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 March 28,September 26, 1999
Commission file number: 0-21154
CREE RESEARCH, 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] Yes [ ] No
The number of shares outstanding of the registrant's common stock, par value
$0.005$0.0025 per share, as of April 7,October 14, 1999 was 14,505,689.29,499,599.
CREE RESEARCH, INC.
FORM 10-Q
For the Quarter Ended March 28,September 26, 1999
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Consolidated balance sheetsBalance Sheets at March 28,September 26, 1999
(unaudited) and June 28, 1998 327, 1999.....................................3
Consolidated statementsStatements of incomeOperations for the three
and nine
months ended March 28,September 26, 1999 and March 29,September 27, 1998
(unaudited) 4.......................................................4
Consolidated statementsStatements of cash flowsCash Flows for the ninethree months
ended March 28,September 26, 1999 and March 29,September 27, 1998 (unaudited) 5.......5
Notes to consolidated financial statementsConsolidated Financial Statements (unaudited) 6............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11Operations..............................11
Item 3. Quantitative and Qualitative Disclosures of Market Risk 19Risk..........15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 218-K................................16
SIGNATURES...............................................................17
EXHIBIT LIST.............................................................18
-2-
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 28, June 28,
1999 1998
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 53,302 $ 17,680
Marketable securities -- 657
Accounts receivable, net 14,006 10,479
Inventories 3,880 2,543
Deferred income tax 264 1,952
Prepaid expenses and other current assets 837 1,347
----------- -----------
Total current assets 72,289 34,658
Property and equipment, net 56,171 36,476
Patent and license rights, net 1,654 1,525
Other assets 1,348 65
----------- -----------
Total assets $131,462 $ 72,724
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 4,840 $ 5,595
Current maturities of long term debt -- 17
Accrued salaries and wages 1,013 391
Other accrued expenses 2,007 1,052
----------- -----------
Total current liabilities 7,860 7,055
Long term liabilities:
Long term debt -- 8,650
Deferred income tax 2,477 2,154
----------- -----------
Total long term liabilities 2,477 10,804
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares -- --
authorized at March 28, 1999 and 2,750 shares
authorized at June 28, 1998; none issued and
outstanding
Common stock, par value $0.005; 30,000 shares 73 65
authorized at March 28, 1999 and 14,500 shares
authorized at June 28, 1998; shares issued and
outstanding 14,505 and 12,989 at March 28, 1999
and June 28, 1998, respectively
Additional paid-in-capital 107,334 49,676
Retained earnings 13,718 5,124
----------- -----------
Total shareholders' equity 121,125 54,865
----------- -----------
Total liabilities and shareholders' equity $ 131,462 $ 72,724
=========== ===========
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 26, June 27,
1999 1999
------------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $41,226 $42,506
Marketable securities 3,727 6,145
Accounts receivable, net 16,900 16,285
Inventories 4,060 3,977
Deferred income taxes 296 296
Prepaid expenses and other current assets 571 558
------------- ----------
Total current assets 66,780 69,767
Property and equipment, net 77,575 69,884
Patent and license rights, net 1,798 1,731
Deferred income taxes 2,827 2,827
Other assets 125 8
============= ==========
Total assets $ 149,105 $ 144,217
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $5,406 $ 7,487
Accrued salaries and wages 2,043 819
Other accrued expenses 3,691 1,239
------------- ----------
Total current liabilities 11,140 9,545
Long term liabilities:
Long term liability 30 --
Deferred income taxes 4,650 4,650
------------- ----------
Total long term liabilities 4,680 4,650
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares -- --
authorized at September 26, 1999 and June 27,
1999; none issued and outstanding
Common stock, par value $0.0025; 60,000 shares 74 73
authorized at September 26, 1999 and June 27,
1999; shares issued and outstanding 29,500
and 29,258 at September 26, 1999 and June 27,
1999, respectively
Additional paid-in-capital 112,180 111,136
Retained earnings 21,031 18,813
------------- ----------
Total shareholders' equity 133,285 130,022
============= ==========
Total liabilities and shareholders' equity $ 149,105 $ 144,217
============= ==========
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ -------------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue:
Product revenue, net $14,084 $ 8,929 $37,609 $25,298
Contract revenue, net 1,951 1,742 4,743 5,685
---------- ---------- ---------- ----------
Total revenue 16,035 10,671 42,352 30,983
Cost of revenue:
Product revenue 6,794 5,510 18,586 15,875
Contract revenue 1,503 1,430 3,755 4,679
---------- ---------- ---------- ----------
Total cost of revenue 8,297 6,940 22,341 20,554
---------- ---------- ---------- ----------
Gross profit 7,738 3,731 20,011 10,429
Operating expenses:
Research and development 1,515 367 3,442 1,287
Sales, general and 1,568 1,041 4,236 3,026
administrative
Other expense 311 31 878 423
---------- ---------- ---------- ----------
Income from operations 4,344 2,292 11,455 5,693
Interest income, net 347 180 482 513
---------- ---------- ---------- ----------
Income before income 4,691 2,472 11,937 6,206
taxes
Income tax expenses 1,314 717 3,343 1,810
---------- ---------- ---------- ----------
Net income $ 3,377 $ 1,755 $ 8,594 $ 4,396
========== ========== ========== ==========
Earnings per share:
Basic $0.25 $0.13 $0.65 $0.34
========== ========== ========== ==========
Diluted $0.23 $0.13 $0.61 $0.33
========== ========== ========== ==========
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
------------------------------
September 26, September 27,
1999 1998
------------- -------------
Revenue:
Product revenue, net $ 18,257 $ 10,720
Contract revenue, net 1,791 1,559
------------- -------------
Total revenue 20,048 12,279
Cost of revenue:
Product revenue, net 9,498 5,415
Contract revenue, net 1,136 1,207
-------------- -------------
Total cost of revenue 10,634 6,622
Gross profit 9,414 5,657
Operating expenses:
Research and development 931 806
Sales, general and Administrative 1,927 1,218
Other expense 101 269
-------------- -------------
Income from operations 6,455 3,364
Interest income, net 569 115
-------------- -------------
Income before income taxes 7,024 3,479
Income tax expense 2,388 1,113
-------------- -------------
Net income 4,636 2,366
============== =============
Other comprehensive income, net of tax
Unrealized holding gain (loss) (2,418) --
============== =============
Comprehensive income 2,218 2,366
============== =============
Earnings per share:
Basic $ 0.16 $ 0.09
============== =============
Diluted $ 0.15 $ 0.09
============== =============
Shares used in per share calculation:
Basic 29,337 25,840
============== =============
Diluted 31,214 26,498
============== =============
The accompanying notes are an integral part of
the consolidated financial statements.
