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 SeptemberDecember 23, 2001
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
$0.00125 per share, as of October 24, 2001January 31, 2002 was 72,340,115.72,611,340.
CREE, INC.
FORM 10-Q
For the Quarter Ended SeptemberDecember 23, 2001
INDEX
Page No.
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Consolidated Balance Sheets at SeptemberDecember 23, 2001 3
(unaudited) and June 24, 2001 3
Consolidated Statements of IncomeOperations for the three
4and six months ended SeptemberDecember 23, 2001 and SeptemberDecember 24,
2000 (unaudited) 4
Consolidated Statements of Cash Flow for the three 5six
months ended SeptemberDecember 23, 2001 and SeptemberDecember 24,
2000 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition 14
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 1822
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 1922
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 2024
SIGNATURES 2125
-2-
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CREE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
SeptemberDecember 23, June 24,
2001 2001
------------ ----------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $142,580$144,337 $164,562
Short-term investments held to maturity 9,93610,000 36,965
Marketable securities 11,13913,917 6,675
Accounts receivable, net 39,95034,740 34,850
Interest receivable 949421 1,270
Inventories 16,92218,244 15,202
Deferred income tax 4,17212,825 4,172
Prepaid expenses and other current assets 1,9781,535 2,220
------------ ----------------------
Total current assets 227,626236,019 265,916
Property and equipment, net 228,823214,413 226,920
Goodwill and intangible assets, net 81,02778,743 83,282
Long-term investments held to maturity 37,97127,971 7,971
Patent and license rights,Patents, net 3,3723,638 3,246
Other assets 29,28223,338 27,788
------------ ----------------------
Total assets $608,101$584,122 $615,123
============ ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 10,2876,902 $ 14,148
Accrued salaries and wages 2,8704,738 2,435
Other accrued expenses 11,1832,437 5,156
------------ ---------------------
Total current liabilities 24,34014,077 21,739
Long term liabilities:
Deferred income taxes 3,850 3,850
Other long term liabilities 43838 438
------------ ---------------------
Total long term liabilities 4,2883,888 4,288
Shareholders' equity:
Preferred stock, par value $0.01; -- --
3,000 shares authorized at
SeptemberDecember 23, 2001 and June 24, 2001;
none issued and outstanding
Common stock, par value $0.00125; 90 91
120,000 shares authorized;
72,38072,591 and 72,907 shares issued and
outstanding at SeptemberDecember 23, 2001
and June 24, 2001, respectively
Additional paid-in-capital 509,326511,130 518,781
Deferred compensation expense (1,081)(955) (1,211)
Retained earnings 82,46165,085 76,001
Accumulated other comprehensive loss, (11,323)(9,193) (4,565)
net of tax
------------ ----------------------
Total shareholders' equity 579,473566,157 589,097
------------ ----------------------
Total liabilities and shareholders' equity $608,101$584,122 $615,123
============ ======================
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
-----------------------------------
September 23, September 24,
2001 2000
------------- -------------
Revenue:
Product revenue, net $ 38,578 $ 34,311
Contract revenue, net 4,588 3,331
------------- -------------
Total revenue 43,166 37,642
Cost of revenue:
Product revenue 19,912 14,489
Contract revenue 3,350 2,587
------------- -------------
Total cost of revenue 23,262 17,076
------------- -------------
Gross profit 19,904 20,566
Operating expenses:
Research and development 4,105 2,101
Sales, general and administrative 5,732 3,957
Intangible asset amortization 2,255 --
------------- -------------
Income from operations 7,812 14,508
Other expense (851) (88)
Interest income, net 2,137 4,783
------------- -------------
Income before income taxes 9,098 19,203
Income tax expense 2,638 6,548
------------- -------------
Net income $ 6,460 $ 12,655
============= =============
Earnings per share:
Basic $0.09 $0.18
============= =============
Diluted $0.09 $0.17
============= =============
Shares used in per share calculation:
Basic 72,952 70,812
============= =============
Diluted 75,642 75,260
============= =============
--------------------------- ---------------------------
Three Months Ended Six Months Ended
--------------------------- ---------------------------
December 23, December 24, December 23, December 24,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue:
Product revenue, net $ 36,873 $ 37,587 $ 75,451 $ 71,898
Contract revenue, net 4,219 3,907 8,807 7,238
------------ ------------ ------------ ------------
Total revenue 41,092 41,494 84,258 79,136
Cost of revenue:
Product revenue 18,508 16,163 38,420 30,652
Contract revenue 3,209 3,257 6,559 5,844
------------ ------------ ------------ ------------
Total cost of revenue 21,717 19,420 44,979 36,496
------------ ------------ ------------ ------------
Gross profit 19,375 22,074 39,279 42,640
Operating expenses:
Research and development 6,748 2,295 10,853 4,396
Sales, general and administrative 5,582 3,010 11,314 6,967
Other expense 18,820 62 19,670 62
Goodwill and intangible
asset amortization 2,256 -- 4,511 --
------------ ------------ ------------ ------------
(Loss) income from operations (14,031) 16,707 (7,069) 31,215
Other non operating (loss) (11,794) (11) (11,794) (99)
Interest income, net 1,353 4,322 3,490 9,105
------------ ------------ ------------ ------------
(Loss) income before income taxes (24,472) 21,018 (15,373) 40,221
Income tax (benefit) expense (7,096) 7,157 (4,458) 13,706
------------ ------------ ------------ ------------
Net (loss) income $ (17,376) $ 13,861 $(10,915) $ 26,515
============ ============ ============ ============
(Loss) earnings per share:
Basic ($0.24) $0.19 ($0.15) $0.37
============ ============ ============ ============
Diluted ($0.24) $0.18 $(0.15) $0.35
============ ============ ============ ============
Shares used in per share calculation:
Basic 72,457 71,495 72,705 71,154
============ ============ ============ ============
Diluted 72,457 75,200 72,705 75,230
============ ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
ThreeSix Months Ended
------------------------------
September---------------------------
December 23, SeptemberDecember 24,
Operating activities: 2001 2000
------------- -------------
Operating activities:------------ ------------
Net (loss) income $ 6,460(10,915) $ 12,65526,515
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property and equipment 7,355 4,12815,337 9,050
Loss on disposal of property, equipment,
and patents 851 --other impairment charge 18,935 62
Amortization of patent rights 41 15
Amortization of124 87
Goodwill and intangible assets 2,255asset amortization 4,511 --
Amortization of deferred compensation 130 151256 279
Deferred income taxes 2,760 1,479
Purchase of marketable trading(8,453) 13,161
(Gain) on available for sale securities -- (5,028)
Proceeds from sale of marketable trading
securities -- 5,837
Gain on marketable trading securities --(558) (1,182)
Tax benefits associated with stock option
exercises 862 4,5001,690 --
Other than temporary decline in value of
long term investments 12,352 --
Changes in operating assets and liabilities:
Accounts and interest receivable (4,779) (9,519)959 (10,802)
Inventories (1,720) (1,244)(3,015) (4,015)
Prepaid expenses and other current assets 243 (2,626)686 (287)
Accounts payable, trade (3,861) (2,499)(7,246) 3,915
Accrued expenses and other long-term (817) (243)
liabilities
5,599 (1,166)
------------- ------------------------- ------------
Net cash provided by operating activities 16,196 5,501
------------- -------------23,846 36,540
------------ ------------
Investing activities:
Purchase of available for sale securities (13,982) --(15,305) (7,176)
Proceeds from sale of available for sale
securities 2,103 5,837
Purchase of property and equipment (10,108) (24,626)(21,765) (57,388)
Purchase of securities held to maturity (30,000) (50,613)(40,000) (56,606)
Proceeds from maturities of securities held
27,029 19,010
to maturity 46,965 50,640
Increase in other long-term assets (1,494) (20,569)(7,901) (21,670)
Capitalized patent costs (168) (64)
------------- -------------(516) (381)
------------ ------------
Net cash used in investing activities (28,723) (76,862)
------------- -------------(36,419) (86,744)
------------ ------------
Financing activities:
Acquisition fees for purchase accounting
transaction -- (674)
Repurchase of common stock (9,996)(10,608) --
Net proceeds from issuance of common stock 541 1,641
------------- -------------2,956 6,531
------------ ------------
Net cash (used in) provided by financing
activities (9,455) 1,641
------------- -------------(7,652) 5,857
------------ ------------
Net decrease in cash and cash equivalents $(21,982) $(69,720)$ (20,225) $ (44,347)
Cash and cash equivalents:
Beginning of period $ 164,562 $103,843
============= =============$ 103,843
=========== ============
End of period $ 142,580144,337 $ 34,123
============= =============59,496
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,104 --
============= =============1,901 $ 414
=========== ============
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
- ---------------------
The consolidated balance sheet as of SeptemberDecember 23, 2001, the consolidated
statements of income for the three and six months ended SeptemberDecember 23, 2001 and
SeptemberDecember 24, 2000, and the consolidated statements of cash flow for the threesix
months ended SeptemberDecember 23, 2001 and SeptemberDecember 24, 2000 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 SeptemberDecember 23, 2001, and for all periods
presented, have been made. The balance sheet at June 24, 2001 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 accounting principles generally accepted
in the United States have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's fiscal 2001
Annual Report on Form 10-K. The results of operations for the period ended
SeptemberDecember 23, 2001 are not necessarily indicative of the operating results that
may be attained for the entire fiscal year.
Accounting Policies
- -------------------
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Inc., and
its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), UltraRF,
Inc. ("UltraRF"), Cree Research FSC, Inc., Cree Funding LLC, Cree Employee
Services Corporation, CI Holdings, Limited, Cree Technologies, IncInc. and Cree
Asia-Pacific, Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
Business Combination
On December 29, 2000, the Company completed the acquisition of the UltraRF
division of Spectrian Corporation, or Spectrian, through the purchase of assets
of the business by Cree's wholly owned subsidiary, UltraRF, Inc. in a business
combination accounted for under the purchase method. Under the terms of the
Asset Purchase Agreement, UltraRF acquired substantially all of the net assets
of the business from Spectrian in exchange for a total of 2,656,917 shares of
Cree common stock valued at $113.5 million. Of the total shares issued, 191,094
shares were placed in escrow and proceeds from the sale of such shares retained
in escrow to secure Spectrian's representations, warranties and covenants under
the Asset Purchase Agreement. Under the terms of the escrow arrangement,
one-half of the funds were released to Spectrian in June 20002001 and the balance
will bewas released in December 2001 ifbecause no claims arewere made against the escrowed
assets.
-6-
The consolidated financial statements reflect the allocation of the purchase
price tobased upon fair value of the assets acquired, including goodwill of $81.5
million and other intangible assets of $6.3 million. Goodwill is being amortized
on a straight-line basis over ten years and other related intangibles are being
amortized over five to eight years.
The results of operations of UltraRF have been included in the consolidated
results of the Company since the date of acquisition.
Business Segments
The Company operates in two business segments, Cree and UltraRF. The Cree
segment incorporates its proprietary technology to produce compound
semiconductors using silicon carbide and gallium nitride technology. Products
from this segment are used for use in automotive and liquid crystal display
backlighting, indicator lamps, full color light emitting diode displays and
other lighting applications as well as microwave and power applications.
The UltraRF segment designs, manufactures and markets a complete line of
silicon-based LDMOS and
bipolar radio frequency power semiconductors the
critical component utilized in building power
amplifiers for wireless infrastructure applications.
Summarized financial information concerning the reportable segments as of and
for the three and six months ended SeptemberDecember 23, 2001 is shown in the following
table. The "Other" column represents amounts excluded from specific segments
such as interest income. In addition, the "Other" column also includes corporate
assets such as cash and cash equivalents, short-term investments held to
maturity, marketable securities, interest receivable and long-term investments
held to maturity which have not been allocated to a specific segment.
As of and for the
three months ended
SeptemberDecember 23, 2001
(in thousands) Cree UltraRF Other Total
- -------------------------- ------------ ------------ ----------- --------------------- ---------- ---------- ---------
Revenue $ 33,49333,311 $ 9,6737,781 $ -- $ 43,166
Income41,092
(Loss) income before
income taxes 6,556 405 2,137 9,098(24,066) (1,759) 1,353 (24,472)
Assets $307,063 $98,463 $202,575 $608,101$ 288,815 $ 98,661 $ 196,646 $ 584,122
As of and for the
six months ended
December 23, 2001
(in thousands) Cree UltraRF Other Total
- -------------------------- ---------- ---------- ---------- ---------
Revenue $ 66,804 $ 17,454 $ -- $ 84,258
(Loss) income before
income taxes (17,509) (1,354) 3,490 (15,373)
Assets $ 288,815 $ 98,661 $ 196,646 $ 584,122
Comparable data for the three and six months ended SeptemberDecember 24, 2000 is not
presented because the company operated in one segment during that period.those periods.
-7-
Reclassifications
Certain fiscal 2001 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 2002 presentation.
These reclassifications had no effect on previously reported net income or
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. The Company's 2002 fiscal year extends from June 25, 2001
through June 30, 2002 and is a 53-week fiscal year. The Company's 2001 fiscal
year extended from June 26, 2000 through June 24, 2001 and was a 52-week fiscal
year.
-7-
Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual amounts could differ
from those estimates.
Revenue Recognition
The Company recognizes product revenue at the time of shipment orwhen title is
transferred to the customer in accordance with the terms of the relevant
contract. Revenue from government contracts is recorded on the
percentage-of-completion method as expenses per contract are incurred.
