At the discretion of the Company's management, the repurchase program can be implemented through open market or privately negotiated transactions. The Company will determine the time and extent of repurchases based on its evaluation of market conditions and other factors. The Company 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. Item18 19 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative DisclosuresQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE DISCLOSURES As of SeptemberDecember 24, 2000, the Company maintains investments in equity securities that are treated for accounting purposes under SFAS 115 as "available""available for sale" securities. These investments are carried at fair market value based on quoted market prices of the investments as of SeptemberDecember 24, 2000, with net unrealized gains or losses excluded from earnings and reported as a separate component of stockholder's equity. These investments are subject to market risk of equity price changes. Management views these stock holdings as investments; therefore, the shares are accounted for as "available for sale" securities under SFAS 115. The fair market value of these investments as of SeptemberDecember 24, 2000, using the closing sale price as of SeptemberDecember 22, 2000 was $16.2$7.8 million. During the first quartersix months of fiscal 2001, the Company invested some of the proceeds from its January 2000 public offering into other investments at fixed interest rates that vary by security. No other material changes in market risk were identified during the most recent quarter. Qualitative DisclosuresQUALITATIVE DISCLOSURES Investments in the common stock of other public companies are 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. 16 PART II - OTHER INFORMATION ItemITEM 1. Legal Proceedings On September 22,LEGAL PROCEEDINGS As reported in the Company's statement on Form 10-Q filed November 3, 2000, the Company filed a patent infringement lawsuit on September 22, 2000 against Nichia Corporation and Nichia America Corporation in the United States District Court for the Eastern District of North Carolina. The lawsuit seeks enforcement of a patent relating to gallium nitride-based semiconductor devices that are manufactured using lateral epitaxial overgrowth (LEO) technology. This technology which permits the growth of high quality gallium nitride-based materials useful in manufacturing certain laser diodes and other devices.devices ("the LEO patent"). The LEO patent was issued to North Carolina State University in April 2000 and is licensed to Cree under a June 1999 agreement pursuant to which Cree obtained rights to a number of LEO and related techniques. In its complaint, Cree alleges that Nichia is infringing the LEO patent by, among other things, importing, selling and offering for sale in the United States certain gallium nitride-based laser diodes covered by one or more claims of the LEO patent. The lawsuit seeks damages and an injunction against infringement. North Carolina State University is a co-plaintiff in the action. Item 2. Changes in Securities DuringOn November 30, 2000, Nichia America Corporation filed an answer and counterclaim seeking a declaratory judgement of non-infringement and invalidity of the three months ended September 24,LEO patent. On December 21, 2000, Nichia Corporation filed an answer and counterclaim against the Company issued 54,696also seeking a 19 20 declaratory judgement of non-infringement and invalidity of the LEO patent. The Nichia Corporation answer also included counterclaims asserting that Cree is infringing four U.S. patents relating to nitride semiconductor technology and further asserting misappropriation of trade secrets and related claims against Cree and a former Nichia researcher now employed by a Cree subsidiary on a part-time basis. The counterclaim filed by Nichia Corporation seeks damages and an injunction. Although there can be no assurance of success, management of the Company believes the counterclaims asserted in the case are without merit and intends to defend against them vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on October 31, 2000. The following proposals were introduced and voted upon: PROPOSAL NO. 1 -- Election of directors* Name Votes For Votes Withheld ---------------------- --------------------- --------------------- F. Neal Hunter 31,942,482 53,294 Charles M. Swoboda 31,940,912 54,864 John W. Palmour 31,942,353 53,423 Walter L. Robb 31,907,453 88,323 William J. O'Meara 31,938,728 57,048 Dolph W. von Arx 31,130,416 865,360 James E. Dykes 31,940,447 55,329 PROPOSAL NO. 2 -- Amendment of Articles of Incorporation to increase the number of authorized shares of its common stock* FOR 31,518,990 AGAINST 446,233 ABSTENTIONS AND BROKER NON-VOTES 30,553 PROPOSAL NO. 3 -- Amendment to Equity Compensation Plan to increase the number of shares authorized for awards* FOR 13,676,584 AGAINST 7,789,950 ABSTENTIONS AND BROKER NON-VOTES 10,529,242 PROPOSAL NO. 4 -- Selection of Ernst & Young LLP as auditors for the fiscal year ending June 24, 2001* FOR 31,922,298 AGAINST 37,929 ABSTENTIONS AND BROKER NON-VOTES 35,549 * Prior to adjustment for the Company's two-for-one stock tosplit that was effective December 1, 2000. 20 21 The matters listed above are described in detail in the holdersCompany's definitive proxy statement dated September 27, 2000, for the Annual Meeting of outstanding warrants upon the exercise of such warrants in relianceShareholders held on the exemption provided by section 4(2) of the Securities Act of 1933 as a private placement. The exercise price for 47,000 warrants was $13.62. The exercise price for 7,696 warrants was $2.55; however, these warrants were exercised on a net basis, and the Company received no cash upon the issuance of the shares. ItemOctober 31, 2000. ITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Articles of Incorporation, as amended 10.1 Purchase Agreement between the CompanyEquity Compensation Plan, as amended and Osram Opto Semi- conductors Gmbh & Co. dated July 27, 2000. (1) 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedulerestated December 1, 2000 * 10.2 Management Incentive Compensation Program - Fiscal Year 2001 Plan * 99.1 Certain Business Risks and Uncertainties (b) Reports on Form 8-K: No reports onOn December 14, 2000 the Company filed a Form 8-K were filed by the Company during the quarter ended September 24, 2000. --------------------- (1) Confidential treatmentannouncing a two-for-one stock split of portions of this document has been requested pursuant to Rule 24b-2 of the Securities and Exchange Commission. 17its outstanding common stock. * Compensatory Plan 21 22 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. Date: November 1, 2000 CREE, INC. Date: February 1, 2001 /s/ Cynthia B. Merrell ------------------------------------------------------------------------------------ Cynthia B. Merrell Chief Financial Officer and Treasurer (Authorized Officer and Chief Financial and Accounting Officer) 1822 23 EXHIBIT INDEX Exhibit No. 3.1 Articles of Incorporation, as amended 10.1 Purchase Agreement between the CompanyEquity Compensation Plan, as amended and Osram Opto Semi- conductors Gmbh & Co. dated July 27, 2000. (1) 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedulerestated December 1, 2000* 10.2 Management Incentive Compensation Program - Fiscal Year 2001 Plan* 99.1 Risk Factors --------------------- (1) Confidential treatment of portions of this document has been requested pursuant to Rule 24b-2 of the SecuritiesCertain Business Risks and Exchange Commission.Uncertainties * Compensatory Plan 23