-4-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Nine Months Ended
------------------------------
March 28, March 29,
1999 1998
------------- -------------
(Unaudited)
Operating activities:
Net income $8,594 $4,396
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,679 3,125
Loss on disposal of property, equipment and 1,284 326
patents
Amortization of patent rights 86 75
Amortization and write off of goodwill -- 86
Proceeds from sale of marketable trading 1,421 421
securities
Purchase of marketable trading securities (234) (1,500)
(Gain) loss on marketable trading securities (141) 333
Changes in operating assets and liabilities:
Accounts receivable (3,862) (286)
Inventories (1,337) 1,373
Prepaid expenses and other assets 861 (201)
Accounts payable , trade (986) (699)
Accrued expenses 2,010 1,913
--------------- ------------
Net cash provided by operating activities 11,375 9,362
--------------- ------------
Investing activities:
Purchase of property and equipment (24,816) (9,346)
Proceeds from sale of property and equipment 189 463
Purchase of patent rights (246) (265)
--------------- ------------
Net cash used in investing activities (24,873) (9,148)
--------------- ------------
Financing activities:
(Retirement) proceeds of long-term debt (8,545) 4,378
Net proceeds from issuance of common stock 60,285 2,911
Receipt of Section 16(b) common stock 594 --
profits
Repurchase of common stock (3,214) (318)
--------------- ------------
Net cash provided by financing activities 49,120 6,971
--------------- ------------
Net increase in cash and cash equivalents 35,622 7,185
Cash and cash equivalents:
Beginning of period 17,680 10,448
=============== ============
End of period $ 53,302 $ 17,633
=============== ============
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts $ 387 $ 48
capitalized =============== ============
Cash paid for income taxes $1,563 $ 234
=============== ============
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Three Months Ended
--------------------------------
September 26, September 27,
1999 1998
-------------- --------------
Operating activities:
Net income $4,636 $ 2,366
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,009 1,140
Loss on disposal of property and equipment 43 511
Amortization of patent rights 32 28
Purchase of marketable trading securities -- (234)
Loss (gain) on marketable trading -- 67
securities
Changes in operating assets and liabilities:
Accounts receivable (615) (1,217)
Inventories (83) (706)
Prepaid expenses and other assets (130) 595
Accounts payable, trade (2,081) (2,452)
Accrued expenses 3,707 1,119
-------------- --------------
Net cash provided by operating activities 7,518 1,217
-------------- --------------
Investing activities:
Purchase of property and equipment (9,744) (4,006)
Proceeds from sale of property and -- 10
equipment
Purchase of patent rights (99) (91)
-------------- --------------
Net cash used in investing activities (9,843) (4,087)
-------------- --------------
Financing activities:
Net proceeds from issuance of long term -- 1,281
debt
Net proceeds from issuance of common stock 1,045 159
Repurchase of common stock -- (3,214)
-------------- --------------
Net cash provided by financing 1,045 (1,774)
activities
-------------- --------------
Net increase in cash and cash equivalents $(1,280) $(4,644)
Cash and cash equivalents:
Beginning of period $42,506 $17,680
-------------- --------------
End of period $41,226 $13,036
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts -- $ 112
capitalized -------------- --------------
Cash paid for income taxes $ 63 $ 164
============== ==============
The accompanying notes are an integral part of
the consolidated financial statements.
-5-
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The consolidated balance sheet as of March 28,September 26, 1999, the consolidated statements of incomeoperations for the
three and nine monthsmonth periods ended March 28,September 26, 1999 and March 29,September 27, 1998, and the
consolidated statements of cash flowflows for the ninethree months ended March 28,September 26, 1999 and
March 29,September 27, 1998 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 flowflows at March 28,September 26, 1999,
and all periods presented, have been made. The balance sheet at June 28, 199827, 1999
has been derived from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's fiscal 19981999 Form 10-K. The results of
operations for the period ended March 28,September 26, 1999 are not necessarily
indicative of the operating results that may be attained for the entire fiscal
year.
Accounting Policies
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. Accordingly, all quarterly reporting reflects a 13-week13 week
period in fiscal 1999. In2000 and fiscal 1998, the Company changed its fiscal year from
the twelve months ending June 30, to the 52-week period ending on the last
Sunday in the month of June.1999. The Company's current fiscal year will extendextends
from June 29, 1998 to28, 1999 through June 27, 1999.25, 2000.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS(SFAS No. 115")115). This statement requires certain securities to
be classified into three categories:
(a) Securities Held-to-Maturity --Held-to-Maturity- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities --Securities- Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are reported at
fair value, with unrealized gains and losses included in earnings.
-6-
(c) Securities Available-for-Sale --Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading securities
are reported at fair value with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders'
equity.
-6-
As of March 28,September 26, 1999, the Company had no short-term investments. At June 28,
1998, allCompany's short-term investments were comprisedconsisted of
common stock holdings of Microvision, Inc. ("MVIS"). The Company purchased
268,600 common shares in a private equity transaction in May 1999 at a price of
$16.75 per share. In August 1999, MVIS filed a registration statement for the
Company's sale of these shares; however, Cree has agreed not to sell the shares
until at least January 6, 2000. Since the Company is currently restricted from
trading these shares and management views this transaction as an investment, the
shares are accounted for as "available for sale" securities that were
classified as trading securities, which were carried at their fair value based
upon quoted market prices of those investments at June 28, 1998, with net
realized andunder SFAS 115.
Therefore unrealized gains or losses are excluded from earnings and losses included in net earnings.reported as
a separate component of shareholders' equity.
As of June 28,September 27, 1998, the Company's short-term investments consisted of
common stock holdings in C3, Inc.Inc ("C3"), the majority of which were bought in
November 1997. The Company also purchasedacquired additional shares of C3 in September
1998 and acquired 24,601 shares directly from C3 pursuant to the exercise of an
option in January 1997. This investment was treated for accounting purposes as a
trading security, with net realized and unrealized gains and losses included in
net earnings. All common shares of C3 held by Cree were subsequently sold during
the
second and third quarters of fiscal 1999. Realized gains on shares of C3 stock sold during fiscal 1999 by the
Company were $13,000 and $140,000, for the three and nine months
ended March 28, 1999, respectively. These amounts were$140,000. This amount was recorded as other income.
Approximately $32,000As of September 27, 1998, the Company's Chief Executive Officer ("CEO") had
promised to indemnify the Company for losses of up to $450,000 for the net
loss wasdifference between the aggregate cash consideration paid by Cree for the shares
of C3 common stock and the cash proceeds received by Cree upon the sale of C3
common shares. At September 27, 1998, the Company had recorded to other income (expense)a $450,000
receivable from the CEO (included in fiscalnet accounts receivable) based upon this
agreement for the net realized and unrealized losses on this investment. Since
Cree sold its shares of C3 for a net gain, the indemnity has been terminated
with no payments becoming due. Net unrealized losses on shares of C3 stock
offset by the unrealized gain on shares acquired from C3 directly were $233,000
at September 27, 1998.