Contract revenue represents reimbursement by various U.S. Government entities to
aid in the development of the Company's technology. The applicable contracts
generally provide that the Company may elect to retain ownership of inventions
made in performing the work, subject to a non-transferable, non-exclusive license retained by the
government to practice the inventions for government purposes. Contract revenue
includes funding of direct research and development costs and a portion of the
Company's general and administrative expenses and other operating expenses for
contracts under which funding is expected to exceed direct costs over the life
of the contract. The specific reimbursement provisions of the contracts,
including the portion of the Company's general and administrative expenses and
other operating expenses that are reimbursed, vary by contract. Such
reimbursements are recorded as contract revenue. For contracts under which the
Company anticipates that direct costs will exceed amounts to be funded over the
life of the contract (i.e., certain cost share arrangements), the Company
reports direct costs as research and development expenses with related
reimbursements recorded as an offset to those expenses.
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.
-8-
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, accrued expenses and other liabilities approximate fair values
at SeptemberDecember 23, 2001 and June 24, 2001.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities". This statement requires certain securities to be
classified into three categories:
(a) Securities Held-to-Maturity -- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at amortized
cost.
-8-
(b) Trading Securities -- Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are reported at
fair value, with unrealized gains and losses included in earnings.
(c) Securities Available-for-Sale -- Debt and equity securities not classified
as either securities held-to-maturity or trading securities are reported at
fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity.
At SeptemberDecember 23, 2001, the Company held short-term investments in the common
stock of publicly traded equity securities. The Company considers these
investments to be strategic in nature,nature; therefore, these investments are
accounted for as "available for sale" marketable 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. At SeptemberDecember 23,
2001, the fair market value of these investments was $11.1$13.9 million with gross
unrealized holding losses totaling $15.9$12.9 million.
As of SeptemberDecember 23, 2001, the Company's short-term investments held to maturity
included $9.9$10.0 million in high-grade corporategovernment bonds. 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 consolidated
balance sheets at amortized cost, as a short-term investment with unpaid
interest included in interest receivable.
As of SeptemberDecember 23, 2001, the Company's long-term investments consisted of $38.0$28.0
million in high-grade commercial paper, medium term notes and other debt
securities that mature in June 2003 and August 2003. 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. These securities
are reported on the consolidated balance sheet at amortized cost, as long-term
investments with unpaid interest included in interest receivable if interest is
due in less than 12 months, and as a long term receivable if interest is due in
more that 12 months.
-9-
As of SeptemberDecember 23, 2001, the Company maintained $29.3$23.3 million of net investments
in the equity of privately- heldprivately-held companies, which are included in other assets on
the consolidated balance sheet. Since the Company does not have the ability to
exercise significant influence over the operations of these companies, these
investment balances are carried at cost and accounted for using the cost method
of accounting for investments. Management conducts a quarterly impairment review
of each investment in the portfolio, including historical and projected
financial performance, expected cash needs and recent funding events.
Other-than-temporary impairments for investments are estimated and recognized if
the market value of the investment is below its cost basis for an extended
period or the issuer has experienced significant financial declines or
difficulties in raising capital to continue operations. During the quarter
ending December 23, 2001, the Company recorded an impairment charge on these
investments of $12.4 million, representing the Company's best estimate of an
"other than temporary" decline in value. This impairment charge was included as
`other non-operating loss' on the consolidated statements of operations.
Impairment of Property and Equipment
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of ("SFAS 121"), the Company reviews long-lived assets for impairment
based on changes in circumstances that indicate their carrying amounts may not
be recoverable. During the quarter ended December 23, 2001, the Company recorded
an impairment charge for property and equipment totaling $18.1 million related
to assets to be disposed of, which is included in `other operating expense' on
the consolidated statements of operations. This impairment charge was due to
technology decisions or changes resulting in the obsolescence of the assets.
These assets are being carried at the lower of their carrying amount or fair
value less cost to sell. The majority of these assets will be destroyed due to
the proprietary nature of the assets. Disposal of the impaired assets is
expected to occur in the second half of fiscal 2002.
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:
-9-
SeptemberDecember 23, June 24,
2001 2001
------------ ----------------------
(in thousands)
Raw materials $ 4,5303,867 $ 4,538
Work-in-progress 7,0678,190 6,206
Finished goods 5,325 4,458
------------ ------------7,315 5,251
Reserve (1,128) (793)
============ ==========
Total inventory, net $16,922$18,244 $15,202
============ ======================
-10-
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, a cost-share or a cost-sharefirm fixed price 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.
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 ------------------------------
SeptemberSix Months Ended
December 23, SeptemberDecember 24, December 23, December 24,
2001 2000 ------------- -------------
(in2001 2000
------------ ------------ ------------ ------------
(In thousands)
Net R&D costs $ 1347 $ 136174 $ 60 $ 239
Government funding 211 347
------------- -------------18 314 229 660
------------ ------------ ------------ ------------
Total direct costs $ 65 $ 488 $ 289 $ 899
incurred $ 224 $ 483
============= ========================= ============ ============ ============
Significant Sales Contracts
On September 21, 2001, 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 LED chips
and silicon carbide wafers through September 2002.
-10-
The Purchase Agreement calls for certain quantities of LED chips to be delivered
each month unless shipment is deferred by Osram under the deferred shipment
notice provisions of the Purchase Agreement. Pursuant to such provisions, Osram
elected during the December 2001 quarter to defer 43% of the original contracted
amount to a later quarter than originally scheduled. In any event, the Purchase
Agreement requires Osram to purchase all products by March 24, 2003. The
-11-
Purchase Agreement also provides for liquidated damages if the Company is unable
to ship at least 85% of the cumulative quantity due to have been shipped each
month. These damages are 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.
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.
In December 2000, the Company's subsidiary, UltraRF, entered into 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. In
October 2001, Spectrian and UltraRF agreed to modify the Supply Agreement under
which the minimum purchase amount for the quarter ending December 23, 2001 was
reduced and the subsequent two quarters increased so that the aggregate for the
eight quarters remained at $58 million. In modification of the supply agreement,
we also agreed that if we are not able to meet our proposed ramp up of LDMOS-8
production to Spectrian in the March 2002 quarter that Spectrian may be entitled
to a credit of up to $2.1 million. Cree, UltraRF and Spectrian also entered into
a development agreement, under which Spectrian has agreed to provideprovided R&D funding of $2.4
million during calendar
2001.million. This work will supportsupports the 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.
Income Taxes
The Company has established an estimated tax provision based upon an effective
rate of 29% for the quarter ended SeptemberDecember 23, 2001. The Company's effective tax
rate was 34% for the quarter ended SeptemberDecember 24, 2000. 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.
Shareholders' Equity
On January 18, 2001, the Company announced that its Board of Directors
authorized the repurchase of up to four million shares or about five percent,
of its outstanding common
stock. Additionally, on March 22, 2001, the Company announced that its Board of
Directors increased the repurchase limits under the stock repurchase program
announced in January 2001 to include an additional three million shares, for a
total of seven million shares of its outstanding common stock. For the three-month periodthree and
six months periods ended SeptemberDecember 23, 2001, the Company repurchased 663,00042,000
shares and 705,000 shares, respectively, of its common stock at an average price
of $15.08$15.04 per share for an aggregate of approximately $10.0$10.6 million. -11-
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 determineexpired during January, 2002, however, management intends to
seek board approval to renew the time and
extent of repurchases based on its evaluation of market conditions and other
factors.program.
-12-
Comprehensive (Loss) Income
(Loss)- ---------------------------
Comprehensive (loss) income (loss) consists of the following:
Three Months Ended ------------------------------
SeptemberSix Months Ended
December 23, SeptemberDecember 24, December 23, December 24,
2001 2000 ------------- -------------
(in2001 2000
------------ ------------ ------------ ------------
(In thousands)
Net (loss) income $ 6,460(17,376) $ 12,65513,861 $ (10,915) $ 26,515
Other comprehensive loss,2,130 (5,532) (4,628) (6,950)
income (loss),
net of tax
(6,758) (1,417)
------------- ------------------------- ------------ ------------ ------------
Comprehensive (loss) $ (15,246) $ 8,329 $ (15,543) $ 19,565
income $ (298) $ 11,238
============= ========================= ============ ============ ============
Earnings Per Share
- ------------------
The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The
following computation reconciles the differences between the basic and diluted
presentations:
Three Months Ended --------------------------------
SeptemberSix Months Ended
December 23, SeptemberDecember 24, December 23, December 24,
2001 2000*
------------- -------------
(in2000 2001 2000
------------ ------------ ------------ ------------
(In thousands, except per share data)amounts)
Net (loss) income $ 6,460(17,376) $ 12,65513,861 $ (10,915) $ 26,515
Weighted average
common shares 72,952 70,812
------------- ----------------72,457 71,495 72,705 71,154
------------ ------------ ------------ ------------
Basic (loss) earnings
per common share $0.09 $0.18
============= ================($0.24) $0.19 ($ 0.15) $0.37
============ ============ ============ ============
Net (loss) income ($17,376) $ 6,46013,861 $ 12,655(10,915) $ 26,515
Diluted weighted
average common shares:
Weighted average commonCommon shares 72,952 70,812outstanding 72,457 71,495 72,705 71,154
Dilutive effect of stock
options 2,690 4,448
and warrants ------------- ------------------ 3,705 -- 4,076
------------ ------------ ------------ ------------
Total diluted weighted
average common shares 75,642 75,260
------------- ----------------72,457 75,200 72,705 75,230
------------ ------------ ------------ ------------
Diluted (loss) earnings
per common share $0.09 $0.17
============= ================
* Weighted average shares and per share amounts have been adjusted for the two
for one stock split effective December 1, 2000.($0.24) $0.18 ($0.15) $0.35
============ ============ ============ ============
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS 128, for
the three and six months ended SeptemberDecember 23, 2001, 7,611,6748,892,675 and 8,843,688
shares, respectively, were not included in calculating diluted earnings per
share -12-
and for the three months and six months ended SeptemberDecember 24, 2000, 1,530,0001,034,441
shares were not included in calculating diluted earnings per share because the
effect would be antidilutive.
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 to common stock
and per common share data have been adjusted to reflect the common stock split,
unless otherwise stated.-13-
New Accounting Pronouncements
- -----------------------------
On June 29, 2001, the Financial Accounting Standards Board ("FASB") unanimously
approved the issuance of Statements of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets". SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. SFAS 141 also includes new criteria to
recognize intangible assets separately from goodwill. The requirements of SFAS
141 are effective for any business combination accounted for by the purchase
method that is completed after June 30, 2001. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually, or more frequently if impairment indicators arise, for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions of
SFAS 142 requiring nonamortization of goodwill and indefinite lived intangible
assets apply to goodwill and indefinite lived intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, we are required to adopt SFAS 142 in the fiscal year beginning
July 1, 2002.
Statements of Financial Accounting Standards No. 144 ("SFAS 144") provides
guidance on differentiating between assets held and used and assets to be
disposed of. The distinction is important because assets to be disposed of must
be stated at the lower of the assets' carrying amount or fair value less cost to
sell, and depreciation is no longer recognized. Assets to be disposed of would
be classified as held for sale (and depreciation would cease) when management,
having the authority to approve the action, commits to a plan to sell the
asset(s) meeting all required criteria. If the plan of sale criteria are met
after the balance sheet date but before issuance of the financial statements,
the related asset would continue to be classified as held and used at the
balance sheet date. Unless the undiscounted cash flow test indicated a loss was
necessary on the balance sheet date, no loss would be recognized even if the
asset is expected to be sold at a loss.
Adoption of SFAF 144 has no material
impact to these financial statements.
-13--14-
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 the Company's judgment concerning the future and are subject to risks
and uncertainties that could cause our 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
such forward-looking statements are further qualified by important factors that
could cause the Company's actual operating results to differ materially from
those forward-looking statements. These factors include, but are not limited to,
uncertainty regarding economic conditions; risks from increased competition;
uncertain product demand; uncertainty whether we can achieve our targets for
increased yields and cost reductions needed to maintain our margins; risks
associated with the production ramp-up for new products; including the
possibility of unexpected delays, increased costs and manufacturing difficulties
or less than expected market acceptance; risks associated with the planned
release of new products under development, including the possibility we will be
unable to develop and manufacture commercially viable versions of such products;
the risk of variability in our manufacturing processes that can adversely affect
yields and product performance; the risk that our investments in third parties
will generate losses; the risk that changes in customer concentration will
adversely affect our sales; the possibility of adverse results in our pending
intellectual property litigation; uncertainty whether our intellectual property
rights will provide meaningful protection and concentration of our business
among few customers. See Exhibit 99.1 for further 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") and gallium
nitride ("GaN"). We recognize product revenue at the time of shipment when legal
title transfers to our customers or in accordance with the terms of the relevant
contract. Our financial statements also include estimates by management for
reserves for inventory, accounts receivable and investments in privately held
companies. We derive the largest portion of our revenue from the sale of blue
and green light emitting diodesdiode ("LED") products. We offer LEDs at threefour
brightness levels- X-Bright(TM) blue and ultraviolet products, MegaBright(TM)
blue, green and ultraviolet products, high brightness blue and green products
(now including our UltraBright(TM) blue and green devices) and standard
brightness blue products. Our LED devices are utilized by end users for
automotive dashboard lighting, LCD backlighting, including wireless handsets and
other consumer products, indicator lamps, miniature white lights, indoor sign
and arena displays, outdoor full color displays, traffic signals and other
lighting applications.
We introduced our new MegaBright(TM)next generation LED line and began to ramp production of
the initial blue product during the fourth quarter of fiscal 2001. We believe
that this product offers two times the brightness of our UltraBright(TM) device
and is one of the brightest blue LEDs commercially available in the world. In
addition, in July 2001 we also announced the introduction of our MegaBright(TM)
ultraviolet ("UV") product. We believe that this device is the brightest
nitride-based LED currently available in the market at 12 milliwatts of power.
During our first quarter,
-14-
MegaBright(TM) products made up 16% of LED revenue. We believe that the
MegaBright(TM) product line is important for our revenue stream for fiscal 2002
and will likely replace some demand for our older products over time, as well as
gain new design wins. These devices also offer a dual path to white light that
differs from combining red, green and blue LEDs in a multi-chip package. Some
customers manufacture products that use a blue LED combined with a yellow
emitting phosphor to create a white light emission; others believe a UV LED with
a red, green, blue phosphor will emit the purest form of white light. We also
target the release of our MegaBright(TM) green products during the second
quarter of fiscal year 2002. We anticipate that the MegaBright(TM) products will
likely benefit customers who provide outdoor displays, automotive designs, cell
phones and traffic signals. In October 2001, Cree announced its intention to
offer a new X-Bright(TM) LED technology to be sampled in the second
quarter of fiscal year 2002. The X-Bright(TM) product family of LEDs is being designed to offer
increased brightness by 50%up to 50 percent over the MegaBright(TM) products. These products
targetfamily of
-15-
LED's. Target applications includingfor the X-Bright(TM) devices include solid state
illumination, cell phones, automotive and video screens. We shipped sample
quantities of our X-Bright(TM) chips during December 2001. These products have
gained strong initial interest from our customers, but will require a design-in
cycle that is expected to continue for several months.
We also recently introduced the 505 traffic signal green and 525 signage green
devices in the MegaBright(TM) product line. These diodes exhibit typical
brightness increase of greater than two times the current UltraBright(TM) device
brightness levels. The target applications for the MegaBright(TM) green devices
are traffic signals, display signs and consumer products. During the first quartersix
months of fiscal 2002, our high-brightness chips comprised the largest portionMegaBright(TM) blue and green products made up 26% of
our revenue at 55%LED revenue. We continue to develop the X-Bright(TM) green family of
LED sales. However, these sales have
declined as a percentage of total LED revenue from 82% in the first quarter of
fiscal 2001 due to the sales of our new MegaBright(TM) products and
standard-brightness product sales.products.
Revenue at the UltraRF divisionsegment was $9.7$17.5 million during the first quartersix months of
fiscal 2002. In the long term, UltraRF's success will depend on the rate at
which we diversify our Spectrian-concentrated business. WeCurrently over 90% of
the sales of the UltraRF division are made to Spectrian under a supply contract
which was entered into when we acquired UltraRF from Spectrian in December, 2000
and was subsequently modified. This supply agreement expires on December 31,
2002.We believe that the introduction of our new 3G LDMOS power amplifier module and
LDMOS-8 RF power device
and continuingtransistor devices along with our continued commitment to LDMOS
research and development, will result ingenerate product design wins from new customers,
consistent with our customer diversification strategy. We also believe that
Spectrian will continue to be a customer after the expiration of the supply
contract. However, the level and pricing of sales to Spectrian will be subject
to market conditions once the supply contract expires.
We derive additional revenue from the sale of advanced materials made from SiC
that are used for manufacturing LEDs and power devices by our customers or for
research and development for new semiconductor applications.
During the first
quarter of fiscal 2002, sales of SiC wafers increased by 29% over the first
quarter of fiscal 2001. 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 quarter, we continued to
develop process refinements to lower costs.
The balance of our revenue is derived from government and customer research contract funding.
Results of Operations
- ---------------------
Three Months Ended SeptemberDecember 23, 2001 and SeptemberDecember 24, 2000
Revenue. Revenue grew 15%decreased 1% to $43.2$41.1 million in the firstsecond quarter of fiscal
2002 from $41.5 million in the second quarter of fiscal 2001. This decrease was
attributable to lower product revenue of $36.9 million in the second quarter of
fiscal 2002 from $37.6 million in the first quarter of fiscal 2001. This increase was
attributable to higher product revenue of $38.6 million in the first quarter of
fiscal 2002 from $34.3 million in the firstsecond quarter of fiscal 2001. Without the
acquisition of UltraRF, revenue for the firstsecond quarter would have been $33.5$33.3
million or 11% lower than the prior year comparative results. For the firstsecond
quarter of fiscal 2002, LED revenue declined 13%19% from the prior year despite a
23%10% LED chip volume increase over units delivered in the firstsecond quarter of last
year. Average LED sales prices declined 29%26% in -15-
the firstsecond quarter of fiscal 2002
compared to the firstsecond quarter of fiscal 2001 due to expected contractual volume
discounts given to customers. Our new
MegaBright(TM) LED products, which first began
shipping in July 2001, showed increasing customer acceptance as they grew to 16%37%
of LED revenue during the firstsecond quarter. The MegaBright(TM) and X-Bright(TM)
products will likely continue to replace some of the demand for older devices,
as new customer product qualifications are completed. In December 2001, we
sampled our first X-Bright(TM) products. These products have gained strong
customer interest but will require a design cycle before significant sales
-16-
begin. Therefore, we target the sales of these products to begin in our fourth
quarter of fiscal 2002. As a result of the growth of theseour MegaBright(TM) and
X-Bright(TM) products, our high brightness chips (including UltraBright(TM)
chips) declined from 82%79% of LED sales in the firstsecond quarter of fiscal 2001 to
55%38% of LED sales for the firstsecond quarter of fiscal 2002. Sales of our standard
brightness chips remained strongmade up 25% of LED revenue in the firstsecond quarter of fiscal 2002.2002
compared to 21% of LED sales for the second quarter of fiscal 2001.
Revenue from UltraRF was $9.7$7.8 million during the quarter with bipolarLDMOS products
making up over 65%68% of revenue due to demand from Spectrian Corporation. As Creewe
completed the acquisition of UltraRF in December 2000, there were no sales from
this unit in the comparable SeptemberDecember 2000 quarter. UltraRF continues to ramp its
production of LDMOS products currently being shipped for next generation
wireless base station applications and introduced its 3G LDMOS power amplifier
module and announced its new LDMOS-8 RF power transistor technology during the
quarter.applications. We continue to work on new customer design
wins, which will utilize this new technology. A successful ramp up of LDMOS-8
products is critical to meeting our contractual obligations with Spectrian.
Material sales declined 25%35% in the firstsecond quarter of fiscal 2002 compared to the
same period of fiscal 2001 due to significantly lower gemstone material sales.
Sales of gemstone material products declined 87%84%, as there were only nominal
sales to Charles & Colvard, ("or C&C")&C during the firstsecond quarter of fiscal 2002. We
anticipate little to no revenue from this customer over the next several
quarters. SiC wafer sales increased 26%revenue decreased 9% in the firstsecond quarter of fiscal
2002 compared to the same period of the prior year. This is due to demand for wafers used in LED and power products by our customers
and increased interest by the research community. Wafer units haveshipped
increased 48%3%, while average sales prices have declined 13%12% in the firstsecond quarter of
fiscal 2002 compared to the firstsecond quarter of fiscal 2001.
Contract revenue received from U.S. Government agencies and non-governmental
customers increased 38%8% during the firstsecond quarter of fiscal 2002 compared to the
firstsecond quarter of fiscal 2001 due to larger microwave contract awards received.
We are currently seeing a trend in our sales activities where orders from our
larger customers are slowing while orders from smaller customers are increasing.
This change in customer mix improves the balance of our revenue stream as we
decrease our customer concentration. However, this change also limits order
visibility as smaller customers generally do not order as far in advance as
larger customers. If the volume of orders from these smaller customers does not
reach the level we currently anticipate, revenue for the second half of 2002
could be significantly less than expected.
Gross Profit. Gross profit decreased 3%12% to $19.9$19.4 million in the firstsecond quarter
of fiscal 2002 compared to $20.6$22.1 million in the firstsecond quarter of fiscal 2001.
Compared to the prior year period, gross margin for the fiscal 2002 quarter
decreased to 46%47% from 55%53% of revenue. Gross margin for the firstsecond quarter of
fiscal 2002 at UltraRF was 47%44% of revenue. Profitability at UltraRF was strong duringlower
than the prior sequential quarter due to improved yields anda shift in product mix favoring a
higher percentage of customLDMOS products in comparison to bipolar sales. Cree product
margin, excluding UltraRF, would have been 46% of revenue forproducts. LDMOS
products had a lower average selling price and lower gross margins relative to
the first quarter
of fiscal 2002.bipolar products. The LED product line realized lower profitability during
the second quarter of fiscal 2002 in comparison to the prior year period due to
overall contractual declines in average sales prices amounting
to 29% beingof 26% partially offset by
a 20% decrease in manufacturing costs that were 12% lower.costs. We continue to focus on cost reduction as
one of our highest priorities. We plan to manage our expense structure and
reduce costs though process improvements and other efficiencies and to increase
overall yields.
Results during the month of
September support our cost reduction efforts as our costs per unit where at new
record lows. In addition, we are targeting an increase in throughput during the
second half of fiscal 2002 to support our anticipated demand for LED chips and
to increase our research and development efforts. As throughput rises, the cost
of LED chips and wafers are expected to decline as fixed costs are spread over
more units. Wafer costs for SiC material sales were also lower comparing
-16--17-
the first quarter of fiscal 2002 results to the first quarter of fiscal 2001;
however, the reduction in wafer costs did not offset the impact of lower average
sales prices.
Research and Development. Research and development expenses increased 95%191%, or
$2.0$4.4 million, in the firstsecond quarter of fiscal 2002 to $4.1$6.7 million from $2.1$2.3
million in the firstsecond quarter of fiscal 2001. Increased spending for research
and development results from the combination of UltraRF expenses and increased
internal funding to support microwave and optoelectronic programs. Without the
addition of UltraRF expenses, research and development costs would have
increased 53%143% from the firstsecond quarter of 2001. Internal funding for programs is
targeted to accelerateR&D will
continue at these spending levels in the next several monthsnear term as we continue to focus on
developing brighter LEDs,LED's, improved LDMOS and SiCSIC microwave devices and power devices
and blue laser products.
Sales, General and Administrative. Sales, general and administrative expenses
increased 45%87%, or $1.8$2.6 million, in the firstsecond quarter of fiscal 2002 to $5.7$5.6
million from $4.0$3.0 million in the firstsecond quarter of fiscal 2001, due to the
combination of UltraRF expenses and significant legal costs primarily associated
with ongoing intellectual property litigation. Excluding UltraRF results,
selling, general and administrative expenses would have been 19%54% higher which is
attributable tothan the
prior year period as a result of greater costs incurred during the September 2001December 2002
quarter associated with patent litigation.
Other Expense. Other expense was $18.8 million during the second quarter of
fiscal 2002. This primarily consists of an impairment charge on property and
equipment of $18.1 million taken during the quarter primarily due to technology
decisions and changes. In accordance with SFAS 121, management reviews
long-lived assets for impairment based on changes in circumstances that indicate
their carrying amounts may not be recoverable. This impairment charge reflects
management's decision on technology resulting from the progress made by our
research and development teams. After extensively testing certain reactor
technology equipment, we narrowed a preference for certain processes, and we
intend to use these processes going forward. We wrote off non-producing reactor
equipment which does not use the preferred processes. Also, in December 2001
management committed to a plan to begin a 3" wafer transition over the next
18-24 months. As a result, we wrote off non-convertible 2" crystal growth
equipment that was not currently or expected to be in use. Finally, yield
improvements also resulted in the obsolescence of certain other equipment. All
equipment written off is being dismantled and destroyed if proprietary in
nature, or sold where possible. These assets are being carried at the lower of
their carrying amount or fair value less cost to sell. The remaining amount of
$700,000 of other expense represents a one-time bonus paid to UltraRF employees.
Other Non Operating (loss). The other non operating (loss) of $11.8 million
primarily represents an "other-than-temporary" decline in value related to our
long-term investments in privately-held companies in the amount of $12.4
million. Management conducts a quarterly impairment review of each investment in
the portfolio, including historical and projected financial performance,
expected cash needs and recent funding events. Other-than-temporary impairments
for investments are recognized if the market value of the investment is below
its cost basis for an extended period or the issuer has experienced significant
financial declines or difficulties in raising capital to continue operations.
This impairment charge was partially offset by a gain on the sale of marketable
securities of $600,000.
-18-
Goodwill and Intangible Asset Amortization. As a result of the acquisition of
UltraRF, Creewe recorded goodwill and other intangible assets on its balance sheet
which are being amortized over periods ranging from 5 to 10 years. No expense
was incurred during the second quarter of fiscal 2001 due to the timing of the
UltraRF acquisition.
Interest Income, Net. Interest income, net declined $3.0 million or 69%, in the
second quarter of fiscal 2002 in comparison to the second quarter of fiscal
2001. The reduction from the comparative quarter results primarily from lower
interest rates available for our liquid cash as a result of aggressive interest
rate cuts by the Federal Reserve.