Long Term Debt
As of March 28, 1999,In November 1997, the Company had paid-off the entire $10 million debt
associated with theentered into a term loan acquired in November 1997 fromwith a commercial bank
for up to $10,000,000 to finance the purchase and upfit of the new main facility
in Durham, North Carolina. Approximately $2,950,000 was disbursed under the loan
to finance the initial purchase of the facility with the remaining proceeds
disbursed on a production facility. Thismonthly basis based on actual expenditures incurred. The loan,
which was collateralized by the purchased property and subsequent upfits,
accrued interest monthly at a fixed rate of 8% and carried customary covenants. Proceedscovenants,
including the maintenance of a minimum tangible net worth and other
requirements. As of September 27, 1998 the entire $10,000,000 loan was
outstanding, including a current portion of $69,000 and a long term amount of
$9,931,000. On February 17, 1999, the entire $10,000,000 indebtedness was repaid
with proceeds received from the secondarya public stock offering were used to retire this debt on February 17, 1999.offering.
-7-
During the three and nine months ended March 28, 1999,September 27, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with the facility. Interest capitalized for the three and nine months ended March 28, 1999September 27,
1998, was $9,000 and $128,000, respectively.$84,000.
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:
March 28, June 28,
1999 1998
------------ ------------
(In thousands)
Raw materials $ 1,383 $ 999
Work-in-progress 1,055 752
Finished goods 1,442 792
------------ ------------
Total Inventory $ 3,880 $ 2,543
============ ============
-7-
September 26, June 27,
1999 1999
------------- -------------
(in thousands)
Raw materials $ 1,352 $ 1,290
Work-in-progress 1,193 1,675
Finished goods 1,515 1,012
------------- -------------
Total Inventory $ 4,060 $ 3,977
============= =============
Research and Development Accounting Policy
The Company contracts with the U.S. Government provides fundinggovernment for severalmany of the Company'sits current research
and development efforts. By entering into these contracts, the Company has most
of its research and product development costs funded by the U.S. government. The
contract funding may be based on a cost-plus or a cost-share arrangement.
ThePursuant to each contract, the amount of funding under each contract is determined based on cost
estimates that include direct costs, plus an allocation for research and
development, general and administrative and the cost of capital expenses.
Cost-plus funding is determined based on actual costs plus a set percentage
margin. For the cost-share contracts, the actual costs are divided between the
U.S. Governmentgovernment and the Company based on the terms of the contract. The
government's cost share is then paidfunded to the Company. Activities performed
under these arrangements include research regarding silicon carbide and gallium
nitride materials. The contracts typically
require the submission of a written report to documentthat documents the results of such
research.
The revenue and expense classification for contract activity is determined basedFunding on the nature of the contract. For contracts whereunder which the Company anticipates that funding will
exceed direct costs over the life of the contract funding is reportedrecorded as contract
revenue and all directrelated costs are reported as costsa cost of
contract revenue. For contracts under
which the Company anticipates that direct costs will exceed amounts to be funded
over the life of the contract, direct costs are reportedshown as research and
development expenses and related funding as an offset of those expenses. InThe
following table details information about contracts for which direct expenses
exceed funding by period as reflected in the second quarterstatements of fiscal 1998 all funding under contracts where the
Company anticipated that direct costs would exceed amounts to be funded had been
exhausted. Therefore, all funding has been recorded as contract revenue while
all direct costs are reported as costs of contract revenue for the three and
nineoperations:
Three months ended
March 28,------------------------------
September 26, September 27,
1999 and for the three months ended March 29, 1998.
For the nine months ended March 28, 1998
approximately $1,427,000 of contract
funding had been recorded as an offset to------------- -------------
(in thousands)
Net research and development expenses.costs $ 40 $ --
Government funding 67 --
============= ============
Total direct costs incurred $ 107 $ --
============= ============
-8-
Significant Sales Contract
In September 1996, the Company entered into a Purchase Agreement with Siemens AG
("Siemens"), pursuant to which Siemens agreed to purchase LED chips made with
the Company's gallium nitride-on-silicon carbide technology. In April 1997,
and
December 1997 and September 1998, contract amendments were executed that
provided for enhanced product specifications requested by Siemens and larger
volume requirements, respectively. In SeptemberDecember 1998, the Company and Siemens further amended the contract to
extend the Purchase Agreement with respectwas
amended to provide for additional shipments of LED products through September
1999. The Purchase Agreement was subsequently assigned to be made on or after
June 29, 1998. The third amendment obligatesan indirect subsidiary
of Siemens, OSRAM Opto Semiconductors GMBH & Co. OHG ("Osram"), effective as of
January 1, 1999.
In August 1999, the Company entered into a new Purchase Agreement with Osram,
pursuant to which Osram agreed to purchase and the Company is obligated to ship and Siemens to
purchase
stipulated quantities of both the conductive bufferstandard brightness and the new high brightness
LED chips and silicon carbide wafers through fiscal 1999.September 2000.
The agreement calls for certain quantities of standard brightness and high
brightness LED chips to be delivered by month. In the event the Company is
unable to ship at least 85% of the cumulative quantity due to have been shipped
each month, Osram is entitled to liquidated damages of one percent per week of
the purchase price of the delayed product, subject to a maximum of ten percent
of the purchase price. If product shipments are delayed six weeks or more due to
circumstances within the Company's control, then in lieu of liquidated damages,
Osram may claim damages actually resulting from the delay up to forty percent of
the purchase price of delayed products.
The contract also limits Siemens' rightgives Osram limited rights to defer shipments to 30% of scheduled
quantities for itemsshipments. For products to
be shipped in more than 24 weeks after initial notice, Osram can defer 30% and
10%20% of scheduled quantities for itemsstandard brightness and high brightness LEDs, respectively. For products
to be shipped in more than 12 weeks, after initial notice.but less than 24 weeks, Osram may defer 10%
of scheduled quantities for both standard brightness and high brightness LEDs.
Also, additional quantities of high brightness LEDs stipulated in the contract
may be deferred to the next quarter with 60 days notice at the election of
Osram. In bothall cases, SiemensOsram would be required to accept all products within 90
days of the original shipment date. Additionally, the amendmentPurchase Agreement
provides for higher per unit prices early in the contract with reductions in
unit prices being available as the cumulative volume shipped increases. -8-
In December 1998, the Company and Siemens further amended the contract to
include greater quantities of conductive buffer LED chips to be shipped during
fiscal 1999 and to extend the contract for these shipments through September
1999. This amendment also provides for higher per unit prices early in the
contract with reductions in unit prices as the cumulative volume shipped
increases. As was the case with the third amendment, theseThe
higher prices were negotiated by the Company to offset higher per unit costs
expected earlier in the contract.
Depreciation
The Company has changed its depreciation policy to reflect lower useful lives on
new manufacturing equipment. The useful life has been reduced from 9 years to 5
years for all manufacturing equipment purchased since the beginning of fiscal
year 2000. In management's estimate, this new policy was necessary due to the
changes in estimated useful lives of new equipment caused by technology changes
-9-
anticipated with the future development of larger diameter wafers. Based on
information available at this time, management estimates that the change in
policy may reduce the Company's fiscal 2000 net income by approximately $660,000
or $0.02 per share, but actual results may vary.