Income Tax (Benefit) Expense. Income tax benefit for the second quarter of
fiscal 2002 was $7.1 million compared to an income tax expense of $7.2 million
in the second quarter of fiscal 2001. The income tax benefit resulted from the
$24 million net loss resulting from the charge taken for the impairment of fixed
assets of $18.1 million and the $12.4 million charge for the reserve for
investments in privately held companies. The effective income tax rate was 29%
for the second quarter of fiscal 2002 compared to a 34% rate during the
comparative period in fiscal 2001. This change in our effective tax rate is a
direct result of the implementation of certain tax planning strategies.
Six Months Ended December 23, 2001 and December 24, 2000
Revenue. Revenue increased 6.6% to $84.3 million in the first six months of
fiscal 2002 from $79.1 million in the first six months of fiscal 2001. This
increase was attributable to higher product revenue of $75.5 million in the
first six months of fiscal 2002 from $71.9 million in the first six months of
fiscal 2001. Without the acquisition of UltraRF, product revenue for the first
six months of fiscal 2002 would have been $66.8 million or 17% lower than the
prior year comparative period results. For the first six months of fiscal 2002,
LED revenue declined 16% from the prior year period despite a 16% LED chip
volume increase over units delivered in the first six months of last fiscal
year. Average LED sales prices declined 28% in the first six months of fiscal
2002 compared to the first six months of fiscal 2001 due to expected contractual
volume discounts given to customers. Our new MegaBright(TM) LED products showed
increasing customer acceptance as they grew to 26% of LED revenue during the
first six months of fiscal 2002. As a result of the growth of these products,
our high brightness chips (including UltraBright(TM) chips) declined from 80% of
LED sales in the first six months of fiscal 2001 to 47% of LED sales for the
first six months of fiscal 2002. Sales of our standard brightness chips remained
strong at 27% of total LED revenue in the first six months of fiscal 2002,
compared 20% during the first six months of fiscal 2001.
Revenue from UltraRF was $17.5 million during the first six months of fiscal
2002 with an even split of bipolar and LDMOS products being shipped. Most of the
revenue demand was generated from Spectrian Corporation. As we completed the
acquisition of UltraRF in December 2000, there were no sales from this unit in
the first six months of fiscal 2001.
Material sales declined 30% in the first six months of fiscal 2002 compared to
the same period of fiscal 2001 due to significantly lower gemstone sales. Sales
of gemstone products declined 85%, as there were only nominal sales to C&C
during the first six months of fiscal 2002. We anticipate little to no revenue
from this customer over the next several quarters. SiC wafer sales increased
6.5% in the first six months of fiscal 2002 compared to the prior year period.
-19-
This is due to demand for wafers used in LED and power products by our customers
and increased interest by the research community. Wafer units increased 23%,
while average sales prices declined 14% in the first six months of fiscal 2002
compared to the first six months of fiscal 2001.
Contract revenue received from U.S. Government agencies and non-governmental
customers increased 22% during the first six months of fiscal 2002 compared to
the first six months of fiscal 2001 due to larger microwave contract awards
received.
Gross Profit. Gross profit decreased 8% to $39.3 million in the first six months
of fiscal 2002 compared to $42.6 million in the first six months of fiscal 2001.
Compared to the first six months of the prior year, gross margin for the first
six months of fiscal 2002 decreased to 47% from 54% of revenue. Gross margin for
the first six months of fiscal 2002 at UltraRF was 46% of revenue. The LED
product line realized lower gross margins during that period in comparison to
the prior year period due to contractual declines in average sales prices
amounting to 28% being offset by manufacturing costs that were 15% lower. We
continue to focus on cost reduction as one of our highest priorities. We plan to
manage our expense structure and reduce costs though process improvements and
other efficiencies and to increase overall yields. Gross margins also declined
on materials revenue as wafer costs for SiC material sales were also higher
comparing the first half of fiscal 2002 results to the first half of fiscal 2001
due to a change in product mix.
Research and Development. Research and development expenses increased 148% or
$6.5 million in the first six months of fiscal 2002 to $10.9 million from $4.4
million in the first six months of fiscal 2001. Increased spending for research
and development results from the combination of UltraRF expenses and increased
internal funding to support microwave and optoelectronic programs. Without the
addition of UltraRF expenses, research and development costs would have
increased 100% from the first six months of 2001.
Sales, General and Administrative. Sales, general and administrative expenses
increased 61%, or $4.3 million, in the first six months of fiscal 2002 to $11.3
million from $7.0 million in the first six months of fiscal 2001. The increase
is due to the combination of UltraRF expenses and significant legal costs of
$3.1 million in the first six months of fiscal 2002 primarily associated with
ongoing intellectual property litigation. For further discussion on the
intellectual property litigation see below in Part II, Item 1, Legal
Proceedings. Excluding UltraRF results, selling, general and administrative
expenses would have been 34% higher.
Other Expense. Other expense was $19.7 million during the first six months of
fiscal 2002. This is made up of a charge for the impairment of fixed assets
during the six-month period due to technology changes and a one-time bonus of
$700,000 for UltraRF employees.
Other Non Operating (loss). The other non operating (loss) of $11.8 million in
the first six months of fiscal 2002 was attributed to an "other than temporary"
decline in value related to our long-term investments in the amount of $12.4
million recorded during the second quarter as discussed above. This charge was
partially offset by a gain on the sale of marketable securities of $600,000.
-20-
Goodwill and Intangible Asset Amortization. As a result of the acquisition of
UltraRF, we recorded goodwill and other intangible assets on its balance sheet,
which are being amortized over periods ranging from 5 to 10 years. No expense
was incurred during the first quartersix months of fiscal 2001 due to the timing of the
UltraRF acquisition.
Other Expense. Other expense was $851,000 during the first quarter of fiscal
2002. This charge is attributable to the disposal of fixed assets during the
quarter. For the three months ending September 24, 2000, the Company recorded an
$88,000 other non-operating loss. A $1.2 million gain on marketable securities
was offset with a $1.2 million one-time charitable contribution to the
University of California at Santa Barbara and other charges relating to the
acquisition of Nitres.
Interest Income, Net. Interest income, net declined $2.6$5.6 million, or 55%62%, in comparisonthe
first six months of fiscal 2002 compared to the first quartersix months of fiscal 2001.
The reduction from the comparative quarter results primarily from lower interest
rates received from
securities-held-to-maturity.available for our liquid cash as a result of aggressive federal interest
rate cuts by the Federal Reserve.
Income Tax (Benefit) Expense. Income tax expensebenefit for the first quartersix months of
fiscal 2002 was $2.6$4.5 million compared to $6.5an income tax expense of $13.7 million
in the first quartersix months of fiscal 2001. The decrease in income tax expensebenefit resulted from the
combination$15.4 million net pre-tax loss which was due to the charges for the impairment
of lower income
before income taxesfixed assets of $18.1 million and a lower income tax rate provision over the same period$12.4 million reserve for investments
in fiscal 2001.privately held companies. The effective income tax rate was 29% for the
firstsecond quarter of fiscal 2002 compared to 34% during the comparative period inof
fiscal 2001. This change in the
Company'sour effective tax rate is a direct result of the
implementation of certain tax planning strategies.
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 SeptemberDecember 23, 2001, we had
working capital of $203.3$221.9 million, including $163.7$168.3 million in cash, short-term
investments and marketable securities. -17-
Operating activities generated $16.2net cash
of $23.8 million for the first threesix months of fiscal 2002 compared with $5.5$36.5
million generated during the comparative period in fiscal 2001. This increasereduction
in cash provided by operations was primarily attributable to an improvementlower income from
operations and timing differences attributable to our increase in our non-cash working capital position.deferred
income tax assets and a decline in accounts payable.
Capital expenditures of property, plant and equipment amounted to $10.1$21.8 million
during the first three monthshalf of fiscal 2002. In addition, $14.0$15.3 million was invested in
available for sale securities during the first quarter of fiscal
2002. Proceeds of $27.0and $40.0 million from securities held to maturity along with $3.0
million in cash were reinvestedwas invested in securities held
to maturity during the quarter.second quarter of fiscal 2002. Proceeds of $47.0 million
from securities held to maturity was used to reinvest in available for sale
securities and in securities held to maturity. In addition, $7.9 million was
invested in privately held companies.
Cash used in the financing activities during the quarterfirst half of fiscal 2002 includes
a total of 705,000 shares of common stock repurchases of 663,000 shareswhich have been repurchased on the
open market for an aggregate of $10.0$10.6 million. In addition, we received $541,000$3.0 in
proceeds from the exercise of stock options from the Company'sour employee stock option plan.
The CompanyWe currently have adequate cash and working capital resources on hand to fund
near term capital expenditures and other planned items. We may issue additional
shares of common stock for the acquisition of complementary businesses or other
significant assets.assets or enter into other capital transactions as needs and
opportunities warrant. From time to time we evaluate potential acquisitions of
and investments in complementary businesses and anticipate continuing to make
such evaluations.
-21-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures
- ------------------------
As of SeptemberDecember 23, 2001, the Company maintains investments in publicly traded
equity securities that are treated for accounting purposes under SFAS 115 as
"available for sale" securities. These investments are carried at fair market
value based on quoted market prices of the investments as of SeptemberDecember 21, 2001,
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
strategic 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 23, 2001, using the closing sale price of SeptemberDecember 21, 2001 was
$11.1$13.9 million.
During the first three months of fiscal 2002, 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 Disclosures
- -----------------------
Investments in the common stock of other public companies are subject to the
market risk of equity price changes. While the Company can notcannot predict or manage
the future market price for such stock, management continues to evaluate its
investment position on an ongoing basis.
-18-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in the Company's Annual Report on Form 10-K filed for the fiscal year
ended June 24, 2001, and the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 24, 2001, the Company isintervened as a party to patent infringementin
lawsuits filed in Tokyo District
Court by Nichia Corporation in December 1999 and April 2000 in the
Tokyo District Court in which Nichia alleges that LED products manufactured by
the Company infringe two Nichia patents, Japanese Patent Nos. 2,778,405 (the
"405 patent") and 2,918,139 (the "139 patent"). Nichia originally filed two
lawsuits based on the `405 patent but voluntarily dismissed one of its patents.the suits in
October 2001. The Tokyo District Court dismissed the second lawsuit on the `405
patent in a decision issued in December 2001 in which the court found that the
Company's high brightness LED products at issue in the case were non-infringing.
Nichia has appealed this dismissal to the Tokyo High Court.
The Tokyo District Court had previously dismissed Nichia's suit on the `139
patent in a decision issued in May 2001 in which the court found that the
Company's standard brightness LED products do not infringe the `139 patent;
Nichia's appeal from the May 15,
2001 decision of the Tokyo District Court, in which the district court dismissed
the lawsuit based on one of the patents,this dismissal remains pending before the Tokyo High Court.
The second patent was the subject ofIn July 2001, Rohm Co., Ltd. ("Rohm") filed a decision issued October 2, 2001 bycomplaint against Nichia in the
Tokyo HighDistrict Court in which Rohm seeks a proceeding brought by a third party seeking to
invalidate the patent, in which the court ruledruling that the Japanese patent office
had erred in finding the patent valid. On October 15, 2001, Nichia voluntarily
dismissed one of its two lawsuits against the Company based on the second
patent. In the dismissed lawsuit, Nichia had sought a preliminary injunction
against the importation and sale of certain ofproducts that
incorporate the Company's standard brightness LED products do not infringe the
`139 patent. The Company intervened in Japan.
The other lawsuit,this suit in which Nichia seeks a permanent injunction based onDecember 2001 to assist in
showing that its standard brightness LED products do not infringe the second`139
patent, and the case remains pending before the Tokyo District Court, which is
scheduled to render its decision during the second quarter of fiscal 2002.
Also asdistrict court.
-22-
As also discussed in the Company's report on Form 10K for fiscal 2001, the
Company is a co-plaintiff and counterclaim co-defendant in a patent infringement
lawsuit brought against Nichia and Nichia America Corporation in the United
States District Court for the Eastern District of North Carolina. On September
21, 2001, the district court granted Nichia's motion for leave to file its
proposed amended answer and counterclaim and denied as moot the previously filed
motion to dismiss the counterclaim. On October 11, 2001, the court also directed
that discovery proceed as to all matters, except matters solely related to trade
secret claims, and directed Nichia to submit a definition of the trade secrets
on which its related claims are based, with discovery regarding trade secret
matters to proceed only after Nichia has done so.
Also as discussed in the Company's Annual Report on Form 10-K for fiscal 2001,and Form 10-Q reports noted above,
the Company's subsidiary, Cree Lighting Company, is a co-plaintiff in a patent
infringement lawsuit brought against Nichia and Nichia America Corporation and
originally filed in the United StatesU.S. District Court for the Northern District of
California. OnCalifornia in May 2001. The California district court in September 14, 2001
provisionally granted the defendants moveddefendants' motion to transfer the actioncase to the United
StatesU.S.
District Court for the Eastern District of North Carolina. At a hearing
on September 26, 2001, the California district court ruled that it would
provisionally grant the motion to transfer,Carolina, subject to a final
determination by the North Carolina court of whether the case should be
transferred. In November 2001 the North Carolina district court onruled that
transfer was appropriate and has retained the meritscase.
Also pending before the North Carolina court is the previously-reported action
brought by the Company and North Carolina State University against Nichia and
Nichia America Corporation in which Nichia has counterclaimed against the
Company, its subsidiary Cree Lighting Company and a former Nichia researcher now
employed part-time by Cree Lighting Company. In October 2001, in response to
Nichia's amended answer and counterclaim filed in September 2001, the Company
and the Cree Lighting employee replied to the amended counterclaim, denying
liability and asserting, in the Company's reply, claims seeking a declaratory
judgment that the Nichia patents at issue are invalid, unenforceable and not
infringed. The Company's reply also asserted a claim for damages in which the
Company alleges that Nichia's actions in bringing the patent infringement
counterclaims were not made for any legitimate purpose and constitute unfair
competition under North Carolina law. In addition, the Company and the Cree
Lighting employee named as a counterclaim co-defendant moved to strike or
dismiss the allegations of the motion.
-19-amended counterclaim in which Nichia asserted
claims for trade secret misappropriation not based on any alleged actual
misappropriation and claims under the Computer Fraud and Abuse Act. Cree
Lighting Company also moved, in October 2001, to dismiss Nichia's claims against
it for lack of proper venue. These motions remain pending.
In November 2001, the Company was served with pleadings in which the Company is
named as a defendant to a counterclaim of Nichia Corporation and Nichia America
Corporation in a lawsuit pending in the U.S. District Court for the Eastern
District of Pennsylvania. The complaint in the underlying action, which was
brought by Rohm Co., Ltd. against Nichia Corporation and Nichia America
Corporation, alleges that Nichia is infringing certain U.S. patents owned by
Rohm. Nichia's counterclaim, as amended in December 2001, names both Rohm and
the Company as counterclaim defendants and alleges that the Company and Rohm
violated antitrust laws by conspiring to exclude Nichia from the U.S. market for
high brightness light-emitting diodes. The counterclaim seeks actual and treble
damages, attorneys' fees and court costs. The Company has moved to dismiss the
counterclaim for lack of personal jurisdiction. Rohm has separately moved to
dismiss certain counts of the counterclaims, including those asserted against
the Company, for failure to state a claim on which relief can be granted. Both
motions remain pending.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on October 23, 2001.
Directors were elected as follows:
Name Votes For Votes Withheld
---- --------- --------------
F. Neal Hunter 66,904,810 156,408
Charles M. Swoboda 66,904,810 156,408
John W. Palmour, Ph.D. 66,904,810 156,408
Dolph W. von Arx 66,556,814 504,404
James E. Dykes 66,904,810 156,408
William J. O'Meara 66,904,810 156,408
Robert J. Potter, Ph.D. 66,854,710 206,508
-23-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are being filed herewith and are numbered in
accordance with Item 601 of Regulation S-K:
10.18 Employment Agreement, dated as of December 1, 2000, between the
Company and M. Todd Tucker10.19 Fiscal 2002 Management Incentive Plan *
*Compensatory Plan
99.1 Certain Business Risks and Uncertainties
(b) Reports on Form 8-K:
None.
-20-*Compensatory plan.
-24-
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: November 2, 2001February 5, 2002 /s/ Cynthia B. Merrell
-------------------------------------------------------------------------------------
Cynthia B. Merrell
Chief Financial Officer and Treasurer
(Authorized Officer and Chief Financial
and Accounting Officer)
-21-
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), dated as of December 1, 2000, is
made and entered into by Cree, Inc., a North Carolina corporation (hereinafter
"Company"), and M. Todd Tucker, an individual residing in the State of North
Carolina (hereinafter the "Employee").
Company desires to employ Employee and Employee desires to accept such
employment on the terms set forth in this Agreement.
Therefore, in consideration of the mutual promises set forth below and
other good and valuable consideration, the receipt and sufficiency of which the
parties acknowledge, Company and Employee agree as follows:
1. EMPLOYMENT. Company employs Employee and Employee accepts employment on
the terms and conditions set forth in this Agreement.
2. NATURE OF EMPLOYMENT. Employee initially shall serve as Executive Vice
President Operations of Company and have such responsibilities and authority as
Company may assign from time to time. Additionally, Employee agrees to perform
such other duties consonant with those of an employee at his level as Company
may set from time-to-time. Employee shall perform all duties and exercise all
authority granted him in accordance with, and shall otherwise comply with, all
Company policies, procedures, practices and directions, including, but not
limited to, policies regarding trading in Company's securities. Employee shall
devote his full working time and attention, best efforts, knowledge and
experience to perform successfully his duties and advance Company's interests.
During his employment, Employee shall not engage in any other business
activities of any nature whatsoever (including board memberships) that could
result in a conflict of interest as provided in the Company's Code of Conduct.
3. COMPENSATION.
3.1 Base Salary. Employee's annual salary ("Salary") for all services
rendered shall be Two Hundred Ten Thousand Dollars ($210,000.00) (less
applicable withholdings), payable in accordance with Company's policies,
procedures and practices as they may exist from time-to-time. Employee's salary
shall be reviewed in accordance with Company's policies, procedures and
practices, as they may exist from time-to-time.
3.2 Sign-on Bonus. Employee shall receive a one-time sign-on bonus in the
amount of Fifty Thousand Dollars ($50,000.00) (less applicable withholdings),
which amount shall be earned upon Employee's first day of employment and paid by
Company in the first pay period thereafter.
3.3 Non-Recurring Compensation. As an inducement to Employee to accept
employment with, and remain employed by, Company, Employee shall be paid as
additional, non-recurring compensation a total amount of Four Hundred Thousand
Dollars ($400,000.00) (less applicable withholdings), as follows: (i) for a
period of twenty (20) calendar months,
beginning with the first full month of his employment, Employee will earn Ten
Thousand Dollars ($10,000.00) per month provided that Employee is employed by
Company on the last day of each such month, and such amount shall be paid by
Company in the first pay period thereafter; and (ii) Employee will earn Two
Hundred Thousand Dollars ($200,000.00) on December 31, 2001 provided that
Employee is employed by Company on such date, and such amount shall be paid by
Company in the first pay period thereafter. At Company's option, these amounts
may be deemed earned and paid sooner.
3.4 Incentive Plan Compensation. In addition to the Employee's base salary,
the Employee shall be eligible to earn additional compensation
under such incentive plan terms as are agreed to by Company and Employee from
time-to-time.
3.5 Benefits. While employed by Company, Employee may participate in any
medical, dental and disability insurance, 401(k), pension and other employee
benefit plans and programs Company may offer to other employees of Company
generally; provided, however, that Employee's participation in any such benefit
plans and programs is subject to the applicable terms, conditions and
eligibility requirements of those plans and programs, some of which are within
the plan administrator's discretion, as they may exist from time-to-time. If
Company adopts a deferred compensation program in the future, Employee will be
eligible to participate in such program to the same degree as other executive
level employees of Company.
3.6 Business Expenses. Employee shall be reimbursed for reasonable and
necessary expenses actually incurred by him in performing services under this
Agreement in accordance with and subject to the terms and conditions of the
applicable Company reimbursement policies, procedures and practices, as they may
exist from time-to-time.
3.7 Continuation of Benefits. Nothing in this Agreement shall require
Company to create, continue or refrain from amending, modifying, revising or
revoking any of the plans, programs, policies, practices or benefits set forth
in Sections 3.4, 3.5 and 3.6. Any amendments, modifications, revisions and
revocations of these plans, programs and benefits shall apply to Employee and
shall not require Employee's consent thereto. Upon termination of Employee's
employment for any reason, Employee shall cease to be eligible to participate in
the plans, programs, policies, practices or benefits set forth in Sections 3.4,
3.5 and 3.6.
4. OPTION GRANT. Employee shall receive a grant of a non-qualified stock
option (the "Option") to purchase Three Hundred Thousand (300,000) (pre-split)
shares (the "Shares") of the common stock of Cree (the "Stock") under the Cree,
Inc. Equity Compensation Plan (the "Plan").
4.1. The parties shall enter into an option award agreement evidencing the
terms of the grant. The award agreement shall be in the form of Company's Master
Stock Option Award Agreement (the "Master Award Agreement") for employee option
grants, modified to reflect the terms specified in this Agreement and such other
changes as may be mutually agreed, a copy of which is attached as Addendum A
hereto.
Page 2 of 5
4.2. The Option will be granted on the first day of Employee's employment
(the "Start Date"). The exercise price will be equal to the "Fair Market Value"
of the Stock on the Start Date. "Fair Market Value" shall have the meaning
defined in the Plan.
4.3. Subject to the accelerated vesting provisions in Section 6 below, the
Option shall vest and become exercisable over a three-year period calculated
from the Start Date according to the following schedule, provided Employee is
employed by Company on the applicable vesting date:
(1) On the first anniversary of the Start Date, the Option shall vest and
may thereafter be exercised to purchase One Hundred Thousand (100,000)
(pre-split) of the Shares.
(2) On the second anniversary of the Start Date, the Option shall vest and
may thereafter be exercised to purchase an additional One Hundred
Thousand (100,000) (pre-split) of the Shares.
(3) On the third anniversary of the Start Date, the Option shall vest and
may thereafter be exercised to purchase an additional One Hundred
Thousand (100,000) (pre-split) of the Shares.
4.4. The Options will first become exercisable upon the applicable vesting
date and if not previously exercised will expire upon the earlier of (i) ten
(10) years from the date the Option was granted, (ii) one (1) year after
termination of Employee's employment if terminated due to death, or (iii) except
as provided in Section 6 below, ninety (90) days after termination of Employee's
employment for any other reason.
5. TERM OF AGREEMENT. The term of this Agreement shall be for a five (5)
year period commencing on the Start Date and expiring at midnight of the day
prior to the fifth anniversary of the Start Date, unless sooner terminated as
provided herein. Upon expiration or termination of this Agreement, any accrued
or continuing obligations of Employee or Company that expressly or by their
nature survive such expiration or termination shall survive.
6. TERMINATION OF EMPLOYMENT. Nothing in this Agreement constitutes a
commitment by Company to employ Employee for any specific term, and during the
term of this Agreement, Employee's employment is at-will, and subject to the
following terms, may be terminated at any time by either party with or without
cause:
6.1 Company may terminate Employee's employment with Company without Cause
(as defined below) at any time upon giving Employee written notice of the
effective date of such termination; provided that, in the event that Company
terminates Employee's employment without Cause, (i) Company shall pay the
Employee, as severance pay or liquidated damages or both, the sum of One Million
Five Hundred Thousand Dollars ($1,500,000) in three equal annual installments of
$500,000, due and payable on or before the first, second and third anniversaries
of the date of termination or sooner at Company's option; provided, however,
Page 3 of 5
that Company shall not be obligated to make or to continue to make such payments
if Employee has engaged in any "Detrimental Activity" as provided in Section 9
of the Master Award Agreement, and (ii) if Employee's employment is terminated
without Cause prior to the first anniversary of his Start Date, Employee's
Option under the Plan shall immediately vest and become exercisable to purchase
One Hundred Thousand (100,000) (pre-split) of the Shares, subject to the
provisions of the Master Award Agreement and the Plan, and shall continue to be
exercisable for one hundred eighty (180) days following such date of
termination. The provisions of this Section 6.1 represent Employee's sole remedy
in the event of termination of Employee's employment by Company without Cause.
6.2 Company may terminate Employee's employment immediately without prior
notice at any time for the following reasons which, for purposes of this
Agreement, shall constitute "Cause": (i) any act of Employee constituting fraud,
misappropriation, embezzlement, or criminal activity having a material adverse
impact on the Company or its reputation in the community, or any incarceration
on criminal charges which results in a material reduction in Employee's work
effectiveness; (ii) breach of the Employee's covenants and obligations under his
Employee Agreement Regarding Confidential Information, Intellectual Property and
Non-Competition; or (iii) Employee's dependence on, or habitual abuse of, a
controlled substance or alcohol (in the case of alcohol abuse, that has a
material adverse affect on Employee's performance of his job duties and
responsibilities). If Employee's employment is terminated by Company for Cause,
Company shall have no further obligation to make any payments to, or on behalf
of, Employee of whatever kind or nature, except as required by applicable law or
as otherwise expressly provided in this Agreement.
6.3 If Employee for any reason terminates his employment after completing
nine (9) months of employment but before the first anniversary of his Start
Date, Employee's Option under the Plan shall immediately vest and become
exercisable to purchase One Hundred Thousand (100,000) (pre-split) of the
Shares, subject to the provisions of the Master Award Agreement and the Plan,
and shall continue to be exercisable for one hundred eighty (180) days following
such date of termination.
7. CONFIDENTIALITY AND NONCOMPETITION. Employee agrees to execute and be
bound by the terms and conditions of the Company's Employee Agreement Regarding
Confidential Information, Intellectual Property and Non-Competition (the
"Confidentiality Agreement"), a copy of which is attached as Addendum B hereto.
A breach of the Confidentiality Agreement shall constitute a breach of this
Agreement.
8. WAIVER OF BREACH. No waiver of any breach of a provision of this
Agreement shall be valid unless the same is in writing and signed by the party
against whom such waiver is sought to be enforced. No valid waiver of any
provision of this Agreement at any time shall be deemed to be a waiver of any
other provision of this Agreement at such time nor will it be deemed a valid
waiver of such provision at any other time.
Page 4 of 5
9. ENTIRE AGREEMENT. Except as expressly provided in this Agreement, this
Agreement: (i) supersedes all other understandings and agreements, oral or
written, between the parties with respect to the subject matter of this
Agreement; and (ii) constitutes the sole agreement between the parties with
respect to this subject matter. No change or modification of this Agreement
shall be valid or binding upon the parties unless such change or modification is
in writing and is signed by the parties.