Income Taxes
The Company has established an estimated tax provision based upon an effective
rate of 28% for fiscal 1999. The estimated tax rate was based on tax reduction
strategies being implemented by the Company.34%. The estimated effective rate was based upon projections of income
for the fiscal year and the Company's ability to utilize remaining net operating
loss carryforwards and other tax credits. However, the actual effective rate may
vary depending upon actual pre-tax book income for the year or other factors.
Earnings Per Share
The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" ("SFAS 128"). SFAS No.
128 required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128.
The following computation reconciles the differencesdifference between the basic and
diluted presentations:
Three Months Ended Nine Months Ended
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
--------- --------- ---------- ----------
(In thousands, except per share amounts)
Net income $ 3,377 $ 1,755 $ 8,594 $ 4,396
Weighted average common shares 13,633 13,028 13,129 12,808
--------- --------- --------- ---------
Basic earnings per common share $ 0.25 $ 0.13 $ 0.65 $ 0.34
========= ========= ========= =========
Net income $ 3,377 $ 1,755 $ 8,594 $ 4,396
Diluted weighted average common
shares:
Common shares outstanding 13,633 13,028 13,129 12,808
Diluted effect of stock options 1,252 473 860 707
and warrants --------- --------- --------- ---------
Total diluted weighted average 14,885 13,501 13,989 13,515
common shares --------- --------- --------- ---------
Diluted earnings per common share $ 0.23 $ 0.13 $ 0.61 $ 0.33
========= ========= ========= =========
Three Months Ended
----------------------------------
September 26, September 27,
1999 1998*
------------- -------------
(in thousands, except per share data)
Basic:
Net income $ 4,636 $2,366
============= =============
Weighted average common shares 29,337 25,840
============= =============
Basic income per common share $0.16 $ 0.09
============= =============
Diluted:
Net income $ 4,636 $2,366
============= =============
Weighted average common shares-basic 29,337 25,840
Dilutive effect of stock options & 1,877 658
warrants
============= =============
Weighted average common shares-diluted 31,214 26,498
============= =============
Diluted income per common share $0.15 $ 0.09
============= =============
* Weighted average shares and per share amounts have been adjusted for the two
for one stock split effective July 26, 1999.
-10-
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these
common shares were not included in calculating diluted income per share.
As of
March 28, 1999, there were no potentialAccordingly, 476,000 and 1,040,000 shares considered to be antidilutive.
Forfor the three and nine months ended March 29,September
26, 1999 and September 27, 1998, there were 360,000 shares
thatrespectively, were not included in calculating
diluted income per share becausefor the effect was antidilutive.
-9-
Shareholders' Equityperiods presented.
On February 17,July 13, 1999 the Company completedfiled a secondary public offering selling
1,495,000 sharesForm 8-K announcing a two-for-one split of
its common stock. The stock split was effected by an amendment to the Company's
Articles of Incorporation that became effective at a pricethe close of $39.38 per share. The Company
received net aggregate proceeds of approximately $55.3 million after deducting
underwriting discounts and commissions and estimated offering costs. The net
proceeds will be used primarily for future plant expansion needs; however, $10
million has been used to repay outstanding debt to a commercial bank.
New Accounting Pronouncements
In fiscal 1999,business on July
26, 1999. With the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 only impacts
financial statement presentation as opposed to actual amounts recorded. Other
comprehensive income includes all nonowner changes in equity that are excluded
from net income. This Statement has no financial statement impact for an
enterprise that has no items of other comprehensive income in any period
presented. During the three and nine months ended March 28, 1999 and March 29,
1999, the Company had no items of other comprehensive income.
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 changes the way public companies report segment
information in annual financial statements and also require those companies to
report selected segment information in interim financial statements to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The applicationeffectiveness of the new rules does not have a significant impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Boardamendment, each issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. Becauseunissued
authorized share of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
Subsequent Event
On May 6, 1999, the Company enteredcommon stock, $0.005 par value per share, was automatically
split into a development agreement with
Microvision, Inc. ("MVIS") for research directed at the development of
edge-emitting LEDs and laser diodes. MVIS has committed to fund a total of
$2,600,000, or $650,000 payable quarterly, to Cree for one year commencing on
May 6, 1999. This agreement is extendable at MVIS' option for a second year for
an additional commitment of $2,500,000. During the initial term, Cree commits to
spend at least $225,000 per quarter for LED objectives. If the costs incurred by
Cree toward the program objectives in any fiscal quarter are less than $650,000
or a portion of costs incurred in any fiscal quarter toward LED objectives are
less than $225,000, the initial term will be
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extended for a number of weeks equal to the funding deficit for the year. All
costs incurred under the program will be charged as research and development
expenses with related funding offsetting these costs. To secure payment of the
development fees, MVIS has provided Cree an irrevocable documentary letter of
credit issued by a domestic commercial bank. Several milestones have been
identified in the development agreement. Cree is obligated to use best efforts
to achieve all milestones; however, Cree is not obligated to incur costs in
excess of funding paid under the agreement. Failure to achieve milestones will
not be grounds for termination of the agreement or to withhold payment of the
development fee. Cree has no liability for the failure to achieve any milestone.
Any funding received by Cree is nonrefundable. Cree has also granted exclusive
rights to MVIS for use of products developed in the program in scanned beam
applications for three years after the termination of the agreement (or six
years if the extension option is exercised).
On May 6, 1999, the Company purchased 268,600two whole shares of common stock, of
Microvision, Inc ("MVIS") in a private equity transaction. The price paid was
calculated based on the volume weighted average of the intraday high-low mean
for the ten trading days preceding closing or approximately $16.75$0.0025 par value per share. MVIS is requiredOn
July 30, 1999, the Company issued to fileeach holder of record of common stock a
registration statementcertificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to register these shares
within 90 days ofcommon stock and per common
share data have been adjusted to reflect the closing. In addition, Cree has agreed not to sell the
shares until at least January 6, 2000. Cree will account for its investment in
MVIS under FAS 115 as an "available for sale" security.common stock split.
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 the Company's actual operating results and
financial position to differ materially. Such forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"anticipate," "believe," "plan," "estimate," "expect," and "intend" or the
negative thereof or other variations thereof or comparable terminology. The
Company cautions that any such forward-looking statements are further qualified
by important factors that could cause the Company's actual operating results to
differ materially from those in the forward-looking statements. These statementsfactors
include, but are not limited to, fluctuations in our operating results,
production yields in our manufacturing processes, whether we can produce commercialgreater
quantities of high brightness blue and green LEDs, our dependence on a few
customers, whether new customers will emerge, whether we can develop, introduce
and create market demand for new products, whether we can manage our growth
effectively, assertion of intellectual property rights by others, adverse
economic conditions, and insufficient capital resources. See Exhibit 99.1 for
additional factors that could cause the Company's actual results to differ.