10. SEVERABILITY. If a court of competent jurisdiction holds that any
provision or sub-part thereof contained in this Agreement is invalid, illegal or
unenforceable, that invalidity, illegality or unenforceability shall not affect
any other provision in this Agreement.
11. NOTICES. Any notice required or desired to be given hereunder shall be
sufficient if in writing and sent by certified or registered mail, return
receipt requested, first-class postage prepaid, in the case of Employee, to his
address as shown on Company's records, and in the case of Company, to Charles
Swoboda, Cree, Inc., 4600 Silicon Drive, Durham, NC 27703, with a copy to
General Counsel, Cree, Inc., 4600 Silicon Drive, Durham, NC 27703.
12. PARTIES BOUND. The terms, provisions, covenants and agreements
contained in this Agreement shall apply to, be binding upon and inure to the
benefit of Company's successors and assigns. Company, at its discretion, may
assign this Agreement to Affiliates. Because this Agreement is personal to
Employee, Employee may not assign this Agreement. As used in this Agreement,
"Affiliates" shall mean: (i) any Company parent, subsidiary or related entity;
and/or (ii) any entity directly or indirectly controlled or beneficially owned
in whole or part by Company or Company's parent, subsidiary or related entity.
13. GOVERNING LAW. This Agreement and the employment relationship created
by it shall be governed by North Carolina law.
IN WITNESS WHEREOF, the parties have entered into this Employment Agreement
effective as of the day and year first written above.
Employee:
/s/ M. Todd Tucker
---------------------------------
M. Todd Tucker
Cree, Inc.
/s/ Charles Swoboda
By: ---------------------------------------
Charles Swoboda, President
Page 5 of 5
ADDENDUM A
MASTER STOCK OPTION AWARD AGREEMENT
TERMS AND CONDITIONS
(For Nonqualified Stock Options)
This Master Stock Option Agreement (this "Master Agreement" or "Agreement") is
entered into between you, the Participant named below, and Cree, Inc., a
corporation formed under the laws of the State of North Carolina (the
"Company").
This Agreement states the terms and conditions that govern nonqualified stock
options (each, an "Option") the Company may from time to time award granting you
the right to purchase shares (the "Shares") of the Common Stock of the Company
(the "Common Stock"). The Options may include awards under the Company's Equity
Compensation Plan, any Company Stock Option Bonus Plan in effect from time to
time or any other plan adopted by the Company's Board of Directors (the "Plan"
or "Plans," as applicable). The number of Shares, vesting schedule and per share
purchase price applicable to each Option will be stated in a Notice of Grant
issued by the Company. The Notice of Grant, together with the terms and
conditions set forth in this Agreement and the applicable Plan, constitute the
entire agreement between you and the Company with respect to the Option
described in the notice.
Unless otherwise specified in the Notice of Grant or agreed to in writing by you
and the Company, this Master Agreement applies to all Options granted to you on
and after the effective date stated below which are nonqualified stock options.
This Agreement is subject to and shall be construed in accordance with the
applicable Plan. As used in this Agreement, "Company" includes Cree, Inc. and
any entity that is part of the "Company" as defined in the applicable Plan.
Unless otherwise defined in this Agreement or the Notice of Grant, capitalized
terms used in this Agreement and defined in the Plan shall have the same meaning
as defined in the Plan.
Please indicate that your have read and agree to the terms and conditions of
this Agreement by signing below and returning the signed copy to the Company at
its principal offices in Durham, North Carolina. This Agreement will be
effective upon the Company's receipt of the signed copy at such offices. By your
signature below, you agree to be bound by the provisions of this Agreement and
the Plans and Notices of Grant applicable to the Options to which this Agreement
applies.
Effective Date: December 1, 2000
CREE, INC. PARTICIPANT:
------------------------------------ -----------------------------------------
Charles M. Swoboda, President Print Name:
For CREE, INC.
Please sign and return this Agreement to Tamara Cappelson
Cappelson, the Stock Plan Administrator in the Legal Department.
1. Grants of Options. Subject to the terms and conditions contained herein and
in the applicable Notice of Grant and Plan, the Company may, from time to
time in its discretion, grant you Options to purchase shares of Common
Stock.
2. Term of Options. Unless sooner terminated in accordance with the Plan or
this Agreement, each Option will expire and cease to be exercisable upon
the first to occur of the following:
(a) the expiration of ninety (90) calendar days following your Termination
of Employment, except where the termination results from your death or
Disability or where your death occurs following the termination but
while the Option is otherwise still exercisable;
(b) the expiration of one (1) year following your Termination of
Employment if the termination results from your death,
(c) the expiration of one (1) year following your Termination of
Employment if the termination results from your Disability, except
where your death occurs after the termination but while the Option is
otherwise still exercisable;
(d) the expiration of one (1) year following your death if your death
occurs after your Termination of Employment but while the Option is
otherwise still exercisable; or
(e) the tenth (10th) anniversary of the Grant Date of the Option, at 5:00
P.M., local time in Durham, North Carolina.
Upon expiration or termination of an Option, the Option will have no
further effect and cannot thereafter be exercised to purchase any Shares.
3. Accelerated Vesting. Each Option will become fully vested and exercisable
to purchase all Shares subject to the Option, to the extent not already
vested and exercisable, upon your death or at such time as the Company
determines you have become Disabled within the meaning of the applicable
Plan, provided you were employed by the Company at the time of your death
or when you became Disabled.
4. Exercise of Option. To exercise an Option, you must complete, execute and
deliver to the Company of a notice of exercise in the form supplied by the
Company and pay to the Company the purchase price for the number of Shares
specified in the notice together with all taxes or other amounts the
Company is required to withhold or collect pursuant to this Agreement.
Exercise of the Option will be effective only when the notice and required
payments are actually received by the Company. If the exercise is
facilitated through a "broker-assisted exercise" or "cashless exercise"
transaction by a brokerage firm you have designated, you agree that the
brokerage firm is acting as your agent in the transaction and that the
Company may rely upon notices, instructions and information given by such
firm in connection with the exercise, as if the same were given by you. The
Company will deliver a certificate or certificates for the purchased Shares
to you, or to such other person as you designate in writing, or make the
Shares available for electronic delivery in the U.S. to an account you
designate in writing, within three (3) business days after the Company
receives the notice of exercise and required payments.
5. Withholding Taxes. The Company's obligation to issue Shares upon exercise
of an Option is subject to the condition that you pay to the Company, in
addition to the purchase price of the Shares purchased, all taxes and any
other amounts the Company is required by law or regulation of any
governmental authority, whether federal, state or local, domestic or
foreign, to withhold or collect in connection with the Option exercise, if
any, as determined by the Committee.
6. Transfer of Option. Neither an Option nor any rights under an Option may be
assigned, pledged as collateral or otherwise transferred, except as
permitted by the applicable Plan, nor is any Option or such rights subject
to attachment, execution or other judicial process. In the event of any
attempt to assign, pledge or otherwise dispose of an Option or any right
under an Option, except as permitted by the applicable Plan, or in the
event of the levy of any attachment, execution or similar judicial process
upon the rights or interests conferred by an Option, the Committee may in
its discretion terminate an Option by notice to you.
7. Rights Prior to Exercise. You will have no rights as a shareholder with
respect to any Shares until such Shares have been duly issued by the
Company or its transfer agent pursuant to exercise of an Option.
8. Provisions of the Plan. The provisions of the applicable Plan are
incorporated by reference herein as if set out in full in this Agreement.
To the extent that any conflict may exist between any other provision of
this Agreement and a provision of the Plan, the Plan provision shall
control. All decisions of the Committee with respect to the interpretation,
construction and application of the Plan or this Agreement shall be final,
conclusive and binding upon you and the Company.
9. Cancellation and Rescission. The Committee may cancel, terminate, rescind,
suspend, withhold or otherwise limit or restrict exercise of the
unexercised portion of an Option if you engage in any "Detrimental
Activity" as defined below or otherwise violate any applicable provision of
this Agreement or the Plan. Upon each exercise of an Option, you must
certify in a manner acceptable to the Company that you are in compliance
with all applicable provisions of this Agreement and the Plan, including
the provisions of this section regarding Detrimental Activity. If you
engage in any Detrimental Activity prior to or within one (1) year after
any exercise of an Option, the exercise may be rescinded pursuant to this
section within two (2) years after such exercise. In the event of such
rescission, you will be obligated to pay to the Company the amount of any
gain realized as a result of the rescinded exercise, in such manner and on
such terms and conditions as the Company may require, and the Company will
be entitled to set-off against the amount of any such gain any amount the
Company owes to you. For purposes of this section, "Detrimental Activity"
means:
(a) the rendering of services for any organization or engaging directly or
indirectly in any business which is or becomes competitive with the
Company, or which organization or business, or the rendering of
services to such organization or business, is or becomes otherwise
prejudicial to or in conflict with the interests of the Company,
provided that such organization or business is engaged in the
development, manufacture, marketing, distribution or sale of, or
research directed to: (i) silicon carbide or AIII nitride materials
for electronic applications, or for any other applications for which
the Company is selling such materials at such time; (ii) devices
fabricated on or from silicon carbide or AIII nitride materials; or
(iii) Si LDMOS power devices, 10 watt and above, for RF applications;
(b) the disclosure to anyone outside the Company, or the use in other than
the Company's business, without prior written authorization from the
Company, of any confidential information or material relating to the
business of the Company, acquired by you either during or after
employment with the Company;
(c) the failure or refusal to disclose promptly and to assign to the
Company all right, title and interest in any invention or idea,
patentable or not, made or conceived by you during employment by the
Company, relating in any manner to the actual or anticipated business,
research or development work of the Company (except for inventions or
ideas which you are not obligated to assign to the Company either by
law or pursuant to a written agreement with the Company), or the
failure or refusal to do anything reasonably necessary to enable the
Company to secure a patent where appropriate in the United States and
in other countries;
(d) any attempt to induce any employee of the Company to leave employment
with the Company to perform services elsewhere or any attempt to
solicit the trade or business of any current or prospective customer,
supplier or partner of the Company;
(e) any breach by you of any confidentiality, noncompetition,
nonsolicitation or nondisparagement obligations undertaken by you in
any written agreement between you and the Company; or
(f) any act of fraud, misappropriation, embezzlement, or tortious or
criminal behavior that adversely impacts the Company.
10. General.
(a) Nothing in this Agreement shall be construed as constituting a
commitment, agreement or understanding of any kind that the Company
will continue your employment nor to limit or restrict either party's
right to terminate the employment relationship.
(b) This Agreement shall be binding upon and inure to the benefit of you
and the Company and upon our respective heirs, executors,
administrators, representatives, successors and permitted assigns.
(c) Notices under this Agreement must be in writing and sent either by
hand delivery or by certified or registered mail (return receipt
requested and first-class postage prepaid), in the case of the
Company, addressed to its principal executive offices to the attention
of the Stock Plan Administrator, and, in your case, to your address as
shown on the Company's records.
(d) This Agreement is governed by and construed in accordance with the
laws of the State of North Carolina, without reference under conflicts
of laws principles.
(e) No amendment or modification of this Agreement shall be valid unless
the same is in writing and signed by you and by an authorized
executive officer of Cree, Inc. If any provision of this Agreement is
held to be invalid or unenforceable, such determination shall not
affect the other provisions of the Agreement and the Agreement shall
be construed as if the invalid or unenforceable provision were omitted
and a valid and enforceable provision, as nearly comparable as
possible, substituted therefor.
(f) This Agreement and the applicable Notice of Grant and Plan set forth
all of the promises, agreements and understandings between you and
Company relating to each Option evidenced by this Agreement. This
Agreement supersedes any and all prior agreements or understandings,
whether oral or written, with respect to each Option evidenced by this
Agreement unless otherwise specified in the Notice of Grant.
(g) Shares issued upon exercise of an Option may be subject to such
stop-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange or trading
system upon which the Common Stock is listed or traded, and any
applicable federal or state laws, and the Committee may cause a legend
or legends to be placed on any such certificates to make appropriate
reference to such restrictions.
(h) You agree that each Option evidenced by this Agreement serves as
additional, valuable consideration for your obligations, if any,
undertaken in any existing agreement between you and the Company
regarding confidential information, noncompetition, nonsolicitation or
similar covenants.
(i) You acknowledge, represent and warrant to the Company, and agree with
the Company, that, except for information provided in the Company's
filings with the Securities and Exchange Commission and in the
Company's current prospectus relating to the applicable Plan: (i) you
have not relied and will not rely upon the Committee, the Company, or
any employee or agent of the Company in determining whether to accept
or exercise an Option, or in connection with any disposition of Shares
purchased upon exercise of an Option, or with respect to any tax
consequences related to the grant or exercise of an Option or the
disposition of Shares purchased pursuant to exercise of an Option; and
(ii) you will seek from your own professional advisors such
investment, tax and other advice as you believe necessary.
(j) You acknowledge that you may incur a substantial tax liability as a
result of exercise of an Option. You assume full responsibility for
all such consequences and the filing of all tax returns and elections
you may be required or find desirable to file in connection therewith.
If you are required to make any valuation of an Option or Shares
purchased pursuant to exercise of the Option under any federal, state
or other applicable tax law, and if the valuation affects any tax
return or election of the Company or affects the Company's financial
statement reporting, you agree that the Company may determine the
value and that you will observe any determination so made by the
Company in all tax returns and elections filed by you.