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Overview
Cree Research, Inc. is the world leader in developing and manufacturing
semiconductor materials and electronic devices made from silicon carbide
("SiC"). We derive the largest portion of our revenue from the sale of blue and
green light emitting diode ("LED") products. The Company offers LEDs at two
brightness levels -- high brightness blue and green products and standard blue
products. The high brightness products which were introduced to the market in
September 1998 in limited quantities, are currently beinghave now been integrated into our
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manufacturing facility for full production. During the first nine monthsquarter of fiscal
1999, margins realized on the2000, revenues derived from high brightness productsLED sales were substantially
lowergreater than those derived from our standard blue50% of
the total LED product as the yield was
lower than the standard product.sales mix. Historically, we have experienced low margins with many
new product introductions, and we are workinghave continued to make improvements to output and
yield duringsince the high brightness products were introduced in fiscal 1999. During
the first quarter of fiscal 2000, margins for the high brightness LED products
were reaching levels attained for the standard brightness product as
improvements in yield contributed to a 16% reduction in costs from the fourth
quarter of fiscal 1999. We believe that in
order to increase market demand for all of our LED products, we must continue to
substantially lower average sales prices. Historically, we have been successful
in achieving lower costs for the standard blue product. During the remainder of fiscal 1999,2000, we plan to focus on
reducing costs through higher production yields and from higher volumes as fixed
costs are spread over a greater number of units.
We derive additional revenue from the sale of advanced materials made from SiC
that are used primarily for research and development. We also sell SiC crystals
to C3, which incorporates them in gemstone applications. The balance of our
revenue is derived from government and customer research contract funding. Under
various programs, U.S. Government entities provide funding to aid development of
our technology.
On September 24, 1997, the Board of Directors changed the Company's fiscal year
from the twelve months ending June 30 to a 52 or 53 week year ending on the last
Sunday in the month of June. The Company's 1998 fiscal year extended from July
1, 1997 to June 28, 1998.
Results of Operations
Three Months Ended March 28,September 26, 1999 and March 29,September 27, 1998
Revenue. Revenue grew 50% from $10.7 millionFor the quarter ended September 26, 1999, the Company reported revenue
of $20,048,000 reflecting a 63% increase in revenue over the third quarter of fiscal 1998
to $16.0 million in the thirdfirst quarter of
fiscal 1999. This increase resulted
from a 58% rise inFirst quarter product revenue from $8.9 million inof $18,257,000, which includes sales
of light emitting diodes ("LEDs") and materials, increased 70% over the third quarter of
fiscal 1998 to $14.1 million in the thirdfirst
quarter of fiscal 1999. Higher product revenue was primarily the result of a 175% increase in unit salesLED
revenue growth of our LED
products92% in the thirdfirst quarter of fiscal 19992000 as compared to the third quarter of
fiscal 1998. This higher volume was somewhat offset by a 38% decline in the
average LED sales price received from customers in the third quarter of fiscal
1999 compared with the
same period in fiscal 1998. The overallthe prior year. Much of this growth was attributed to a 121%
increase in LED volume resultedvolumes over the comparable period with a substantially higher
mix of high brightness blue and green LED products. During the first quarter of
fiscal 2000, revenue from strong demand for thehigh brightness chips surpassed revenues from our
standard brightness product and an
increased customer base. By significantly loweringproducts. Average LED sales prices paid by customers
declined 15% in the average sales price for
LED products, Cree was able to meet customer price points for several new LED
applications, which continues to drive additional volume sold. Volume growth and
decliningfirst quarter of fiscal 2000 compared with the first quarter
of fiscal 1999. During the remaining quarters of fiscal 2000, average sales
prices for the standard brightness productand high brightness LED products are expected to
continueremain stable or decline slightly at a slowed pace from reductions experienced
in previous years. Management believes that increased volumes will offset any
decline in average LED sales prices during the remaining quarters of fiscal
2000.
LED shipments also increased as a result of the new Osram contract which calls
for a 44% increase in chip shipments over the next
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several quarters. Whileprevious agreement and extends the
high brightness production was almost three times
greater than units produced inOsram purchase commitment through the secondfirst quarter of fiscal 1999, these products
are not yet fully integrated into2001. While we
believe that Osram will continue to be our manufacturing process. Althoughlargest customer during fiscal 2000,
we expect that the yield
forpercentage of revenue from this customer will decline as new
customers emerge in Asia and Europe. However, there can be no assurance that
revenue from new or existing customers will reduce the high brightness product continues to improve, additional progress will
be necessary to meet demand and improve gross margin.concentration of our
total revenues derived from the Osram contract.
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Revenue attributable to sales of SiC materials was 47%46% higher in the thirdfirst
quarter of fiscal 19992000 than in the same period of fiscal 1998. This greater1999. The increased
revenue was a result of increased demand fordue to significant contributions made by the gemstone materials from C3. C3
funded additional capacity at our manufacturing facilityproducts and
improvements in early fiscal 1999,throughput and as a result revenue fromyield efficiency in wafer production. Gemstone
product sales of gemstone materials increased. Also,
revenue from our wafer business grew 23%have benefited from the third quarter of fiscal 1998
toadded capacity provided under the third quarter of fiscal 1999 due to a 24% rise in the number of wafers
sold. This increase was caused by a greater acceptance of silicon carbide in the
research community and improved product quality. The Company believes that
growth in future wafer sales may be slowedC3
supply agreement. Wafer volume has also increased as more customers approach the Company continues to be
successful in offering wafer products with lower defect densities, which enable
customers to conduct advanced research for device products rather than wafer materials. This trend is
indicative of the Company's special expertise in silicon carbide materialsmicrowave and its success in the development of devices made from those materials.power applications.
Contract revenue received from U.S. Government agencies increased 12%15% during the
thirdfirst quarter of fiscal 19992000 as compared to the thirdsame quarter in the prior year.
The additional revenue was anticipated as additional contract awards were
received in late fiscal 1999 and in the first quarter of fiscal 1998 due to a
significant funding award that was made in the third quarter of fiscal 1999 for
microwave development.2000.
Gross Profit. GrossThe Company's gross margin climbed to 48% of revenue duringwas 47% for the third quarter of
fiscalthree months ended
September 26, 1999 as compared to 35% during46% for the third quartersame period in the prior year. The
sustained profitability stems from higher throughput and manufacturing yield on
LED and materials products, thereby lowering the cost per unit and successfully
matching or more than offsetting lower sales prices. The Company has also been
successful in growing LED revenue by lowering prices and raising the volume of
high brightness products. For the remainder of fiscal 1998. This
increase is predominantly attributable2000, the Company plans to
designcontinue the strategy of seeking to lower LED costs and manufacturing improvementsexpects that occurred over the
past year resulting in significant reductions in cost.
Withgreatest cost saving benefits will be derived from greater volume and higher
yield efficiency on the introduction of the new conductive buffer LED technology in the fourth
quarter of fiscal 1998, we were able to significantly lowerhigh brightness products. Lower costs of productionalso have been
achieved on wafer products due to the fewer manufacturing steps required with the new chip structure and
improved yield. These cost reductionsefficiency. Margins from gemstone
products have more than offset declines in the
average sales prices of products, primarily LEDs. Wafer costs for SiC material
sales also declined 53% during the third quarter of fiscal 1999 over the
comparative periodimproved due to higher throughput and improved yield. Gross profit in
the third quarter of fiscal 1998 was also lower as over $0.4 million of
write-downs to inventory were made for the displays business, which has
subsequently been de-emphasized.yields.
Research and Development. Research and development expenses for the three months
ending September 26, 1999, increased 313%16% over the comparable prior year period.
This was due to increases in internal research and development efforts not
included in the third quarterscope of fiscal 1999 to $1.5 million from $0.4 million ingovernment contract funding. In addition, spending
under the third
quarter of fiscal 1998. Much of this increaseMVIS contract was caused by significantly higher costs for the development of the new high brightness LED products. We anticipate
that internalthan funding for the development of new products will continue to grow
in future periods.received.
Sales, General and Administrative. Sales, general and administrative expenses
for the three month period ended September 26, 1999 increased 51%by 58% over the
same period in the prior year due to increased costs to support the growth of
business. Overall as a percentage of revenue, S,G&A costs remain at 10% of
revenue in the first quarter compared to the first quarter of fiscal 1999. These
costs as a percentage of revenue are expected to remain comparable for the
remainder of fiscal 2000.
Other (Income) Expense. The Company continues to perform under an agreement with
C3 to sell equipment manufactured by the Company to C3 at cost plus a comparable
overhead allocation to those incurred from government contracts. The overhead
allocation was recorded as "other operating income"; however, the amount was
more than offset by unrelated asset writeoffs for both the first quarter of
fiscal 2000 and 1999, respectively.
Interest Income, Net. Net interest income increased by $454,000 in the first
quarter over the first quarter of fiscal 1999. This was due primarily to the
investment of cash proceeds from the public stock offering in February 1999. In
addition, a portion of the proceeds from the public stock offering were used to
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repay the $10,000,000 loan commitment in the third quarter of fiscal 1999 to $1.6 million from $1.0
million1999;
therefore, no interest expense was incurred in the thirdfirst quarter of fiscal 1998 due2000.
Interest expense incurred with the loan commitment was capitalized as a part of
the construction improvements made to the general growth of the
business. Also, as a result of our increased profitability during the third
quarter of fiscal 1999 over the third quarter of fiscal 1998, the profit sharing
accrual (which is based on 5% of net income) has also grown by $0.1 million. We
anticipate that total sales, general and administrative costs will continue to
increasefacility in connection with the
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growth of our business; however, we believe that as a percentage of revenue they
will remain constant or possibly decline.
Other (Income) Expense. Other expenses have increased 903% to $0.3 million
during the third quarter of fiscal 1999. In the third quarter of fiscal 1999, we
realized impairments to leasehold costs as a result of management's decision to
move equipment from our leased facility to our newWhen certain
manufacturing site. Thereoperations were no write-down charges taken in the third quarter of fiscal 1998.
Interest Income, Net. Interest income, net has increased 93% to $0.3 million in
the third quarter of fiscal 1999 from $0.2 million in the third quarter of
fiscal 1998 duemoved to the completion of our secondary common stock offering in
February 1999. As a result of this offering, the Company raised net proceeds of
$55.3 million and issued 1.5 million shares of stock. With the proceeds from
this offering, we have been able to maintain a larger balance of cash on hand
and therefore realize greater interest income. Cree used a portion of the
proceeds to pay-off outstanding debt of $10 million; however, interest expense
recorded for the third quarter of fiscal 1999 was still higher than interest
expense in the third quarter of fiscal 1998 as a significant portion of that
interest was capitalized.
Income Tax Expense. Income tax expense for the third quarter of fiscal 1999 was
$1.3 million compared to $0.7 million in the third quarter of fiscal 1998. This
increase resulted from increased profitability during the third quarter of
fiscal 1999 over the same period of fiscal 1998.
Nine Months Ended March 28, 1999 and March 29, 1998
Revenue. Revenue grew 37% from $31.0 million in the first nine months of fiscal
1998 to $42.4 million in the first nine months of fiscal 1999. This increase was
attributable to higher product revenue, which grew 49% from $25.3 million in the
first nine months of fiscal 1998 to $37.6 million in the first nine months of
fiscal 1999. This rise in product revenue was a result of the 166% increase in
unit sales of our LED products in the first nine months of fiscal 1999 compared
to the first nine months of fiscal 1998. This higher volume was somewhat offset
by a 39% decline in the average LED sales price received from customers in the
first nine months of fiscal 1999 compared with the same period in fiscal 1998.
The majority of the growth in LED volume resulted from strong demand for the
standard brightness product and an increased customer base. By significantly
lowering the average sales price for LED products, Cree was able to meet
customer price points for several new LED applications, which continues to drive
additional volume sold. Volume growth and declining average sales prices for the
standard brightness product are expected to continue over the next several
quarters. The high brightness LED production, which begansite in the first quarter of
fiscal 1999, has contributed a 9% increase in volume forportions of the interest associated with the completed work were
expensed. For the first nine
months of fiscal 1999 over the prior year. These products are currently not yet
fully integrated into our manufacturing process. Although the yield for the high
brightness product continues to improve, additional progress will be necessary
to meet demand and improve gross margin.
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Revenue attributable to sales of SiC material was 69% higher in the first nine
months of fiscal 1999 than in the same period of fiscal 1998 due to a
significant increase in sales to C3 for gemstone applications. During the first
nine months of fiscal 1998, C3 was in initial stages of operation; therefore,
unit sales were limited. C3 also funded additional capacity at our manufacturing
facility in early fiscal 1999, and as a result revenue from sales of gemstones
increased. Also, sales of SiC wafers increased 38% in the first nine months of
fiscal 1999 as compared to the first nine months of fiscal 1998, due to quality
improvements in wafers, along with the availability of the larger two-inch wafer
during fiscal 1999. During the first nine months of fiscal 1999, sales from our
displays business declined 96% over the prior year period as we have chosen to
de-emphasize this product line. Contract revenue received from U.S. Government
agencies declined 17% during the first nine months of fiscal 1999 compared to
the first nine months of fiscal 1998, as a significant contract that funded
optoelectronic research was exhausted in early fiscal 1999. However, a new
significant microwave contract has been funded in the third quarter of fiscal
1999.
Gross Profit. Gross margin climbed to 47% of revenue during the first nine
months of fiscal 1999 as compared to 34% during the first six months of fiscal
1998. This increase is predominantly attributable to design and manufacturing
improvements that occurred over the past year resulting in significant
reductions in cost. With the introduction of the new conductive buffer LED
technology in the fourth quarter of fiscal 1998, we were able to significantly
lower costs of production due to fewer manufacturing steps required with the new
chip structure and improved yield. During the first nine months of fiscal 1998,
we introduced a smaller LED chip size and, in December 1997, we began to
fabricate devices on a larger two-inch wafer. For much of fiscal 1998, we were
still in the process of establishing these new manufacturing designs and had not
achieved production efficiency. In addition, the larger two-inch wafer had not
been in full production for much of the period; therefore, average die yields
during the first nine months of fiscal 1998 were significantly lower. Wafer
costs for SiC material sales also declined 53% during the first nine months of
fiscal 1999 over the comparative period due to more efficient processes and
higher volume throughput. The Company believes that growth in future wafer sales
may be slowed as more customers approach the Company for device products rather
than wafer materials. This trend is indicative of the Company's special
expertise in silicon carbide materials and its success in the development of
devices made from those materials. Gross profit for the first nine months of
fiscal 1998 was also lower as $0.4 million of write-downs to inventory were made
for the displays business, which has subsequently been de-emphasized.