11. Special Provisions. The following additional terms and conditions shall
apply in accordance with the terms of the Severance Rights Agreement
entered into between you and the Company ("Severance Agreement"):
(a) In the event that your employment is terminated by the Company without
Cause (as defined in the Severance Agreement) prior to the first
anniversary of your Start Date (as defined therein), the number of
options that would become vested on the first anniversary of your
Start Date shall immediately vest and become exercisable in full and
continue to be exercisable for one hundred eighty (180) days following
such date of termination.
(b) In the event that you terminate your employment with the Company for
any reason after completing nine (9) months of employment but before
the first anniversary of your Start Date, the number of options that
would become vested on the first anniversary of your Start Date shall
immediately vest and become exercisable in full and continue to be
exercisable for one hundred eighty (180) days following such date of
termination.
(c) Except as expressly modified in this section, all other provisions of
this Master Agreement shall apply to the Options received by you,
including, but not limited to, Section 9 above.
EMPLOYEE AGREEMENT REGARDING
CONFIDENTIAL INFORMATION, INTELLECTUAL PROPERTY
AND NON-COMPETITION
In consideration of my employment by Cree, Inc., a North Carolina corporation,
or by any of its divisions, subsidiaries or affiliates (collectively, the
"Company"), and of my compensation as an employee of the Company, I,
___________________, agree as follows:
1. I understand that during my employment I may have access to unpublished or
otherwise confidential information relating to the Company, such as
unpublished information relating to the Company's business plans, products,
manufacturing operations, research and development activities, finances,
customers, vendors and personnel. Such information, whether of a technical
or non-technical nature, is referred to below as "Confidential
Information." As used in this Agreement, that term also includes
information disclosed to the Company by third parties under an obligation
to hold such information in confidence.
I will comply with all Company policies and procedures concerning
Confidential Information. I will not disclose Confidential Information to
others except when authorized in performing my duties for the Company, and
I will not use Confidential Information for any purpose other than
performing my duties for the Company. I will be bound by this Agreement
with respect to Confidential Information learned during my employment, both
for so long as I am employed and thereafter without limit, except that my
obligation will end as to an item of information as such time as it becomes
generally known to the public through no fault of mine.
2. On termination of my employment with the Company for any reason, I will
promptly deliver to the Company all documents, records, files, notebooks,
manuals, letters, notes, reports, customer and supplier lists, cost and
profit data, apparatus, drawings, blueprints, and any other material of the
Company, including all materials pertaining to Confidential Information
developed by me or others, and all copies of such materials, whether of a
technical, business or fiscal nature, which are in my possession or under
my control.
3. I will promptly disclose to the Company any idea, invention, formula,
process, technique, know-how, data, discovery or improvement, whether
patentable or not, made or conceived or reduced to practice or learned by
me, either alone or jointly with others, at any time during my employment.
All such ideas, inventions, formulas, processes, techniques, know-how,
data, discoveries or improvements are hereafter referred to as
"Inventions". I agree that the Company owns any Invention, and I hereby
assign and agree to assign to the Company all rights I have or may acquire
therein and agree to execute any and all applications, assignments or other
instruments relating thereto which the Company deems necessary. These
obligations shall continue beyond the termination of my employment with
respect to Inventions made or conceived or reduced to practice or learned
by me during my employment with the Company. I understand that the
obligation to assign my Inventions to the Company shall not apply to any
Invention which is developed entirely on my own time without using any of
the Company's equipment, supplies, facilities and/or trade secret
information unless such Invention (a) relates in any way to the business or
to the current or anticipated research or development of the Company, or
(b) results in any way from my work at the Company.
4. I understand that I will not be obligated to assign any invention which may
be wholly conceived by me after the termination of my employment, except
that I will be so obligated if the invention involves utilization of
Confidential Information. I also understand and agree that any idea,
invention, formula, process, technique, know-how, data, discovery or
improvement relating to the business of the Company or to the duties of my
employment with the Company disclosed to third parties within one year
after leaving the employ of the Company will be presumed to have been made
or conceived or reduced to practice or learned by me during my employment
with the Company and shall belong to the Company, and if such is not the
fact, that I will have the burden of proving the contrary.
5. I further acknowledge and agree that the Company is the owner of the
copyright in any work that I produce within the scope of my employment by
the Company. I agree to execute any and all assignments and other
instruments relating to such copyrights that the Company deems necessary.
6. At the Company's request and expense, I agree to assist in protecting the
Company's rights in any Invention or copyright owned by or to be assigned
to the Company pursuant to this Agreement.
7. If the Company does not wish to retain ownership of any such Invention or
copyright, and I wish to use or develop same for my own benefit, I will
obtain the Company's written permission before I do so.
8. I have set forth on Appendix A all ideas, inventions, formulas, processes,
techniques, know-how, data, discoveries or improvements, whether or not
patentable, relating to the business of the Company or to the duties of my
employment with the Company that I conceived, made, reduced to practice,
learned or acquired prior to beginning my employment with the Company and
in which I claim a prior ownership interest. Except as set forth on
Appendix A, I claim no other prior ownership rights or interests in any
such items.
9. I represent and warrant that my employment with the Company does not and
will not breach any agreement or duty I have to anyone else, including any
agreement or duty to keep in confidence confidential information belonging
to others or any non-competition or similar agreement. I agree not to
disclose to the Company or use on its behalf any confidential information
belonging to others.
10. I agree with the Company as follows:
(a) While employed by the Company, I will not, without the express written
consent of an authorized representative of the Company, (i) perform
services for any business that competes directly with the Company (a
"Competing Business"), whether as an employee, consultant, agent,
contractor or in any other capacity, (ii) hold office as an officer or
director or like position in any Competing Business or be the
beneficial owner of an equity interest in a Competing Business, (iii)
request any customers or suppliers of the Company to reduce, curtail
or cancel their business with the Company, or (iv) induce or attempt
to influence any employee of the Company to terminate his or her
employment with the Company. Further, while employed by the Company, I
will not engage in any other employment or business that could
interfere with my performance of my duties and responsibilities to the
Company or take any preliminary steps to set up any Competing
Business.
(b) As an exception to the above restrictions, I may own passive
investments in any Competing Business (including, but not limited to,
indirect investments through mutual funds), provided the securities of
the Competing Business are publicly traded and I do not own or control
more than two percent (2%) of the outstanding voting rights or equity
of the Competing Business.
(c) As an exception to the above restrictions, with the express written
consent of an authorized representative of the Company, I may be
employed by or otherwise provide services to a government agency,
university or other nonprofit organization provided that I do not
participate in or have any responsibilities relating to any program
funded or sponsored by or affiliated with any Competing Business other
than such agency, university or nonprofit organization.
11. I further agree with the Company as follows:
(a) The obligations of Section 10 shall continue for a period of one (1)
year following the termination of my employment with the Company, with
the following modifications applicable to such post-employment
obligations: (i) "Competing Business" shall mean any corporation,
partnership, university, government agency or other entity or person
(other than the Company) which is engaged in Competing Activities (as
defined below); (ii) the prohibition on the performance of services
for any Competing Business shall only apply within the Territory (as
defined below); (iii) the prohibition against soliciting customers and
suppliers of the Company shall only extend to customers and suppliers
that I had contact with, or personal knowledge about their business
with the Company, while employed by the Company and that were
customers or suppliers of the Company within the eighteen (18) months
prior to the termination of my employment; and (iv) the prohibition
against soliciting employees of the Company shall only extend to
employees that I had contact with, or personal knowledge about their
employment with the Company, while employed by the Company.
(b) "Competing Activities" means the development, manufacture, marketing,
distribution or sale of, or research directed to: (i) silicon carbide
or AIII nitride materials for electronic applications, or for any
other applications for which the Company is selling such materials at
the time of termination of my employment; (ii) devices fabricated on
or from such materials; or (iii) Si LDMOS power devices, 10 watts and
above, for RF applications.
(c) "Territory" shall mean (i) throughout the world, but if such area is
determined by judicial action to be too broad, then it shall mean (ii)
within the continental United States, but if such area is determined
by judicial action to be too broad, then it shall mean (iii) within
any state in which the Company is engaged in business, but if such
area is determined by judicial action to be too broad, then it shall
mean (iv) the State of North Carolina, but if such area is determined
by judicial action to be too broad, then it shall mean (v) Durham
County, Wake County, Orange County and Chatham County, North Carolina,
but if such area is determined by judicial action to be too broad,
then it shall mean (vi) Durham County, North Carolina.
(d) I agree that in the event a court determines that the length of time
or the geographic area or activities prohibited under this Section 11
are too restrictive to be enforceable, the court may reduce the scope
of the restriction to the extent necessary to make the restriction
enforceable.
12. My obligations under this Agreement will continue following any termination
of my employment, whether voluntary or involuntary or with or without
cause. Nothing in this Agreement shall be construed to imply any obligation
on the part of the Company to employ me for a specific or indefinite term,
and no such commitment will be binding on the Company unless set forth in a
separate written agreement signed by an executive officer of the Company.
13. I understand and agree that the Company cannot be adequately compensated by
damages at law in the event of my breach of this Agreement and therefore, I
agree that, in the event of any breach or threatened breach by me of any
covenant or obligation contained in this Agreement, the Company shall be
entitled (in addition to any other remedy that may be available to it) to
seek and obtain (a) a decree or order of specific performance to enforce
the observance and performance of such covenant or obligation, or (b) an
injunction restraining such breach or threatened breach. I further agree
that the Company shall not be required to post a bond or similar instrument
as a condition to obtaining any remedy referred to in this Section 13.
14. This Agreement is for the benefit of the Company, its successors and
assigns and shall be binding upon my successors, executors, administrators
and other legal representatives. The substantive laws of the State of North
Carolina shall govern this Agreement. If any provision of this Agreement is
declared void or unenforceable by a court of competent jurisdiction, all
other provisions shall nonetheless remain in full force and effect. This
Agreement constitutes the complete and exclusive statement of my agreement
with the Company relating to the subject matter addressed in this Agreement
and supersedes any prior agreement concerning such subject matter.
I have signed this Agreement under seal on the date shown below.
EMPLOYEE:
(SEAL)
-----------------------------------------------
Print Name:
Date:
APPENDIX A
I represent that I have identified below all ideas, inventions, formulas,
processes, techniques, know-how, data, discoveries or improvements, whether
patentable or not, relating to the business of the Company or to my
employment with the Company in which I claim ownership and which were made
or conceived or reduced to practice, learned by me or acquired prior to my
employment by the Company (attach additional pages, if required).
Brief Description of Inventions
(Include title and numbers of
any applicable patents) Date Made or Acquired
-------------------------------- ----------------------
-------------------------------------
Employee's Signature
EXHIBIT 99.1
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
Described below are various risks and uncertainties that may affect our
business. These risks and uncertainties are not the only ones we face.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general may also affect our business. If any of the
risks described below actually occurs, our business, financial condition or
results of future operations could be materially and adversely affected.
OUR OPERATING RESULTS AND MARGINS MAY FLUCTUATE SIGNIFICANTLY.
Although we have had significant revenue and earnings growth in recent years, we
may not be able to sustain such growth or maintain our margins, and we may
experience significant fluctuations in our revenue, earnings and margins in the
future. For example, historically, the prices of our LEDs have declined based on
market trends. We have attempted to maintain our margins by constantly
developing improved or new products, which command higher prices. If we are
unable to do so, our margins will decline. Our operating results and margins may
vary significantly in the future due to many factors, including the following:
- our ability to develop, manufacture and deliver products in a timely and
cost-effective manner;
- variations in the amount of usable product produced during manufacturing
(our "yield");
- our ability to improve yields and reduce costs in order to allow lower
product pricing without margin reductions;
- our ability to expand our production capacity for our new LED products;
- our ability to produce higher brightness and more efficient LED products
that satisfy customer design requirements;
- demand for our products and our customers' products;
- declining average sales prices for our products;
- changes in the mix of products we sell; and
- changes in manufacturing capacity and variations in the utilization of that
capacity.
These or other factors could adversely affect our future operating results and
margins. If our future operating results or margins are below the expectations
of stock market analysts or our investors, our stock price may decline.
IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR MARGINS COULD DECLINE AND OUR
OPERATING RESULTS MAY SUFFER.
Our SiC material products and our LED and RF device products are manufactured
using technologies that are highly complex. We manufacture our SiC wafer
products from bulk SiC crystals, and we use these SiC wafers to manufacture our
LED products and our SiC-based RF power semiconductors. Our UltraRF subsidiary
manufactures its RF semiconductors on silicon wafers purchased from others.
During manufacturing, each wafer is processed to contain numerous "die," which
are the individual semiconductor devices, and the RF power devices are further
processed by incorporating them into a package for sale as a packaged component.
The number of usable crystals, wafers, die and packaged components that result
from our production processes can fluctuate as a result of many factors,
including but not limited to the following:
- impurities in the materials used;
- contamination of the manufacturing environment;
- equipment failure, power outages or variations in the manufacturing
process;
- losses from broken wafers or other human error; and
- defects in packaging.
We refer to the proportion of usable product produced at each manufacturing step
relative to the gross number that could be constructed from the materials used
as our manufacturing "yield." Since many of our manufacturing costs are fixed,
if our yields decrease, our margins could decline and our operating results
would be adversely affected. In the past, we have experienced difficulties in
achieving acceptable yields on new products, which has adversely affected our
operating results. We may experience similar problems in the future and we
cannot predict when they may occur or their severity. In some instances, we may
offer products for future delivery at prices based on planned yield
improvements. Reduced yields or failure to achieve planned yield improvements
could significantly affect our future margins and operating results.