Research and Development. Research and development expenses increased 167% in
the first nine months of fiscal 1999 to $3.4 million from $1.3 million in the
first nine months of fiscal 1998. Much of this increase was caused by
significantly higher costs for the development of the new high brightness LED
product. We anticipate that internal funding for the development of new products
will continue to grow in future periods.
Sales, General and Administrative. Sales, general and administrative expenses
increased 40% in the first nine months of fiscal 1999 to $4.2 million from $3.0
million in the first nine months of fiscal 1998 due primarily to the overall
growth in our business. In addition, during the second quarter of fiscal 1998,
Cree expenses benefited from two one-time insurance refunds. As a result
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of the dismissal of a securities class action lawsuit in November 1997, Cree was
reimbursed $0.2 million for costs incurred in connection with the lawsuit. Most
of these expenses were recorded in fiscal 1997. In addition, we received a $0.2
million reimbursement of medical expenses due to a negotiated cost cap in a
partially self-funded insured health plan. As a result of our increased
profitability during the first nine months of fiscal 1999 over the first nine
months of fiscal 1998, the profit sharing accrual (which is based on 5% of net
income) has also grown by $0.3 million. We anticipate that total sales, general
and administrative costs will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue they will remain
constant or possibly decline.
Other (Income) Expense. Other expenses have increased 108% to $0.9 million
during the first nine months of fiscal 1999 from $0.4 million for the first nine
months of fiscal 1998 due to higher write-downs of fixed assets. In the first
nine months of fiscal 1999, we realized impairments to leasehold costs as a
result of management's decision to move equipment from our leased facility to
our new manufacturing site.
Interest Income, Net. Interest income, net has decreased 6% to $0.5 million in
the first nine months of fiscal 1999 from $0.5 million in the first nine months
of fiscal 1998 due to interest expense incurred and lower cash balances
maintained for a majority of the nine months ended March 28, 1999. The
completion of our secondary common stock offering in February 1999 provided
$55.3 million; however, for the majority of the nine-month period, these
proceeds were not included in investible cash balances. Cree used a portion of
the proceeds to pay-off outstanding debt of $10 million; however, interest
expense recorded for the first nine months of fiscal 1999 was still higher than
interest expense in the third quarter of fiscal 1998. A significant portion of interest incurred in fiscal 1998 was capitalized.$196,000
with only $84,000 being eligible for capitalization, and therefore $112,000 was
expensed.
Income Tax Expense. Income tax expense for the first nine monthsquarter of fiscal 19992000 was
$3.3 million$2,388,000 compared to $1.8 million$1,113,000 in the first nine monthsquarter of fiscal 1998.1999. This
increase resulted from increased profitability during the first nine
monthsquarter of
fiscal 19992000 over fiscal 1998. Our effective tax rate during the first
nine monthssame period of fiscal 1999 was 28% compared to 29% in the first nine months of
fiscal 1998.1999.
Liquidity and Capital Resources
We have funded ourNet cash provided by operations was $7,518,000 for the three months ended
September 26, 1999 compared with $1,217,000 generated during the comparative
period in fiscal 1999. The increase was primarily attributable to date through sales of equity, bank borrowingshigher
profitability, and revenue from productwas supplemented by timing differences and contract sales. On February 17, 1999, the Company
completed an underwritten secondary public offering of its common stocknet increase
in which
the Company sold 1,495,000 new shares sold at a price of approximately $39.38
per share. There were no selling shareholders.accounts payable and accrued expenses.
The Company received net
aggregateinvested $9,843,000 in capital expenditures during the first three
months of fiscal 2000 compared to $4,087,000 during the same period in the prior
year. The majority of the increase in spending was due to new equipment
additions to increase manufacturing capacity in the crystal growth and epitaxy
areas. The Company also continues to expand facilities at the production site
near Research Triangle Park, North Carolina. Cash provided by financing
activities during fiscal 2000 related to the receipt of $1,045,000 in proceeds
from the secondary offeringexercise of approximately $45.3 million
after deducting underwriting discounts and commissions and estimated offering
costs andstock options from the payoff of long term debt.Company's employee stock option
plan. The Company expects thatis presently reviewing capital requirements for fiscal 2000
and beyond and may seek additional financing alternatives in the majority of
these funds will continue to be used to expand facilities and equipment capacity
for the manufacturing plant in Durham, North Carolina. The remainder will be
used for general corporate purposes, including working capital. A portion of the
net proceeds may also be used to acquire or invest in complementary businesses.future.
Although the Company from time to time evaluates potential acquisitions of and
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investments in suchcomplementary businesses and anticipates continuing to make such
evaluations, the Company has no present commitments or agreements with respect
to the acquisition of or investment in another business other than its equity
interest in MVIS.
At September 27, 1998, the equity
purchaseCompany had a loan outstanding for $10,000,000 from a
commercial bank to finance portions of MVIS. Pending such uses, the proceeds will be invested in short-term
interest bearing securities and other instruments in compliance withupfit of the Company's investment policy. As of March 28, 1999, we had working capital of
approximately $64.4 million, including $53.3 million in cash and cash
equivalents.
Operating activities generated $11.4 million in cashproduction facility. The
final draw to this loan was made during the first nine
monthsquarter of 1999 for
$1,281,000. The loan was subsequently paid off in the third quarter of fiscal
1999. This was attributable primarily to net income of $8.6
million and other non-cash expenses of $5.0 million. These amounts were partly
offset by an increase of $3.9 million in account receivables, a $1.3 million
rise in inventory and a $1.0 million decrease in accounts payable. CashThe Company also increased by $2.0 million relating to a rise in accrued expenses. Cash generated
by operating activities for the nine months ended March 29, 1998 was $9.4
million. Cash was generated primarily from net income of $4.4 million and other
non-cash expenses of $3.6 million. Operating activities incommitted $3,214,000 during the first nine months
of fiscal 1998 also benefited from a $1.4 million reduction in inventory and a
$1.9 million increase in accrued expenses.
The majority of the $24.8 million of cash used by investing activities in the
first nine monthsquarter of fiscal
1999 was related to expenditures associated with the
continued construction of our new manufacturing facility in Durham, North
Carolina and equipment capacity increases made throughout the plant. We have
spent approximately $5.0 million for the new clean room facility, which was
completed in April 1999. We also increased manufacturing capacity by adding new
equipment to support the epitaxial deposition and crystal growth processes. In
February, Cree acquired an 80-acre tract of land near our existing facility for
$1.5 million. This land will provide expansion capabilities for future growth,
including providing space for a second manufacturing facility at a remote site.
We are currently expanding our facility for new crystal growth and test and
packaging areas. These additions will allow therepurchase Company to consolidate all LED
and wafer manufacturing facilities to one site. Approximately $5-8 million of
additional expenditures are expected to complete these projects. In addition, in
order to meet anticipated growth in LED and wafer sales and provide expanded
facilities for our new microwave product line; the Company anticipates a second
phase of expansion to facilities and equipment to begin in early fiscal 2000. We
anticipate total costs for these expenses to be between $15 and $18 million.
The $49.1 million of cash provided by financing activities in the first nine
months of fiscal 1999 related primarily to the proceeds from the secondary
public offering and exercises of stock warrants and stock options from the
Company's employee stock option plan. These cash proceeds were offset by a net
$8.5 million outflow for the pay-off of long-term debt to a commercial bank (the
$10.0 million balance less $1.5 million received in early fiscal 1999 from the
commercial bank) and a $3.2 million cash outlay for the repurchase of our common
stock. This stock was repurchased at an average price of $13.68. The stock
warrants exercised was distributed in connection with the Company's September
1995 private placement and had an exercise price of $27.23. As of March 28,
1999, warrants remained outstanding to purchase 147,750 shares; these warrants
will expire in September 2000.
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The Company believes that existing cash, along with cash generated from
operations, will be sufficient to meet the Company's capital requirements for at
least the next twelve months.
Impact of the Year 2000
State of Readiness
We have adoptedevaluated all of our internal software, embedded systems and products
against Year 2000 concerns and believe that our products and businesses will not
be substantially affected by the advent of the year 2000. We have completed a
Year 2000 compliance plan and formed a team of information
technology professionals assigned the task of identifying and resolving any Year
2000 issues that may affect our business. Our compliance plan hadincluded four phases: inventory, assessment,
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remediation and testing. We have nowA detailed inventory of all computers and related
systems was completed and all phases
including a complete inventorycritical upgrades were finished for all of our computer systems; computer related
equipmentcomputers
that were non-Year 2000 compliant. All factory-dependent computers were also
tested and equipment with embedded processors, as well as our products. We
have completed the assessment with respect to all of our systems and have
determined that our products are of a nature that they are not subject to
failure as a result of Year 2000 issues. All necessary repairs and testing
needed to ready systems for Year 2000 compliance is completed.compliant.
Although we cannot control whether and how third parties will address the Year
2000 issue, we also are in the process of contactinghave now contacted critical vendors and suppliers to
assess theirhave been informed that
they have the ability to ensure smooth delivery of products without disruptions
caused by Year 2000 problems. Costs
We have not prepared estimatesBased on the responses of coststhese vendors to remediateour
survey, we believe that all vendors are either substantially Year 2000 problems;
however, basedcompliant
or that any noncompliance will not have a material effect on the results of our assessment of systems, weoperations.
Costs
We do not believe that the costs associated with Year 2000 compliance will have had a
material adverse effect on our business, results of operations, or financial
condition. As of September 26, 1999, this project is complete.
Year 2000 Risksrisks
Although we believe that our Year 2000 compliance plan isplanning efforts are adequate to address our Year
2000 concerns, there can be no assurance that we will not experience negative
consequences and material costs as a result of undetected errors or defects orin
the non-compliancetechnology used in our internal systems. Also, there is no assurance that
the systems of third parties with whomon which we interact. Furthermore, there canrely will be no assurance that
there will not bemade compliant on a delay in, or increased costs associated with, the
implementation of corrections as the Year 2000 compliance plan is, performed.timely
basis. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
We believe that our greatest risk stems from the potential non-compliance of our
suppliers. We depend on a limited number of suppliers for certain raw materials,
components and equipment necessary for the manufacture of our products.
Accordingly, if those suppliers are unable to process or fill our orders or
otherwise interact with us because of Year 2000 problems, we could experience
material adverse effects to our business. We are in the processWhile our critical suppliers have
informed us that they do not anticipate any disruption as a result of assessing the Year 2000
status of our suppliers andproblems, we are investigating alternativealternate sources of supply. As a consequence of
our dependence on limited sources of supply, we generally maintain a significant
inventory of certain critical materials and require suppliers to keep certain
amounts of inventory -18-
available for us; however, thereus. There can be no assurance that we will
have enough materials on hand to continue production without interruption in the
event one or more of our suppliers experiences Year 2000 problems that affect
its (their) ability to supply us. Any supply chain disruptions would affect our
ability to manufacture our products, which could result in material adverse
consequences to our business, results of operations and financial condition.
Contingencies
We have not yet developed a contingency plan to address what would happen in the
event that we are unable to address the Year 2000 issue. The contingency plan
will be addressed after the inquiry of vendors and customers is completed.
Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk
As of March 28, 1999, the Company had no investmentsNo material changes in equity securities;
however, on May 6, 1999, the Company acquired an equity position in MVIS and
will therefore continue to experience a market risk for equity price change. In
addition,have been identified during the $10 million term loan from a commercial bank, which accrued
interest at 8%, has been repaid as of February 17, 1999. Therefore, the Company
is no longer subject to market risk for interest rates.
-19-most recent
quarter.
-15-
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit DescriptionExhibits:
10.1 Equity Compensation Plan, as amended and restated August 24, 1999
10.2 Purchase Agreement between the Company and Osram Opto
Semiconductors GmbH & Co. dated August 30, 1999. (1)
27 Financial Data Schedule
99.1 Risk Factors (1)Certain Business Risks and Uncertainties
(b) Reports on Form 8-K
No reports on8-K:
On July 13, 1999 the Company filed a Form 8-K were filed byannouncing a two-for-one
split of its common stock to be effective at the Company during the
quarter ended March 28,close of business on
July 26, 1999.
- -------------------------------------------------
(1) Incorporated by reference herein. Filed as an exhibitConfidential treatment of portions of this document is being requested
pursuant to the Company's
quarterly report filed on Form 10-Q withRule 24b-2 of the Securities and Exchange Commission
on January 28, 1999.
-20-Commission.
-16-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CREE RESEARCH, INC.
Date: May 11,November 4, 1999
/s/ Cynthia B. Merrell
--------------------------------------------
Cynthia B. Merrell,
Chief Financial Officer and Treasurer
(Authorized Officer and Chief Financial
and Accounting Officer)
-21--17-
EXHIBIT INDEX
Exhibit
No.
- -------
10.1 Equity Compensation Plan, as amended and restated August 24, 1999
10.2 Purchase Agreement between the Company and Osram Opto Semiconductors
GmbH & Co. dated August 30, 1999. (1)
27 Financial Data Schedule
99.1 Certain Business Risks and Uncertainties
- -------------------
(1) Confidential treatment of portions of this document is being requested
pursuant to Rule 24b-2 of the Securities and Exchange Commission.
-18-