OUR BUSINESS AND OUR ABILITY TO PRODUCE OUR PRODUCTS MAY BE IMPAIRED BY CLAIMS
WE INFRINGE INTELLECTUAL PROPERTY OF OTHERS.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights. These traits have resulted in significant and
often protracted and expensive litigation. Litigation to determine the validity
of patents or claims by third parties of infringement of patents or other
intellectual property rights could result in significant expense and divert the
efforts of our technical personnel and management, even if the litigation
results in a determination favorable to us. In the event of an adverse result in
such litigation, we could be required to:
- pay substantial damages;
- indemnify our customers;
- stop the manufacture, use and sale of products found to be infringing;
- discontinue the use of processes found to be infringing;
- expend significant resources to develop non-infringing products and
processes; and/or
- obtain a license to use third party technology.
Where we consider it necessary or desirable, we may seek licenses under patents
or other intellectual property rights. However, we cannot be certain that
licenses will be available or that we would find the terms of licenses offered
acceptable or commercially reasonable. Failure to obtain a necessary license
could cause us to incur substantial liabilities and costs and to suspend the
manufacture of products. In addition, if adverse results in litigation made it
necessary for us to seek a license or to develop non-infringing products or
processes, there is no assurance we would be successful in developing such
products or processes or in negotiating licenses upon reasonable terms or at
all. Our results of operations, financial condition and business could be harmed
if such problems were not resolved in a timely manner.
Our distributor in Japan is presently a party to patent litigation in Japan
brought by Nichia, in which the plaintiff claims that certain of our LED
products infringe two Japanese patents it owns. The complaints in the
proceedings seek injunctive relief that would prohibit our distributor from
further sales of these products in Japan. The court has ruled in our favor on
the suit directed towards our standard brightness product; however Nichia has
appealed the ruling. An adverse result in these cases would impair our ability
to sell both our standard brightness and high brightness LED products in Japan
and could cause customers not to purchase other LED products from us. Subject to
contractual limitations, we have an obligation to indemnify our distributor for
patent infringement claims.
We have also initiated patent infringement litigation in the United States
against Nichia and one of its subsidiaries, asserting patent infringement with
respect to certain Nichia nitride semiconductor products, including laser diode
products. Nichia has responded with counterclaims alleging, among other things,
patent infringement claims against us based on four U.S. patents directed to
nitride semiconductor technology. In addition, they allege trade secret
misappropriation and related claims against Cree and a former Nichia researcher
who is now employed by one of our subsidiaries on a part-time basis. An adverse
result under Nichia's counterclaims would impair our ability to sell our LED
products and could include a substantial damage award against us.
Our Cree Lighting subsidiary has also initiated litigation in the United States
against Nichia and one of its subsidiaries asserting patent infringement with
respect to gallium nitride-based semiconductor technology useful in
manufacturing certain LEDs and other devices. The lawsuit seeks damages and an
injunction against infringement.
We believe the claims asserted against our products in the Japanese cases and
the counterclaims asserted against us by the defendants in the initial U.S. case
are without merit, and we intend to vigorously defend against the charges.
However, we cannot be certain that we will be successful, and litigation may
require us to spend a substantial amount of time and money and could distract
management from our day-to-day operations. Litigation costs to date in these
cases have been substantial, and variability in these costs could adversely
affect our financial results. If any of these cases were decided against us, the
result would have a material adverse effect on our operations and financial
condition.
THERE ARE LIMITATIONS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY.
Our intellectual property position is based in part on patents owned by us and
patents exclusively licensed to us by NCSU and others. The licensed patents
include patents relating to the SiC crystal growth process that is central to
our SiC materials and device business. We intend to continue to file patent
applications in the future, where appropriate, and to pursue such applications
with U.S. and foreign patent authorities, but we cannot be sure that patents
will be issued on such applications or that our existing or future patents will
not be successfully contested. Also, since issuance of a valid patent does not
prevent other companies from using alternative, non-infringing technology, we
cannot be sure that any of our patents (or patents issued to others and licensed
to us) will provide significant commercial protection.
In addition to patent protection, we also rely on trade secrets and other
non-patented proprietary information relating to our product development and
manufacturing activities. We try to protect this information with
confidentiality agreements with our employees and other parties. We cannot be
sure that these agreements will not be breached, that we would have adequate
remedies for any breach or that our trade secrets and proprietary know-how will
not otherwise become known or independently discovered by others.
Where necessary, we may initiate litigation to enforce our patent or other
intellectual property rights, but there is not assurance that we will be
successful in any such litigation. Moreover, litigation may require us to spend
a substantial amount of time and money and could distract management from our
day-to-day operations.
IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR ULTRABRIGHT(TM) AND
MEGABRIGHT(TM) LEDs WITH IMPROVED YIELDS, OUR OPERATING RESULTS MAY SUFFER.
We believe that higher volume production and lower production costs for our
UltraBright(TM) blue and green LEDs and our MegaBright(TM) blue and UV LEDs will
be important to our future operating results. We must reduce costs of these
products to avoid margin reductions from the lower selling prices we may offer
to meet the competition and satisfy prior contractual commitments. Achieving
greater volumes and lower costs requires improved production yields for these
products. In addition, in the case of our MegaBright(TM) LED products, we only
recently began manufacturing these products in volume and may encounter delays
and manufacturing difficulties as we ramp up our capacity to make these
products. Failure to produce adequate quantities and improve the yields of our
UltraBright(TM) and MegaBright(TM) LED products could have a material adverse
effect on our business, results of operations and financial condition.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
Our future success will depend on our ability to develop new SiC solutions for
existing and new markets. We must introduce new products in a timely and
cost-effective manner, and we must secure production orders from our customers.
The development of new SiC products is a highly complex process, and we have
historically experienced delays in completing the development and introduction
of new products. Products currently under development include high power RF and
microwave devices, power devices, blue laser diodes and higher brightness LED
products. The successful development and introduction of these products depends
on a number of factors, including the following:
- achievement of technology breakthroughs required to make commercially
viable devices;
- the accuracy of our predictions of market requirements and evolving
standards;
- acceptance of our new product designs;
- the availability of qualified development personnel;
- our timely completion of product designs and development;
- our ability to develop repeatable processes to manufacture new products in
sufficient quantities for commercial sales;
- our customers' ability to develop applications incorporating our products;
and
- acceptance of our customers' products by the market.
If any of these or other factors become problematic, we may not be able to
develop and introduce these new products in a timely or cost-efficient manner.
WE DEPEND ON A FEW LARGE CUSTOMERS.
Historically, a substantial portion of our revenue has come from large purchases
by a small number of customers. We expect that trend to continue. For example,
for fiscal 2001 our top five customers accounted for 72% of our total revenue.
Accordingly, our future operating results depend on the success of our largest
customers and on our success in selling large quantities of our products to
them. The concentration of our revenues with a few large customers makes us
particularly dependent on factors affecting those customers. For example, if
demand for their products decreases, they may stop purchasing our products and
our operating results will suffer. If we lose a large customer and fail to add
new customers to replace lost revenue, our operating results may not recover.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The markets for our LED and RF and microwave power semiconductor products are
highly competitive. Our competitors currently sell LEDs made from sapphire
wafers that are brighter than the high brightness LEDs we currently produce and
similar in brightness to our UltraBright(TM) and MegaBright(TM) LED products. In
addition, new firms have begun offering or announced plans to offer blue and
green LEDs. In the RF power semiconductor field, the products manufactured by
UltraRF compete with products offered by substantially larger competitors. The
market for SiC wafers is also becoming competitive as other firms have in recent
years begun offering SiC wafer products or announced plans to do so. We also
expect significant competition for products we are currently developing, such as
those for use in microwave communications.
We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Any of
these developments could have an adverse effect on our business, results of
operations and financial condition.
WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH.
We have experienced a period of significant growth that has strained our
management and other resources. We have grown from 248 employees on June 28,
1998 to 970 employees on June 24, 2001 and from revenues of $44.0 million for
the fiscal year ended June 28, 1998 to $177.2 million for the fiscal year ended
June 24, 2001. To manage our growth effectively, we must continue to:
- implement and improve operating systems;
- maintain adequate manufacturing facilities and equipment to meet customer
demand;
- add experienced senior level managers; and
- attract and retain qualified people with experience in engineering, design,
technical marketing support.
We will spend substantial amounts of money in supporting our growth and may have
additional unexpected costs. Our systems, procedures or controls may not be
adequate to support our operations, and we may not be able to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development, and
administrative support. If we cannot attract qualified people or manage growth
effectively, our business operating results and financial condition could be
adversely affected.
PERFORMANCE OF OUR INVESTMENTS IN OTHER COMPANIES COULD NEGATIVELY AFFECT OUR
FINANCIAL CONDITION.
From time to time, we have made investments in public and private companies that
engage in complementary businesses. Should these investments be deemed to be
impaired, the related write-down in value could have a material adverse effect
on our financial condition. Each of these investments is subject to the risks
inherent in the related company's business. Our private company investments are
subject to additional risks relating to the limitations on transferability of
our interests due to the lack of a public market and other transfer
restrictions. Our public company investments are subject to market risks and
also can be subject to contractual limitations on transferability. As a result,
we may not be able to reduce the size of our positions or liquidate our
investments when we deem appropriate to limit our downside risk.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS
TRANSITIONING PRODUCTION TO A LARGER WAFER SIZE.
We currently plan to begin gradually shifting production of some products from
two-inch wafers to three-inch wafers in fiscal 2002. We must first qualify our
production processes on systems designed to accommodate the larger wafer size,
and some of our existing production equipment must be refitted for the larger
wafer size. Delays in this process could have an adverse effect on our business,
particularly on our ability to sell some of our RF and power products at a
competitive price. In addition, in the past we have experienced lower yields for
a period of time following a transition to a larger wafer size until use of the
larger wafer is fully integrated in production and we begin to achieve
production efficiency. We anticipate that we will experience similar temporary
yield reductions during the transition to the three-inch wafers, and we have
factored this into our plan for production capacity. If this transition phase
takes longer than we expect or if we are unable to attain expected yield
improvements, our operating results may be adversely affected.
WE RELY ON A FEW KEY SUPPLIERS.
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our products, including key materials and
equipment used in critical stages of our manufacturing processes. We generally
purchase these limited source items with purchase orders, and we have no
guaranteed supply arrangements with such suppliers. If we were to lose such key
suppliers, our manufacturing efforts could be hampered significantly. Although
we believe our relationship with our suppliers is good, we cannot assure you
that we will continue to maintain good relationships with such suppliers or that
such suppliers will continue to exist.
IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR
RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support is
discontinued or reduced, our ability to develop or enhance products could be
limited and our business, results of operations and financial condition could be
adversely affected.
IF OUR PRODUCTS FAIL TO PERFORM OR MEET CUSTOMER REQUIREMENTS, WE COULD INCUR
SIGNIFICANT ADDITIONAL COSTS.
The manufacture of our products involves highly complex processes. Our customers
specify quality, performance and reliability standards that we must meet. If our
products do not meet these standards, we may be required to replace or rework
the products. In some cases our products may contain undetected defects that
only become evident after shipment. We have experienced product quality,
performance or reliability problems from time to time. Defects or failures may
occur in the future. If failures or defects occur, we could:
- lose revenue;
- incur increased costs, such as warranty expense and costs associated with
customer support;
- experience delays, cancellations or rescheduling of orders for our
products; or
- experience increased product returns.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 69%, 69% and 59%
of our revenue in fiscal 2001, 2000 and 1999, respectively. We expect that
revenue from international sales will continue to be a significant part of our
total revenue. International sales are subject to a variety of risks, including
risks arising from currency fluctuations, trends in use of the Euro, trading
restrictions, tariffs, trade barriers and taxes. Also, U.S. Government or
military export restrictions could limit or prohibit sales to customers in
certain countries because of their uses in military or surveillance
applications. Because all of our foreign sales are denominated in U.S. dollars,
our products become less price competitive in countries with currencies that are
low or are declining in value against the U.S. dollar. Also, we cannot be sure
that our international customers will continue to place orders denominated in
U.S. dollars. If they do not, our reported revenue and earnings will be subject
to foreign exchange fluctuations.
IF WE FAIL TO INTEGRATE ACQUISITIONS SUCCESSFULLY, OUR BUSINESS WILL BE HARMED.
We completed two strategic acquisitions during calendar year 2000. We will
continue to evaluate strategic opportunities available to us, and we may pursue
other product, technology or business acquisitions. Such acquisitions can
present many types of risks, including the following:
- we may fail to successfully integrate the operations and personnel of newly
acquired companies with our existing business;
- we may experience difficulties integrating our financial and operating
systems;
- our ongoing business may be disrupted or receive insufficient management
attention;
- we may not cost-effectively and rapidly incorporate acquired technology;
- we may not be able to recognize cost savings or other financial benefits we
anticipated;
- acquired businesses may fail to meet our performance expectations;
- we may lose key employees of acquired businesses;
- we may not be able to retain the existing customers of newly acquired
operations;
- our corporate culture may clash with that of the acquired businesses; and
- we may incur undiscovered liabilities associated with acquired businesses
that are not covered by indemnification we may obtain from the seller.
We may not successfully address these risks or other problems that arise from
our recent or future acquisitions. In addition, in connection with future
acquisitions, we may issue equity securities that could dilute the percentage
ownership of our existing shareholders, we may incur debt and we may be required
to amortize expenses related to intangible assets that may negatively affect our
results of operations.-25-